<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999
REGISTRATION NO. 333
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
</TABLE>
BENZ ENERGY INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
DELAWARE 1311 76-0577348
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
1000 LOUISIANA STREET, 15TH FLOOR
HOUSTON, TEXAS 77002
(713) 739-0351
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
</TABLE>
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 COPY TO:
PORTER & HEDGES, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002
(713) 226-0629
Attn: Samuel N. Allen
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
-----------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
-----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PROPOSED MAXIMUM AGGREGATE REGISTRATION FEE
(3) OFFERING OFFERING PRICE
PRICE PER SHARE
- -------------------------------------------------------------------------------------------------------------------------------
Class A, Series II Convertible Preferred Stock, 238,201 90.91(1) 21,654,853 6,054.20
$1.00 par value
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
issuable upon conversion of the
convertible preferred stock 100,772,634 N/A N/A N/A
Common Stock, $.01 par value,
issuable upon exercise of warrants
or otherwise previously issued 8,558,649 .2179(2) 1,864,704 521.37
- -------------------------------------------------------------------------------------------------------------------------------
Total 6,575.57
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(i), the registration fee is calculated based on the
offering price of the convertible preferred stock when originally issued
by the Company.
(2) Pursuant to Rule 457(c), the registration fee is calculated based on the
average of the bid and ask prices for the Common Stock reported on
the Vancouver Stock Exchange July 19, 1999.
(3) Plus an indeterminate number of shares that may be issued upon conversion
of preferred stock due to changes in the exchange rate of Canadian to U.S.
dollars.
-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATE AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
Subject to completion, dated July 23, 1999
PROSPECTUS
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not offer these securities until the registration statement filed with the SEC
is effective. This prospectus is not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
- --------------------------------------------------------------------------------
[LOGO]
BENZ ENERGY INC.
238,201 Shares of Class A, Series II Convertible Preferred Stock
109,331,283 Shares of Common Stock
This prospectus relates to the resale by certain of our selling
securityholders of:
- up to 238,201 shares of our class A, series II convertible preferred
stock;
- up to 100,772,634 shares of our common stock, par value $.01 per
share, 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;
- 2,984,526 shares of our common stock issued as commission and fees
related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for certain
convertible debentures, series III; and
- 1,057,500 shares of our common stock issued in lieu of interest
payments.
We will not receive any of the proceeds from the resale of the
convertible preferred stock or common stock issuable upon conversion of the
convertible preferred stock or exercise of warrants.
The convertible preferred stock currently is not listed on any
securities exchange, but we expect to post the convertible preferred stock for
trading on the Nasdaq Bulletin Board. Our common stock is traded on the
Vancouver Stock Exchange under the symbol "BZG." In addition, upon completion of
this offering, we expect to post our common stock for trading on the Nasdaq
Bulletin Board and remove our common stock from trading on the Vancouver Stock
Exchange.
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
- -------------------------------------------------------------------------------
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 August ___, 1999.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Summary ..................................................................... 2
Cautionary Statement Regarding Forward-looking Statements ................... 4
Risk Factors ................................................................ 4
Capitalization .............................................................. 13
Common Stock Price Range and Dividend Policy ................................ 14
Selected Consolidated Financial Information ................................. 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 16
Business and Properties ..................................................... 25
Management .................................................................. 39
Certain Transactions ........................................................ 44
Principal and Selling Shareholders .......................................... 47
Plan of Distribution ........................................................ 50
Description of Capital Stock ................................................ 52
Legal Matters ............................................................... 55
Experts ..................................................................... 55
Index to Financial Statements ............................................... F-1
</TABLE>
AVAILABLE INFORMATION
As a result of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file reports and other information with
the Securities and Exchange Commission. The reports and other information filed
by us with the Commission can be inspected and copies can be obtained at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission 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 such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission 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 Commission.
This Prospectus constitutes a part of a registration statement on Form
SB-2 filed by us with the Securities and Exchange Commission 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
hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the registration statement or otherwise filed
with the Securities and Exchange Commission is not necessarily complete, and in
each instance, reference is made to the copy of such 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.
i
<PAGE>
SUMMARY
THIS SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS OTHERWISE
INDICATED HEREIN, ALL DOLLAR AMOUNTS ARE IN UNITED STATES DOLLARS. UNLESS
OTHERWISE NOTED HEREIN, REFERENCES IN THIS PROSPECTUS TO US INCLUDE OUR WHOLLY
OWNED SUBSIDIARIES.
BENZ ENERGY INC.
We are an independent energy company engaged in the exploration for and
development of oil and natural gas. We have interests in more than 25 oil and
gas prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of these prospects have been, are being,
or are expected to be, enhanced with 3-D seismic data and CAEX technologies. The
3-D seismic data, including current surveys, will cover more than 820 square
miles. Our 1999 capital budget provides for a total of $11.3 million for
drilling and prospect development. Of such amounts, approximately $7.3 million
is budgeted for development drilling, approximately $1.0 million is budgeted for
exploratory drilling, testing, and subsequent completions, $2.3 million is
budgeted for seismic data acquisitions and the remainder is budgeted primarily
for leasehold purchases.
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
SHARES OFFERED:
- 238,201 shares of our class A, series II convertible preferred
stock;
- 100,772,634 shares of our common stock, par value $.01 per
share, 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;
- 2,984,526 shares of our common stock issued as commission and
fees related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for
certain convertible debentures, series III; and
- 1,057,500 shares of our common stock issued in lieu of
interest payments.
2
<PAGE>
SUMMARY 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 three-month period ended March 31, 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 these dates and the results of operations and cash
flows for these periods. Operating results for the three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
<TABLE>
<CAPTION>
TEN MONTH
FOUR MONTH PERIOD
FOR THE QUARTER ENDED YEAR ENDED PERIOD ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
---------------------------- ---------------- ------------ ----------
1999 1998 1998 1997 (1) 1997 (2)
------------ ------------ ---------------- ------------ ----------
(unaudited) (unaudited) (audited) (audited) (audited)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Petroleum revenues ...................... $ 1,370,957 $ 1,040,780 $ 4,947,457 $ 707,987 $ 444,203
Earnings (loss) before DD&A, interest,
amortization of issuance costs,
income tax and preferred dividends..... 210,271 (465,790) (2,756,466) (1,479,769) (1,686,624)
Net loss applicable to common
stockholders .......................... (2,665,782) (2,365,163) (11,915,191) (2,739,322) (1,917,141)
<CAPTION>
AS OF AS OF AS OF
MARCH 31, DECEMBER 31, AUGUST 31,
---------------------------- ----------------------------- -----------
1999 1998 1998 1997 (1) 1997 (2)
------------ ------------ ------------ ------------ -----------
BALANCE SHEET DATA: (unaudited) (unaudited) (audited) (audited) (audited)
Working Capital Surplus (Deficit) ....... $(35,135,688) $ 2,538,902 $(27,360,635) $(15,290,406) $ 1,784,075
Properties and Equipment, net ........... 85,463,843 45,109,137 79,412,241 25,319,771 11,916,817
Total Assets ...................... 97,890,925 75,339,380 95,240,247 36,216,129 21,520,880
Long-term Debt, including current
maturities ............................ 61,871,586 41,152,167 59,490,912 12,708,303 781,326
Redeemable Preferred Shares ............. 9,488,140 12,000,000 9,488,140 -- --
Stockholders' Equity .................... 4,394,320 12,547,544 6,990,828 11,806,496 14,089,948
</TABLE>
- --------------------
(1) We changed our fiscal year end to December 31.
(2) Represents the period from inception to original year-end, August 31.
3
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements made in this prospectus or in the documents we have
incorporated by reference that are not statements of historical fact are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 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
such 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 such estimate and such revisions, if significant, would 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.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF FINANCIAL LOSSES AND HAVE
ACCUMULATED SUBSTANTIAL WORKING CAPITAL DEFICITS.
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
substantial operating and net losses to date. The following table reflects
total net losses and net losses per share of common stock for the periods
indicated:
<TABLE>
<CAPTION>
PER SHARE
AMOUNT (BASIC)
------------- ---------
<S> <C> <C>
Quarter ended March 31, 1999 .................. $ (2,665,782) $(0.08)
Year ended December 31, 1998 .................. $(11,915,191) $(0.37)
Four Month Period ended December 31, 1997 ..... $ (2,739,322) $(0.10)
Ten Month Period ended August 31, 1997 ........ $ (1,917,141) $(0.09)
</TABLE>
4
<PAGE>
We have also had the following working capital surplus (deficit) as at
the dates indicated:
<TABLE>
<CAPTION>
<S> <C>
March 31, 1999 ................... $(35,135,688)
December 31, 1998 ................ $(27,360,635)
December 31, 1997 ................ $(15,290,406)
August 31, 1997 .................. $ 1,784,075
</TABLE>
WE WILL CONTINUE TO REQUIRE SUBSTANTIAL EXPENDITURES TO DEVELOP AND EXPAND OUR
BUSINESS.
Our future financial results will depend primarily on the following:
- our ability to economically locate hydrocarbons in commercial
quantities;
- our ability to reduce drilling risks and costs through 3-D
seismic data and CAEX technologies in selecting site and depth
of wells;
- our ability to secure adequate financial resources to fund
activities; and
- externally, on oil and gas prices.
There can be no assurance that we will achieve or sustain profitability
or positive cash flows from operating activities in the future.
SUBSTANTIAL CAPITAL REQUIREMENTS--WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS THAT
WE MAY BE UNABLE TO MEET.
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 1999 capital and exploration budget;
- payment for the recently completed 3-D survey at Old Ocean
Field in remaining installments totaling approximately
$3,338,000;
- payment of EnCap Credit Facility, the BOCP Credit Facility and
the Old Ocean Loan, all due July 31, 1999 in the principal
amounts of $12.0 million, $6.0 million and $2.2 million, plus
accrued interest, respectively;
- payment of certain trade payables of which approximately
$12,160,000 is past due as of June 30, 1999;
- 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. The net
capital and exploration budget excludes expenditures anticipated to be funded
by related property sales. We plan to finance anticipated ongoing expenses
and our 1999 net capital and exploration budget with funds generated from the
following sources:
- available cash and cash investments;
- cash provided by operating activities;
- capital we believe we can raise through the Aquila Energy
Capital Corporation ("Aquila") Production Payment and sale
of equity;
- non-core asset sales and sales of excess interests in core
assets;
- a $4.0 million capital infusion from an affiliate of EnCap;
and
- capital raised in connection with our recently completed
offering of convertible preferred stock.
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
5
<PAGE>
subjected to applicable non-consent penalties; and may not be able to meet
certain of our existing contractual obligations, which as to any of the
foregoing would have a material adverse effect on us and our financial
condition.
IMPENDING MATURITY DATES--A SUBSTANTIAL AMOUNT OF OUR INDEBTEDNESS IS CURRENTLY
DUE OR PAST DUE AND WE MAY BE UNABLE TO REPAY OR REFINANCE THIS INDEBTEDNESS.
Our EnCap, BOCP and Old Ocean Credit Facilities will come due on
July 31, 1999. As to the indebtedness reflected by the Old Ocean Loan, all
lenders, other than affiliates of EnCap that are owed $100,000, elected to
convert their respective indebtedness and the mineral interests obtained in
connection with the Old Ocean Loan into our convertible preferred stock. We
repaid the $100,000 owed to affiliates of EnCap under the Old Ocean Loan and
expect to repay the indebtedness reflected by the EnCap Credit Facility and
the BOCP Credit Facility with funds obtained in connection with our recently
completed offering of convertible preferred stock and new funds anticipated
being received in connection with a new production payment arrangement with
Aquila. We are currently engaged in negotiations, but do not have a binding
agreement with respect to the Aquila facility. There can be no assurance that
this financing option will be consummated. We currently have an extension of
the maturity dates to July 31, 1999 with respect to the EnCap and BOCP Credit
Facilities, and the lenders thereunder have in the past granted maturity date
extensions, and we believe that EnCap Energy and BOCP will continue to extend
the maturity dates to provide us with sufficient time to obtain the new
financings. If the maturity dates under the EnCap and BOCP Credit Facilities
are not extended or we are unable to obtain sufficient new financings to
repay the EnCap Credit Facility and the BOCP Credit Facility, then we will be
in default under the applicable Credit Facility and the applicable lenders
will have the right to seek immediate repayment of the entire indebtedness
due thereunder and enforce their other remedies, which include the right to
foreclose on substantially all of our properties. Such a default will also
cause defaults under other material contracts to which we and our
subsidiaries are parties. Any of the foregoing actions could cause us to
cease operations.
On June 10, 1999, we were obligated to pay one-half of the $6.7
million cost of acquiring certain seismic materials relating to the Old Ocean
Prospect and were obligated to pay the remaining amounts 60 days after
delivery of the processed data. We paid $700,000 of the total amount due on
June 18, 1999, $2.6 million on July 9, 1999 and have reached an oral
agreement to pay the remaining balance by July 31, 1999. Funds for the final
payment are anticipated to come from the sale of approximately 37.5% of our
interest in the Old Ocean Prospect. We currently are in negotiation for the
sale of that interest, and have entered into a letter of intent with a
potential purchaser. Although we believe the sale will be consummated in time
for us to meet our payment obligations, there can be no assurance that the
sale will be consummated by that time or at all. If we are unable to complete
the transaction and are unable to satisfy our payment obligations by some
other means, we will be in default with respect to our obligations to the
company that has completed the seismic survey and with the other owner of an
interest in the Old Ocean Prospect. The defaults would subject us to the
possibility of losing our rights in the seismic materials and in a
substantial portion of our rights in the Old Ocean Prospect. The defaults
also will cause defaults under other material contracts to which we and our
subsidiaries are parties. Any of the foregoing actions would have a material
adverse effect on us and our financial condition.
TRADE PAYABLES--WE HAVE A SUBSTANTIAL AMOUNT OF PAST-DUE TRADE PAYABLES THAT WE
CURRENTLY DO NOT HAVE THE FUNDS TO PAY.
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 is past due. We have requested the holders of such
accounts payable to accept payment over an extended time. There can be no
assurance that a sufficient number of our creditors will accept the proposed
discounts or other payment terms; however, on July 12, 1999, we conducted a
meeting with our trade creditors, and a substantial number of them have
indicated that they will be willing to participate in our proposed repayment
plan.
We anticipate funding our payment obligations by using the proceeds to
be received from the new production payment that we are attempting to arrange,
sale of assets and production revenue. If a creditor is unwilling to participate
in any of our proposed repayment arrangements and we do not have sufficient
funds to pay that creditor, then the creditor may declare us in default and
pursue their available remedies against us. Those remedies could include, under
certain circumstances, placing us into involuntary bankruptcy.
6
<PAGE>
ABILITY TO CONTINUE AS A GOING CONCERN--THE REPORT OF OUR INDEPENDENT
ACCOUNTANTS WITH RESPECT TO OUR FINANCIAL STATEMENTS DISCUSSES OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
The report of our independent public accountants in our financial
statements includes an explanatory paragraph that states that our ability to
continue as a going concern is in question. Note 18 to our audited
consolidated financial statements states that the 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
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.
VOLATILITY OF OIL AND GAS MARKETS--THE VOLATILITY OF OIL AND GAS MARKETS CAUSES
UNCERTAINTY CONCERNING THE VALUE OF OUR OIL AND GAS RESERVES.
MARKET PRICES ARE VOLATILE. Our profitability and cash flow depend
greatly on the market price of oil and natural gas. Prices for oil and natural
gas are subject to wide fluctuations in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
we cannot control.
These factors include:
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political conditions in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- overall economic conditions.
Our ability to maintain or increase our borrowing capacity and to
obtain additional capital on attractive terms, or not at all, is also
substantially dependent upon oil and gas prices. Compared to 1998, the average
prices for our production have generally declined. Continued low prices could
seriously affect our cash flow, financial condition and access to additional
capital.
HEDGING TRANSACTIONS MAY MITIGATE FLUCTUATION IN PRICES. Substantially
all of our sales of oil and natural gas are made in the spot market or pursuant
to contracts based on spot market prices. To reduce price risk, we sometimes
execute contracts on a portion of our production to hedge against market price
changes. Hedging transactions are intended to limit the negative effect of
future price declines, but could also limit our participation in significant
price increases for the covered period. We cannot be certain that hedging
transactions will reduce the effect of any substantial declines in oil and
natural gas prices. Except as described below, as of June 30, 1999, we were not
a party to any natural gas futures contracts, crude oil swap agreements or other
commodity hedging agreement; however, we have agreed to backstop the limited gas
hedges entered into by Shell Capital covering gas dedicated to our term
production payment if the gas volumes delivered to Shell Capital are less than
the amounts hedged. In March, we entered into a forward sale of ten contracts
for delivery in May 1999, and twelve contracts for delivery in June, July and
August, of our anticipated gas production at an average price of $2.07/MMBTU.
Each contract equates to 10,000 million BTU of gas.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES--ESTIMATING OIL AND GAS
RESERVES IS UNCERTAIN AND WE MAY BE UNABLE TO RECOVER ALL OF OUR CURRENTLY
ESTIMATED RESERVES.
There is substantial uncertainty in estimating quantities of proved
reserves and projecting future production rates and the timing of development
expenditures. No one can measure underground accumulations of oil and natural
gas in an exact way. Accordingly, oil and gas reserve engineering requires
subjective estimations of those accumulations. Estimates of other engineers
might differ widely from those of our internal engineers as well as R.A. Lenser
and Associates, Inc., our independent engineers. Accuracy of reserve estimates
depend on the quality of available data and on engineering and geological
interpretation and judgment. Lenser & Associates may make material changes to
reserve estimates based on the results of actual drilling, testing and
production. As a result, our reserve estimates often differ from the quantities
of oil and gas we ultimately recover. Also, we make certain assumptions
7
<PAGE>
regarding future oil and gas prices, production levels, and operating and
development costs that may prove incorrect. Any significant variance from these
assumptions could greatly affect our estimates of reserves and future net
revenues.
EXPLORATION RISKS--OUR OPERATIONS ARE SUBJECT TO SIGNIFICANT EXPLORATION RISKS,
INCLUDING THE RISKS THAT OUR 3-D SEISMIC DATA AND CAEX TECHNOLOGY MAY BE
INSUFFICIENT FOR US TO IDENTIFY OIL AND GAS RESERVES.
Our strategy is to enhance the value of our prospects through the use
of 3-D seismic data and CAEX technology with emphasis on direct hydrocarbon
detection technologies. These technologies create computer generated 3-D
displays of subsurface geological formations that can help our explorationists
detect seismic anomalies and structural features that are not apparent in 2-D
seismic surveys. These technologies, however, require greater pre-drilling
expenditures than traditional drilling strategies. Even when fully used and
properly interpreted, 3-D seismic data and CAEX visualization techniques only
assist geoscientists in identifying subsurface structures and hydrocarbon
indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present and recoverable.
OPERATING AND UNINSURED RISKS--OUR OPERATIONS ARE SUBJECT TO MANY OPERATING
RISKS INCLUDING MANY FOR WHICH WE ARE NOT INSURED.
We must continually acquire or explore for and develop new oil and
natural gas reserves to replace those produced and sold. Our hydrocarbon
reserves and revenues will decline if we are not successful in our drilling,
acquisition or exploration activities. We cannot be certain that our exploration
and development projects will result in significant additional reserves or that
we will have success drilling productive wells at economically viable costs.
Casualty risk and other operating risks could cause reserves and revenues to
decline.
CASUALTY RISKS. Our operations are subject to the following inherent
casualty risks:
- fires;
- explosions and blowouts;
- abnormally pressured formations;
- uncontrollable flows of oil, natural gas or well fluids;
- pollution and other environmental risks; and
- pipe failure.
We could suffer substantial financial losses due to any of the
following:
- injury or loss of life;
- severe damage to and destruction of property and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties; and
- suspension of operations.
UNINSURED RISKS. As is customary in the industry, we maintain insurance
against some, but not all, casualty risks incidental to our business.
OTHER OPERATING RISKS. Numerous risks affect our drilling activities,
including the risk of drilling non-productive wells or dry holes. The cost of
drilling, completing and operating wells and of installing production facilities
and pipelines often is uncertain. Also, our drilling operations could diminish
or cease because of any of the following:
- title problems;
- compliance with governmental regulations;
- shortages or delays in the delivery or availability of
drilling rigs and other equipment; and
- weather conditions.
Moreover, effective marketing of our natural gas production depends on
factors such as the following:
- existing market supply of and demand for natural gas;
8
<PAGE>
- the proximity of our reserves to pipelines;
- the available capacity of such pipelines; and
- government regulations.
The marketing of oil and gas production similarly depends on the
availability of pipelines and other transportation, processing and refining
facilities, and the existence of adequate markets. As a result, even if
hydrocarbons are discovered in commercial quantities, a substantial period of
time may elapse before commercial production commences. If pipeline facilities
in an area are insufficient, we may have to wait for construction or expansion
of pipeline capacity before we can market production from the area.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS--OUR OPERATIONS ARE SUBJECT TO
SUBSTANTIAL GOVERNMENTAL REGULATION AND ENVIRONMENTAL RISKS THAT COULD HAVE AN
ADVERSE IMPACT ON OUR OPERATIONS.
LEGAL LIMITATIONS. We are subject to various United States federal,
state and local laws and regulations on taxation, exploration and development,
and environmental and safety matters. Many laws and regulations require drilling
permits and govern the spacing of wells, the prevention of waste, rates of
production and other matters. These statutes and regulations, and any others
that are passed by the jurisdictions where we have production, could limit the
total number of wells drilled or the total allowable production from successful
wells, which could limit revenues. Currently, we have not curtailed production
on any of our oil and gas wells.
ENVIRONMENTAL LIABILITIES. We could incur liability to the government
or third parties for any unlawful discharge of oil, gas or other pollutants into
the air, soil or water, including responsibility for remedial costs. We could
potentially discharge oil or natural gas into the environment in any of the
following ways:
- from a well or drilling equipment at a drill site;
- leakage from storage tanks, pipelines or other gathering and
transportation facilities;
- damage to oil or natural gas wells resulting from accidents
during normal operations; or
- blowouts or explosions.
Environmental discharges may move through soil to water supplies or
adjoining properties giving rise to additional liabilities. Some laws and
regulations could impose liability for failure to notify the proper authorities
of a discharge and other failures to comply with those laws. Environmental laws
may also affect the costs of our acquisitions of properties. We do not believe
that our environmental risks are materially different from those of comparable
companies in the oil and gas industry. However, we cannot be certain that
environmental laws will not, in the future, result in decreased production,
substantially increased costs of operations or other adverse effects to our
operations and financial condition. Pollution and similar environmental risks
generally are not fully insurable.
COMPETITION--WE ARE SUBJECT TO INTENSE COMPETITION WITHIN OUR INDUSTRY AND MANY
OF OUR COMPETITORS HAVE GREATER FINANCIAL RESOURCES THAN US.
The oil and gas industry is highly competitive. We compete with major
oil and gas companies, other independent oil and gas concerns, and individual
producers and operators. Many of these competitors have financial and other
resources substantially greater than those available to us. Moreover, the oil
and gas industry competes with other industries in supplying the energy and fuel
needs of industrial, commercial and other consumers. Increased competition
causing over supply and depressed prices could greatly affect our operations
revenues.
DEPENDENCE ON THE K.S. BYRD 31-1 #1 WELL AND HOWELL #1 WELL--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 quarter of 1999, revenue from the K.S. Byrd 31-1#1 well
totaled approximately $640,800, 47% of our total revenue, on net production of
4,290 MCFGED. The K.S. Byrd 31-1#1 well accounted for approximately $2.4 million
of our revenues for the year ended December 31, 1998, 49% of total revenue, on
net production of 3,226 MCFGED. After dedication of certain volumes to the Shell
Production Payment or a replacement production payment, the K.S. Byrd 31-1 #1
will continue to be a major contributor to our net production. Subsequent to
year-end 1998, we
9
<PAGE>
put the Howell #1 on production at a high rate of gas flow. The Howell well
is expected to contribute greater net production than the Byrd, and thus,
should become the largest production source for us.
CONFLICTS OF INTEREST WITH RESPECT TO CERTAIN TRANSACTIONS--WE HAVE ENGAGED IN
SUBSTANTIAL TRANSACTIONS WITH CERTAIN OF OUR OFFICERS AND DIRECTORS THAT WERE
NOT NEGOTIATED AT ARMS-LENGTH.
We have engaged in acquisitions, financings, and other transactions
with entities that are owned in part by certain of our officers, directors and
affiliates. We believe that these transactions were fair to us; however, the
transactions did not result from arms length negotiations. There can be no
assurance that better terms would not have been negotiated in these transactions
through arms-length negotiations with unaffiliated third parties.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS--A SUBSTANTIAL PORTION OF OUR
OUTSTANDING VOTING STOCK IS CONTROLLED BY A FEW SHAREHOLDERS THAT HAVE
SUBSTANTIAL INFLUENCE OVER OUR BUSINESS DECISIONS.
At June 30, 1999, the Chairman and Chief Executive Officer, Prentis B.
Tomlinson, Jr. and his wife Heather Tomlinson, beneficially own approximately
33.8% and 7.9%, 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 the
stockholders.
SHARES ELIGIBLE FOR FUTURE SALE--WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF
COMMON STOCK ISSUABLE UPON THE CONVERSION OF OUTSTANDING CONVERTIBLE SECURITIES
AND WARRANTS THAT IF SOLD INTO THE PUBLIC MARKETS COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK.
As of June 30, 1999, we had 34,785,224 shares of common stock
outstanding. Of the outstanding common stock, 15,414,858 shares are owned by
affiliates, as defined in regulations under the Securities Act, and will be
considered "Restricted Stock" within the meaning of Rule 144 under the
Securities Act. Common stock held by affiliates may not be sold in the absence
of registration under the Securities Act, unless an exemption from registration
is available. The remaining outstanding common stock is freely transferable by
persons other than affiliates without restriction or further registration under
the Securities Act. Although we cannot predict the timing or amount of future
sales of common stock, if any, by our selling shareholders or affiliates or the
effect that the availability of such common stock for sale will have on the
market price from time to time, sales of substantial amounts of common stock
could adversely affect the market price of the common stock. In addition to the
common stock described above, 14,493,837 shares of common stock are reserved for
issuance or are issuable upon the exercise of outstanding warrants, options and
other convertible securities.
To the extent that outstanding options and warrants are exercised, the
percentage ownership of common stock of our stockholders will be diluted.
Moreover, the terms upon which we will be able to obtain additional equity
capital may be adversely affected because the holders of outstanding options and
warrants can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than the exercise terms provided by such outstanding securities. In the event of
the exercise of a substantial number of stock options or warrants or the
conversion of any convertible securities, within a reasonably short period of
time after the right to exercise commences, the resulting increase in the amount
of our common stock in the trading market could substantially affect the market
price of the common stock.
ABSENCE OF UNITED STATES TRADING MARKET--OUR SECURITIES CURRENTLY ARE NOT TRADED
ON ANY UNITED STATES STOCK EXCHANGE AND THERE CAN BE NO ASSURANCE THAT WE WILL
BE SUCCESSFUL IN LISTING OUR COMMON STOCK ON ANY UNITED STATES EXCHANGE.
Our common stock currently is traded on the Vancouver Stock Exchange.
There is no established trading market for our common stock in the United
States. The future value of the common stock and preferred stock will depend on
many factors including:
- prevailing foreign currency exchange rates,
- operating results, and
- the market for similar domestic securities.
10
<PAGE>
We cannot assure that the common stock will be listed on a U.S.
exchange, that an active United States public market will develop or that if
convertible preferred stock is converted into common stock, that it will be able
to resell these securities in the United States. See "Summary - The Offering."
CERTAIN ANTI-TAKEOVER PROVISIONS--OUR CERTIFICATE OF INCORPORATION CONTAINS
PROVISIONS THAT COULD ALLOW OUR BOARD OF DIRECTORS TO IMPEDE THE ABILITY OF
OTHERS TO ACQUIRE US.
Our certificate of incorporation authorizes the issuance of preferred
stock at the discretion of our board of directors. The board of directors can,
without shareholder approval, issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of holders of our securities. The preferred stock could be used,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of us. This could discourage bids for us and, thereby,
prevent shareholders from receiving the maximum value for their shares.
Notwithstanding our board's ability to issue preferred stock without shareholder
approval, the certificates of designation with respect to our currently
outstanding preferred stock limit the board's ability to issue any new series of
preferred stock under certain circumstances. The board of directors may
institute further protections on behalf of shareholders to assure their fair
consideration in certain circumstances.
SUBORDINATION OF THE CONVERTIBLE PREFERRED STOCK--THE CONVERTIBLE PREFERRED
STOCK SUBJECT TO RESALE UNDER THIS PROSPECTUS IS SUBORDINATE IN CERTAIN RESPECTS
TO OTHER OF OUR ISSUED AND OUTSTANDING SECURITIES.
The convertible preferred stock ranks PARI PASSU with certain other
issued and outstanding preferred stock and any new issue of preferred stock that
stipulates a liquidation preference PARI PASSU with the convertible preferred
stock, and senior to all other present and any of our future equity that does
not stipulate it, will be PARI PASSU with the convertible preferred stock. The
convertible preferred stock is subordinate to claims of creditors, including
holders of our outstanding debt instruments. As of March 31, 1999, we had
$61,871,600 of indebtedness outstanding. In addition, at March 31, 1999, we had
approximately $12,000,000 of trade payables outstanding and $4.8 million in
notes payable to our vendors.
Additional indebtedness will be incurred by us and our subsidiaries
from time to time subject to certain restrictions contained in our credit
arrangements, the trust indenture relating to our outstanding debentures and the
terms of the convertible preferred stock. In the event of our liquidation,
dissolution or winding up, our lenders to and other creditors and our
subsidiaries would be entitled to payment in full before satisfaction of the
liquidation preference on the convertible preferred stock.
EFFECT OF SUBSTANTIAL INDEBTEDNESS--OUR SUBSTANTIAL INDEBTEDNESS PLACES
SIGNIFICANT RESTRICTIONS ON OUR ABILITY TO ACCESS CAPITAL MARKETS.
Our indebtedness has several important consequences, including, but not
limited to, the following:
- the holders of convertible preferred stock will be subordinate
to any such debt;
- our ability to obtain additional financing in the future, as
needed, 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; and
- 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.
NO DIVIDENDS--WE HAVE NEVER PAID CASH DIVIDENDS AND DO NOT EXPECT TO PAY
DIVIDENDS ON COMMON STOCK IN THE FUTURE.
We may only pay cash dividends out of surplus, as defined in the
Delaware General Corporation Law, or, if no surplus is available, out of our net
profits for the fiscal year which the dividend or distribution is declared and
the preceding fiscal year. No dividends or distributions may be declared or paid
if we are or would be rendered insolvent by virtue of the dividend distribution.
We do not believe that these restrictions will limit our ability to pay
dividends on the convertible preferred stock in the future. We have not paid any
cash dividends on our common stock and do not expect to declare or pay any cash
dividends on our common stock or the convertible preferred stock in the
foreseeable
11
<PAGE>
future. We currently intend to pay dividends on the convertible preferred
stock with common stock. The EnCap Credit Facility and the BOCP Credit
Facility currently contain restrictions on the payment of dividends; however,
we intend to repay these credit facilities shortly.
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS TO STOCKHOLDERS--OUR
CERTIFICATE OF INCORPORATION LIMITS THE LIABILITY OF OUR OFFICERS AND DIRECTORS
FOR CERTAIN ACTIONS, WHICH MAY RESULT IN OUR INABILITY TO COLLECT MONETARY
DAMAGES FROM THEM IN THE CASE OF THEIR MISCONDUCT.
Section 145 of the Delaware General Corporation Law contains provisions
entitling our directors and officers to indemnification from judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees,
as the result of an action or proceeding in which they may be involved by reason
of being or having been our director or officer provided the officers or
directors acted in good faith. Our certificate of incorporation contains
provisions indemnifying our officers and directors to the fullest extent
permitted by Delaware law. These provisions provide, among other things, that
our director shall not be liable either to us or our stockholders for monetary
damages for breach of fiduciary duty as a director. These provisions may limit
the ability of our stockholders to collect on any monetary liability owed to
them by our officer or director.
12
<PAGE>
CAPITALIZATION
The following table sets forth (i) our capitalization at March 31,
1999; (ii) 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 1, due
March 31, 2003, the related sale of 45,150 shares of class A, series II
convertible preferred stock and 34,596 shares of our class A, series II
convertible preferred stock for $2,200,000 principal amount due on the Old Ocean
loan plus accrued interest and repurchase of the NPI, and the application of the
net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------
HISTORICAL PRO FORMA
-------------- --------------
<S> <C> <C>
Long-term debt, including current maturities, net of unamortized discount of $ 61,871,586 $ 44,526,586
$937,500 ......................................................................
Redeemable Preferred Stock, no par value, unlimited shares authorized; 9,488,140
shares issued and outstanding; redemption value of $9,488,140 ................. 9,488,140 9,488,140
Stockholders' equity:
Preferred Stock, $1.00 par value, 100,000,000 shares authorized; no shares issued
or outstanding; (238,201 shares outstanding as adjusted) .................... -- 23,820,100
Common Stock; $.01 par value, unlimited shares authorized; 33,727,724 shares
issued and outstanding (1) ................................................... 20,424,996 20,424,996
Common Stock reserved for issuance, 1,927,436 shares reserved (1) .............. 2,496,030 2,496,030
Additional paid-in capital ..................................................... 878,067 878,067
Accumulated deficit ............................................................ (19,237,436) (18,432,936)
Unrealized losses on available for sale marketable securities .................. (72,882) (72,882)
Cumulative foreign currency translation adjustment ............................. (94,455) (94,455)
-------------- --------------
Total stockholders' equity .................................................. 4,394,320 29,018,920
-------------- --------------
Total Capitalization .............................................. $ 75,754,046 $ 83,033,646
-------------- --------------
-------------- --------------
</TABLE>
- -----------------------------
(1) On May 18, 1999, we migrated from the Yukon Territory, Canada and
became a Delaware Corporation. Authorized capital stock is currently
400,000,000 shares consisting of 300,000,000 shares of common stock,
par value $.01 per share, and 100,000,000 shares of preferred stock,
par value $1.00 per share.
13
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
Our common stock is listed on the Vancouver Stock Exchange under the
symbol "BZG." At June 30, 1999, there were approximately 289 shareholders of
record of common stock and 811 beneficial owners.
The following table sets forth, for the periods indicated, the high and
low sales prices per share, in Canadian dollars and in U.S. dollar equivalents,
for the common stock as reported on Canada Stockwatch. We commenced operations
on October 31, 1996.
<TABLE>
<CAPTION>
COMMON SHARE PRICE COMMON SHARE PRICE
RANGE (CDN) RANGE (US$) (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 July 14, 1999) .................... $ 0.37 $ 0.29 $ 0.25 $ 0.20
</TABLE>
- -------------------------------
(1) Share price was converted from Canadian dollars to U.S. dollars using
the average of the high and low exchange rate in effect during the
respective periods.
(2) In 1997, we changed our fiscal year-end from August 31 to December 31.
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 the board of directors and will depend on our earnings,
if any, our capital requirements and financial condition and other relevant
factors. Presently, the payment of dividends in cash by us on our common stock
is restricted under the terms of certain of our credit facilities. We have the
right through December 31, 1999 to pay dividends due on our class A, series I
preferred stock with common stock priced at a trailing average closing price. To
date, we have elected this option with respect to all dividends due on the class
A, series I preferred stock.
14
<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 three-month period ended March 31, 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 such dates and the results of operations and cash flows
for such periods. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
<TABLE>
<CAPTION>
FOUR MONTH
FOR THE QUARTER ENDED YEAR ENDED PERIOD ENDED TEN MONTH PERIOD
MARCH 31, DECEMBER 31, DECEMBER 31, ENDED AUGUST 31,
----------------------------- ---------------- --------------- ------------------
1999 1998 1998 1997 (1) 1997 (2)
-------------- ------------- ---------------- --------------- ------------------
(unaudited) (unaudited) (audited) (audited) (audited)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Petroleum revenues ....................... $ 1,370,957 $ 1,040,780 $ 4,947,457 $ 707,987 $ 444,203
Earnings (loss) before DD&A, interest,
amortization of issuance costs, income
tax and preferred dividends............... 210,271 (465,790) (2,756,466) (1,479,769) (1,686,624)
Net loss applicable to common
stockholders ............................. (2,665,782) (2,365,163) (11,915,191) (2,739,322) (1,917,141)
AS OF AS OF AS OF AS OF
MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
----------------------------- ---------------- --------------- ------------------
1999 1998 1998 1997 (1) 1997 (2)
-------------- ------------- ---------------- --------------- ------------------
BALANCE SHEET DATA: (unaudited) (unaudited) (audited) (audited) (audited)
<S> <C> <C> <C> <C> <C>
Working Capital Surplus (Deficit) .... $ (35,135,688) $ 2,538,902 $ (27,360,635) $ (15,290,406) $ 1,784,075
Properties and Equipment, net ........ 85,463,843 45,109,137 79,412,241 25,319,771 11,916,817
Total Assets ...................... 97,890,925 75,339,380 95,240,247 36,216,129 21,520,880
Long-term Debt, including current
maturities ........................ 61,871,586 41,152,167 59,490,912 12,708,303 781,326
Redeemable Preferred Shares .......... 9,488,140 12,000,000 9,488,140 -- --
Stockholders' Equity ................. 4,394,320 12,547,544 6,990,828 11,806,496 14,089,948
</TABLE>
- ------------------------------
(1) We changed our fiscal year end to December 31.
(2) Represents the period from inception to original year-end, August 31.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following matters had a significant impact on our results of
operations and financial position for the three months ended March 31, 1999:
VOLUME AND PRICE INFORMATION. Revenue for the first quarter of 1999 was
significantly impacted by low average natural gas prices. Natural gas production
accounts for 87% of our total production on an equivalent MCF basis. Our
revenues are, therefore, more sensitive to gas price fluctuations than to oil
price changes. For the first quarter of 1999, natural gas prices we received for
our production averaged $1.70 per MCF compared to $2.27 for the comparable
period in 1998.
The following table summarizes volume and price information with
respect to our oil and gas production for the three months ended March 31, 1999
and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------------ INCREASE
1999 1998 (DECREASE)
----------- ----------- --------------
<S> <C> <C> <C>
Gas Volume - MCFGD ................... 7,913 4,570 3,343
Average Gas Price - per MCF .......... $ 1.70 $ 2.27 $ (0.57)
Oil Volume - BOD ..................... 191 99 92
Average Oil Price - per barrel ....... $ 9.50 $ 12.08 $ (2.58)
</TABLE>
OUTSTANDING DEBT. At March 31, 1999, we had outstanding debt of
$61.9 million. Our EnCap, BOCP and Old Ocean Credit Facilities will come due
on July 31, 1999. As to the indebtedness reflected by the Old Ocean Loan, all
lenders, other than affiliates of EnCap that are owed $100,000, elected to
convert their respective indebtedness and the mineral interests obtained in
connection with the Old Ocean Loan into our convertible preferred stock. In
July 1999, we repaid the $100,000 owed to affiliates of EnCap under the Old
Ocean Loan and we anticipate that we will repay the indebtedness reflected by
the EnCap Credit Facility and the BOCP Credit Facility in July, 1999, with
funds obtained in connection with our recent offering of our convertible
preferred stock and new funds received in connection with an increase either
of the Shell Production Payment or through funds received in connection with
a new production payment arrangement with a new lender. We currently are
engaged in negotiations as to both financing options and believe such new
financing will be available in time to meet the current maturity dates. If we
are unable to obtain sufficient new financing to repay the EnCap Credit
Facility and the BOCP Credit Facility, then we will be in default under the
applicable Credit Facility and the applicable lenders will have the right to
seek immediate repayment of the entire indebtedness due thereunder and
enforce other remedies, which include the right to foreclose on substantially
all of our properties. Any of the foregoing actions could cause us to cease
operations.
16
<PAGE>
The following had a significant impact on our results of operations and
financial position for the year ended December 31, 1998:
CAPITALIZATION. We completed in March and April of 1998, 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 changes
to the indentures. Series 3 debentureholders and the Series A special
noteholders have agreed to the same changes by written consent. The 9% notes are
convertible into 29,003,555 shares of common stock, based on a conversion price
of Cdn.$1.40 and an exchange rate of $0.6711 per Cdn.$1.00 (the exchange rate as
of April 15, 1999). The remaining 9% convertible debentures are convertible into
10,551,121 shares of common stock based on a current conversion price of
Cdn.$1.40, adjusted for a 10% penalty on conversion due to delayed registration.
DISCOVERY WELL. The K. S. Byrd Well, which began producing in September
of 1997, contributed an average of 2,402 MCF per day during 1998, before
including 747 MCF per day for acquired interests.
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 DECEMBER 31,
--------------------------- FOUR MONTHS TEN MONTHS
ENDED ENDED
1998 1997(1) INCREASE DECEMBER 31, AUGUST 31,
(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>
- ---------------------------------
(1) The amounts for the year ended December 31, 1997 were derived by adding
the audited four month period ended December 31, 1997 and the audited
ten month period ended August 31, 1997 and then subtracting the
unaudited two month period ended December 31, 1996.
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
whereby we sold a term production payment to Shell Capital for $7.0 million.
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THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
NET LOSS. For the three months ended March 31, 1999, we reported a net
loss applicable to common stockholders of $2.7 million, or $0.08 per share,
compared to a net loss of $2.4 million, or $0.08 per share, in the comparable
1998 period. Weighted average shares outstanding increased from approximately
30.6 million in the first quarter of 1998 to over 33.7 million in the comparable
1999 period as a result of the issuance of Common Stock as dividend payment on
preferred shares as well as the exercise of warrants and options in the second
half of 1998.
REVENUE. For the three months ended March 31, 1999, revenue from crude
oil and natural gas production increased 32% over the same period in 1998.
Natural gas contributed 88% and crude oil contributed 12% of total oil and gas
production revenue.
GAS SALES. Natural gas sales increased 30%, from $932,400 for the three
months ended March 31, 1998 to approximately $1.2 million for the same period in
1999; however, the impact of increased production was significantly reduced by
the decline in natural gas prices. Production for the first quarter of 1999
increased significantly over the comparable prior year period due primarily to
production from the assets purchased in the second quarter of 1998 and
production from new wells drilled and completed. This increase in production
improved revenue from the 1999 period by $681,800. The average realized price
for natural gas sales declined from $2.27 per MCF in the first quarter of 1998
to $1.70 per MCF in the comparable 1999 period decreasing revenues by $406,700.
OIL SALES. For the three months ended March 31, 1999, oil sales
increased 51% to $163,500, compared to $108,400 for the same period in 1998, due
primarily to sales of production from properties acquired in the second quarter
of 1998 and from new wells drilled and completed. This increase in production
improved revenue for the first quarter of 1999 by approximately $99,500. Our
average realized price for sales of crude oil in the first quarter of 1999
decreased by $2.58 per barrel, or 21%, decreasing revenue by $44,400 compared to
the same period in 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion
and amortization expense for the first quarter of 1999 totaled $1.2 million
compared to $676,600 in the comparable period for 1998. Full cost DD&A totaled
$1.1 million for the three months ended March 31, 1999 compared to $621,600 for
the same period in 1998. The increase in DD&A is consistent with a higher
amortizable asset base and an increase in production for the 1999 period
compared to the prior year period. On an equivalent MCF basis, full cost DD&A
decreased $0.04 per MCFE, from $1.34 per MCFE for the three months ended March
31, 1998 to $1.30 per MCFE in the comparable 1999 period. DD&A of other assets
for the first quarter of 1999 totaled $102,500, an increase of $47,500 over the
comparable period in 1998, due primarily to an increase in the related asset
base.
OPERATING COSTS. Operating costs, including lease operating expense and
production taxes, increased 30% from $129,200 in the first quarter of 1998 to
$168,200 for the same period in 1999. The increase was due primarily to
increased production from wells drilled or acquired since the prior year period.
For the three months ended March 31, 1999, lease operating expense, excluding
severance taxes, totaled $138,000 compared to $111,100 for the comparable period
in 1998. On an equivalent MCF basis, average lease operating expense for the
first quarter of 1999 decreased from $0.24 per MCFE in 1998 to $0.17 per MCFE in
the same 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the three months ended March 31, 1999 decreased $552,200, or 37%, compared
to the same period in 1998. On an equivalent MCF basis, general and
administrative expenses declined 64% to $1.15 per MCFE for the three months
ended March 31, 1999 compared to $3.19 per MCFE for the same period in 1998. The
decrease in 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 three months ended March 31,
1999 totaled $1.0 million compared to $1.2 million in the comparable prior year
period. Average debt was approximately $59.8 million for the first quarter of
1999, resulting in gross interest costs of $2.0 million. Other financing costs
include the amortization of a discount of $77,800. Partially offsetting these
costs was capitalized interest of $1.0 million, which is based on the carrying
value of unproved properties. Financing costs also included amortization of debt
issuance costs totaling $582,030 for the first
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<PAGE>
quarter of 1999. For the first quarter of 1998, average debt was
approximately $25.6 million, resulting in gross interest costs of $857,000.
Other financing costs included the amortization of the original issue
discount for the EnCap NPI and warrants of $512,400. Partially offsetting
these costs was capitalized interest of $171,400. Amortization of debt
issuance costs totaled $53,800 for the first quarter of 1998.
OTHER. Other income (expense) for the three months ended March 31, 1999
included interest income of $88,200 partially offset by losses on the sale of
marketable securities totaling $58,600. For the comparable period in 1998 other
income included interest income of $29,000 and gains on the sale of marketable
securities totaling $108,800.
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 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
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<PAGE>
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 is due primarily to the financing arrangements under the EnCap
Credit Facility entered into in December 1997 and interest on the $37.5 million
principal amount of 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 our key employee
recorded in December 1998 to reflect settlement of his employment contract. Such
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.
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, depreciation, depletion
and amortization expense was $240,400. Full cost depreciation, depletion and
amortization 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, lease operating expense 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.
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<PAGE>
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 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.
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, payment for the acquisition and processing of seismic
data, the repayment of trade payables and repayment of principal and interest on
outstanding debt. We have budgeted $11.3 million to fund planned capital
expenditures on our prospects during 1999. Our sources of financing include net
proceeds from our recently completed offering of convertible preferred stock, a
tentative commitment of equity from an affiliate of EnCap, revenue generated
from operations, ongoing sales of non-core assets and proceeds from production
payment facilities. Based on the foregoing, 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. Such
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 the foregoing. In the absence of any
new funding, we will have inadequate liquidity to satisfy our existing
contractual obligations and to continue operations in our current form.
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 March 31, 1999, we had cash and cash equivalents on hand
of $565,200 and working capital deficit of $35.1 million, as compared to a cash
balance of $2.3 million and a working capital deficit of $27.4 million as at
December 31, 1998 and a cash balance of $3.2 million and a working capital
deficit of $15.3 million at December 31, 1997. Our ratio of current assets to
current liabilities was 0.16:1 at March 31, 1999, 0.25:1 at December 31, 1998
and 0.37:1 at December 31, 1997. The working capital deficit and low current
ratio is primarily due to the EnCap Credit Facility discussed below, repayment
of which is due by July 31, 1999.
21
<PAGE>
CASH FLOWS. Cash flows used in operations, totaled $153,600 for the
three months ended March 31, 1999, compared to $4.1 million for the year ended
December 31, 1998. Cash used in investing activities for the quarter ended March
31, 1999 and year ended December 31, 1998 was $4.1 million and $35.4 million,
respectively. During the first quarter of 1999, costs incurred for exploration
and development expenditures totaled $4.2 million and capital expenditures for
furniture and equipment totaled $64,200. Partially offsetting these costs were
proceeds of $128,100 from the sale of marketable securities. Cash outlays for
exploration and development expenditures totaled approximately $36.3 million and
capital expenditures for furniture and equipment totaled $745,400 during the
year ended December 31, 1998. Partially offsetting these costs were $1.1 million
in proceeds from the sale of non-core properties and $1.1 million in proceeds
from the sale of marketable securities.
Cash provided by financing activities totaled $2.4 million for the
first quarter of 1999 and included borrowings under the BOCP Credit Facility of
approximately $2.7 million and repayments under the Shell Production Payment
totaling approximately $352,500. For the year ended December 31, 1998 cash
provided by financing activities totaled approximately $38.7 million and
consisted primarily of proceeds from the issuance of 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 whereby 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 a short term, secured advance from
investors introduced by the agent (referred to herein as the Old Ocean Loan).
CREDIT FACILITIES
ENCAP CREDIT FACILITY. In 1997, we entered into a $20 million credit
agreement with EnCap Capital Fund III, L.P. ("EnCap Energy") consisting of an
original promissory note for $12,000,000 and a supplemental promissory note for
$8,000,000. The original note bears interest at 10% per annum through December
31, 1998 and at 18% per annum thereafter. The original note is due, with accrued
interest, by July 31, 1999. The supplemental note was repaid in full and is no
longer outstanding. Under the terms of the 9% convertible debentures, we have
agreed to limit borrowings under the EnCap Credit Facility to $12,000,000, all
of which is outstanding and due July 31, 1999. 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.
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<PAGE>
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;
- 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 is $6.0
million. All interest accrued on Tranche B remains unpaid and owing and is
due on July 31, 1999. We have reached a standstill agreement covering certain
covenants of which we are currently in violation and received an extension in
the maturity date to July 31, 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 is due, through extension, on July 31, 1999, and is 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. 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.
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.
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<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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BUSINESS AND PROPERTIES
BACKGROUND
We are an independent energy company engaged in the exploration for
and development of oil and natural gas. We have interests in over 25 oil and
gas prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of these prospects have been, are
being, or are expected to be, enhanced with 3-D seismic data and CAEX
technologies. The 3-D seismic data, including current surveys, will cover
over 820 square miles. Our 1999 capital budget provides for a total of $11.3
million for drilling and prospect development. Of such amounts, 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, 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 migrated to the state of 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:
- in January 1998, the acquisition 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 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.
On July 7, 1999, we executed a letter of intent with Prime
Natural Resources, Inc. for the sale of 37.5% of our interest in the Old
Ocean Prospect. The consummation of the transaction is subject to the
negotiation and execution of a definitive purchase and sale agreement. Under
the letter of intent, Prime has agreed to pay us $3,500,000 at closing and
$1,978,098 on or before September 15 in consideration of the interest to be
purchased. We will reserve an
25
<PAGE>
overriding royalty interest in all leases and contractual rights to volumes
of production and all similar interests, whether we currently own them or
later acquire them, within the established area of mutual interest for the
project. Prime has an option for a six month period to purchase an additional
12.5% of our interest in the Old Ocean Prospect, subject to the overriding
royalty reservation set forth above, at a purchase price of $1,826,033, plus
$214,276 at the end of the six month period. We have agreed to enter into an
agreement under which Prime or one of its affiliates will have the right to
market the 3-D seismic geophysical data covering the Old Ocean Prospect for a
ten year period following a 120 day exclusivity period that we have retained.
Prime 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. The letter of intent will expire if the transactions
contemplated thereby are not closed on or before July 31, 1999.
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.
In May 1999, we closed the sale of our interests in the Lisbon
Field, comprising essentially all of our proven reserves in Louisiana, for
$507,500 in gross proceeds to an unrelated party.
In 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.
We plan to co-mingle the 42 net feet in the Harper and the 38 net
feet in the Booth for production. Both of these zones are producing in the
adjacent fault block to the north out of our first two wells in the field,
the K. S. Byrd #1 and the Howell #1.
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;
26
<PAGE>
- 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. Such 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 displays 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. Such
professional staff has on average 18 years of experience in the oil and gas
industry.
USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING
TECHNOLOGY. In addition to applying the latest in 3-D seismic and CAEX
technology, we use the latest in industry reservoir stimulation and
directional drilling techniques. For example, many of our development and
exploitation opportunities are "tight" reservoirs in which modern stimulation
practices may significantly increase production.
CONTROL OF DRILLING FUNCTIONS. We believe that controlling the most
critical functions in the drilling process will enhance our ability to
successfully develop our prospects. We have acquired a majority interest in
many of our prospects, including interests in most of the 3-D seismic data
relating to those prospects. In many cases where we do not own a majority
interest in a prospect we still own a greater interest than that of any other
working interest owner. As a result, in many of our prospects, we will be
able to influence the 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 March 31, 1999, we owned interests in 20
producing wells we operated and also owned non-operated interests in one
producing well in Texas. 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 7,913 MCFGD and 191 BOPD for the three months ended March
31, 1999. Daily production as of March 31, 1999, was approximately 9,547 MCFGD
and 219 BOPD. 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 (gross). The table below gives certain information regarding the location,
objectives, and present status of our most significant prospects as of March 31,
1999:
27
<PAGE>
<TABLE>
<CAPTION>
LEASED ADDITIONAL GROSS
ACREAGE ACREAGE (4) SQUARE
------------------ --------------------- MILES OF
GROSS NET GROSS 3-D APPROX.
ACRES ACRES ACRES NET SEISMIC FORMATION TOTAL
PROSPECT (1) (2) (1) ACRES (2) DATA (5) OBJECTIVE DEPTH
- ---------------------------------- --------- ------- --------- ---------- -------- ----------- -------
MISSISSIPPI
<S> <C> <C> <C> <C> <C> <C> <C>
Oakvale Dome (3,7) ............ 4,853 2,675 N/A N/A 33 Hosston 16,700'
Glancy Re-entry (3,8) ......... 6,135 5,077 N/A N/A N/A Hosston; 21,000'
Cotton
Valley
Wausau (3) .................... 1,240 471 N/A N/A 55 Cotton 19,000'
Valley
Sardis Church Dome (3,8) ...... 3,588 3,104 N/A N/A N/A Hosston 16,500'
TEXAS
LaHinch (3,9) ................. 1,382 1,037 N/A N/A 20 Wilcox 16,000'
Old Ocean (8,10,11, 12, 13) ... 671 243 42,217 9,846 102 Frio 16,000'
Oak Hill Field (3) ............ 793 698 N/A N/A N/A Cotton 9,500'
Valley
Rayburn (3,8) ................. 2,966 1,050 4,585 3,626 30 Yegua; 15,000'
Wilcox
OTHER
Louisiana ..................... 7,362 705 N/A N/A 478
Mississippi ................... 26,618 10,621 N/A N/A 73
New Mexico .................... 160 12 N/A N/A N/A
Texas ......................... 5,566 2,408 N/A N/A 30
--------- ------- --------- ---------- -----------
Total ......................... 61,334 28,101 46,802 13,472 821
--------- ------- --------- ---------- -----------
--------- ------- --------- ---------- -----------
</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.
(5) Represents 3-D seismic data acquired, being acquired or expected to
be acquired.
(6) Drilling.
28
<PAGE>
(7) Completing.
(8) Soliciting industry participant.
(9) Evaluating 3-D seismic data.
(10) Shooting 3-D seismic survey.
(11) Affiliates of EnCap own an overriding royalty interest that is
convertible into a participating net profit interest.
(12) We will earn an additional working interest in deep rights upon
completion and delivery of a 3-D survey over the unit and the
establishment of commercial production.
(13) Clients of the Agent and the Agent own an overriding royalty
interest that is convertible into a participating net profit
interest. We have the right to buy back the participating net
profits interest and are currently negotiating such purchase in
exchange for Preferred Stock.
Below are descriptions, as of March 31, 1999, unless otherwise
indicated, of our most significant prospects.
OAKVALE DOME. The Oakvale Dome Prospect, located in Jefferson Davis
County, Mississippi, is our most significant producing property. We own
approximately 4,853 gross (2,675 net) acres in the Prospect. We are the
operators.
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 March 31, 1999, was flowing at the
rate of 9.95 MMCFGD and 37 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 6,135 gross (5,077 net) acres in the
Glancy Prospect in Copiah County, Mississippi. We are the operators. 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 1,240 gross (471 net) acres in the
Wausau Prospect in Wayne County, Mississippi (surface to 15,360 feet only).
We are the operators. 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. Production commenced in November and was increased
to a rate of over 400 BOPD and 2,000 MCFD with the connection to a gas sales
pipeline in February 1999. The well has three additional shallower Cotton
Valley reservoirs behind pipe.
29
<PAGE>
SARDIS CHURCH DOME. We own approximately 3,588 gross (3,104 net)
acres in the Sardis Church Dome Prospect in Copiah County, Mississippi. We
are the operators. Our drilling objectives are the Paluxy, Hosston and Cotton
Valley sands. We anticipate we will sell at least 50% of the working interest
to an industry participant before spudding the test well. This prospect is an
analog to the Oakvale Dome discovery and is located along a trend. A nearby
off structure well has tested significant oil and gas shows in the Hosston
objective section.
LAHINCH. We own deep rights under approximately 1,382 gross (1,037
net) acres in the LaHinch Prospect in Duval County, Texas. We are the
operators. The objectives for the prospect are sands in the Upper Wilcox
formation. The adjoining operator has drilled an Upper Wilcox test on the
same structure that, if successful, will confirm our prospect and reclassify
it as a proven location. This well reached total depth in April 1999 and is
currently being completed. If we complete a successful test well, we will
commence a development program on our acreage.
OLD OCEAN. We own leases, options for oil and gas leases and have
contractual rights to earn working interests in approximately 42,888 gross
(10,089 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 of the seismic survey.
The Old Ocean Prospect is the largest Frio gas field in the Gulf Coast,
having produced more than five TCFGE since our discovery in 1934. In excess
of 200 wells have been drilled in the Old Ocean field. These reserves have
been produced from four normally pressured reservoirs between 9,500 and
11,000 feet. The Old Ocean Prospect actually consists of numerous prospects
and the main objective is in the 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. Affiliates of EnCap and the
Agent and certain of our clients own a 50% overriding royalty interest in
certain of our properties that make up the Old Ocean Prospect, which interest
is convertible into a participating net profit's interest. We have the right
to buy back the participating net profits interests and are negotiating such
purchase in exchange for a cash payment to affiliates of EnCap and using
Preferred Stock for the other Old Ocean Lenders.
OAK HILL FIELD. 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. There are currently
six producing wells in Oak Hill Field owned by us.
RAYBURN. We own approximately 2,966 gross (1,050 net) acres and have
options for oil and gas leases on an additional 4,585 gross (3,626 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 acquired in 1998 of which we
intend to sell up to 60% to industry partners. The objectives are sands
primarily in the Wilcox, Cockfield and Miocene formations ranging in depth
from 2,000 to 16,000 feet.
OIL AND GAS RESERVES
The following table sets forth information regarding estimated oil
and gas reserve quantities, reserve values and discounted future net revenues
as estimated by our independent engineering consultant, Lenser & Associates,
as of January 1, 1999.
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.
30
<PAGE>
<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)
---------- ---------- -------------- ------------- --------------
Proved developed reserves: (3) (in thousands)
<S> <C> <C> <C> <C> <C>
Louisiana (5) ........................ 87 75 541 $ 349 $ 311
Mississippi .......................... 15,940 279 17,611 30,772 24,373
Texas ................................ 4,182 55 4,516 5,292 3,473
---------- ---------- -------------- ------------- --------------
20,209 409 22,668 $ 36,413 $28,157
---------- ---------- -------------- ------------- --------------
Proved undeveloped reserves: (4)
Louisiana (5) ........................ 1,359 119 2,072 $ 1,093 $ 362
Mississippi .......................... 14,837 56 15,171 25,816 17,154
Texas ................................ -- -- -- -- --
---------- ---------- -------------- ------------- --------------
16,196 175 17,243 $ 26,909 $17,516
---------- ---------- -------------- ------------- --------------
Total proved reserves ................ 36,405 584 39,911 $ 63,322 $45,673
---------- ---------- -------------- ------------- --------------
---------- ---------- -------------- ------------- --------------
</TABLE>
- ------------------------
(1) Oil production is converted to MCFE at the rate of six MCF of
natural gas per Bbl of oil, based upon the approximate energy
content of natural gas and oil.
(2) Estimated future net revenue represents estimated future gross
revenue to be generated from the production of proved reserves, net
of estimated production and future development costs, using prices
and costs in effect as of January 1, 1999. The amounts shown do not
give effect to expenses unrelated to property, such as general and
administrative expenses, debt service and future income tax expense
or to depreciation, depletion and amortization. The estimates shown
do not include amounts dedicated to Shell Capital pursuant to the
Shell Production Payment (see description of Shell Production
Payment above), but do include the effect of the EnCap NPI which
vested on January 1, 1999. The EnCap NPI comprises a 6.25% interest
in the producing Byrd #1 and Howell #1.
(3) "Proved Developed Reserves" means those reserves estimated as
recoverable under current technology and projected economic
conditions, from that portion of a reservoir that can reasonably be
evaluated as economically productive on the basis of analysis of
drilling, geological, geophysical and to be obtained by enhanced
recovery processes demonstrated to be economic and technically
successful in the subject reservoir.
(4) "Proved Undeveloped Reserves" mean those reserves estimated as
recoverable under current technology and projected economic
conditions from that portion of a reservoir that can reasonably be
evaluated as technologically productive, but which requires the
drilling and completion of a well to initiate production.
(5) In May 1999, we sold our interest in the Lisbon Field, which
accounted for all of the proved developed and undeveloped reserves
in Louisiana.
ACREAGE
The following table sets forth as of March 31, 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.
31
<PAGE>
<TABLE>
<CAPTION>
DEVELOPED (1) UNDEVELOPED (2)
-------------------------- ---------------------------
GROSS NET GROSS NET
ACRES (3) ACRES (4) ACRES (3) ACRES (4)
------------ ------------ ------------- ------------
STATE:
<S> <C> <C> <C> <C>
Louisiana (5) .................................. 2,086 481 5,276 224
Mississippi .................................... 1,920 1,130 40,514 20,818
New Mexico ..................................... 160 12 -- --
Texas .......................................... 2,573 1,243 8,805 4,193
------------ ------------ ------------- ------------
Total ................................... 6,739 2,866 54,595 25,235
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</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
executed.
(4) "Net acres" means the sum of the fractional working interest owned
in gross acres expressed as whole numbers and fractions thereof.
(5) The number of gross and net acres in Louisiana includes the acreage
associated with the Lisbon Field which we sold after December 31,
1998.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth certain information regarding our
ownership as of March 31, 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 NET GROSS NET
WELLS WELLS WELLS WELLS
STATE (1) (2) (1) (2)
- -------------------- ----------- -------------- --------- ------------
<S> <C> <C> <C> <C>
Louisiana .............................................. 5 0.88801130 -- --
Mississippi ............................................ 6 3.493795 1 0.03730014
New Mexico ............................................. 1 0.07500000 -- --
Texas .................................................. 10 6.09927790 1 0.50000000
----------- -------------- --------- ------------
Total ........................................... 22 10.5560842 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.
32
<PAGE>
(2) "Net wells" means the sum of the fractional working interest owned
in gross wells expressed as whole numbers and fractions thereof.
(3) The number of gross and net wells in Louisiana includes wells
located in the Lisbon Field which we sold after December 31, 1998.
DRILLING ACTIVITY
During the first quarter of 1999, we participated in one gross
(.556248 net) productive developmental well and one gross (.1575 net) dry
developmental well. We participated in one gross (0.14 net) dry and three
gross (1.8383 net) productive exploratory wells and three Gross (0.25954 net)
productive development wells during the year ended December 31, 1998. For the
four-month period ended December 31, 1997, we drilled one gross (0.48500 net)
productive exploratory well, two gross (1.3575 net) dry exploratory wells and
three gross (0.342202 net) productive development wells. For the ten months
ended August 31, 1997, we drilled one gross (0.14725 net) productive
exploratory well and one gross (0.20110 net) dry exploratory well. We are
entitled to a working interest in certain additional wells completed during
these time periods when and if those wells pay-out. Furthermore, the number
of net wells was calculated based-on our before pay-out working interest and
in some cases we will have a greater working interest or is entitled to a
working interest in certain wells completed during these time periods when
and if these wells pay-out. In certain cases, we, subsequent to completion,
sold the prospect on which certain of these wells were drilled. As such,
while we did participate in the drilling, it does not currently have an
interest in all of the productive wells mentioned above.
On March 31, 1999, we were drilling 1.0 gross (0.704075 net)
development well. This well is a step out well from the Byrd discovery well
at Oakvale Dome Field in Mississippi.
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>
THREE MONTHS TWELVE MONTHS FOUR MONTHS TEN MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 12, DECEMBER 31, AUGUST 31,
1999 1998 1997 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net Production:
Oil (BBL) ....................................... 17,213 40,662 4,506 9,281
Gas (MCF) ....................................... 712,171 2,009,550 223,683 83,810
Gas Equivalent (MCFE) ........................... 815,449 2,253,522 250,719 139,493
Average sales price:
Oil ($ per BBL) ................................. $ 9.50 $ 10.83 $ 18.54 $ 20.28
Gas ($ per MCF) ................................. $ 1.70 $ 2.24 $ 2.79 $ 3.05
Gas Equivalent ($ per MCFE) ..................... $ 1.68 $ 2.20 $ 2.82 $ 3.18
Average production expenses ($ per MCFE) (1) .... $ 0.17 $ 0.38 $ 0.17 $ 0.33
</TABLE>
- -----------------------------
(1) Average production costs, excluding severance taxes.
CAEX AND 3-D SEISMIC TECHNOLOGY
33
<PAGE>
We, either directly or through other prospect participants, uses 3-D
seismic data and CAEX technology to collect and analyze geological,
geophysical, engineering, production and other data obtained about potential
gas or oil prospects. 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 uses 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 such data are made possible by computer
programs and advanced computer hardware.
While large oil companies have used 3-D seismic data and CAEX
technologies for approximately 20 years, these methods were not affordable by
smaller, independent oil and gas companies until more recently, when improved
data acquisition equipment and techniques and computer technology became
available at reduced costs. We believe that our use of 3-D seismic data and
CAEX technology may provide it with certain advantages in the exploration
process over those companies that do not use this technology. These
advantages include better delineation of the subsurface, which can reduce
exploration risks and help optimize well locations in productive reservoirs.
We believe these advantages can be readily validated based upon general
industry experience. Because computer modeling generally provides clearer and
more accurate projected images of geological formations, we believe it is
better able to identify potential locations of hydrocarbon accumulations and
the desirable locations for wellbores. However, we have not used the
technology extensively enough to arrive at any conclusion regarding our
ability to interpret and use the information developed from the technology.
CUSTOMERS
For the quarter ended March 31, 1999, Coral Energy L.P. and Tejas
Gas Corporation accounted for approximately 60% and 14%, respectively, of our
total oil and gas revenue. 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 our total revenue. For the four-month period ended
December 31, 1997, H&N Gas and KCS Resources, Inc. ("KCS") accounted for 75%
and 10%, respectively, of 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
enters into various forward contracts covering a portion of our production to
minimize the fluctuations and the effect of price declines. Under the terms
of the term production payment with Shell Capital, we market our natural gas
through Coral Energy Resources, L.P. ("Coral") whereby Coral markets at both
fixed and floating prices.
COMPETITION
The oil and gas industry is highly competitive in all of its phases.
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,
34
<PAGE>
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 such laws, changing rules and regulations and
the interpretations and applications of such laws, rules and regulations. Oil
and gas industry legislation and agency regulation are under constant review
for amendment and expansion for a variety of political, economic and other
reasons. Numerous regulatory authorities, and federal, state and local
governments issue rules and regulations binding on the oil and gas industry,
some of which carry substantial penalties for failure to comply. The
regulatory burden on the oil and gas industry increases our cost of doing
business and, consequently, affects our profitability. We believe it is in
compliance with all federal, state and local laws, regulations and orders
applicable to us and our properties and operations, the violation of which
would have a material adverse effect on us or our financial condition.
SEISMIC PERMITS. Current law in Louisiana requires permits from
owners of at least an undivided 80% interest in each tract over which we
intend to conduct seismic surveys. As a result, we may not be able to conduct
seismic surveys covering our entire area of interest in that state. Moreover,
3-D seismic surveys typically are conducted from various locations both
inside and outside the area of interest to obtain the most detailed data of
the geological features within the area. To the extent that we are unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available. In addition,
a recent decision of a federal court in Louisiana casts doubt on traditional
seismic permitting practices, which decision, in some instances, could lead
to the surface owner claiming ownership of the data.
EXPLORATION AND PRODUCTION. Our operations are subject to various
regulations at the federal, state and local levels. Such regulations include
(i) requiring permits for the drilling of wells; (ii) maintaining bonding
requirements to drill or operate wells; and (iii) regulating the location of
wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and
abandoning of wells and the disposal of fluids used in connection with well
operations. 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 unitization or
pooling of oil and gas properties. In addition, state conservation laws
establish maximum rates of production from oil and gas wells, generally
prohibiting the venting or flaring of gas, and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of oil and gas we can produce from our wells and to limit
the number of wells or the locations at which we can drill.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal
legislation and regulatory controls in the United States have historically
affected the price of the natural gas produced by us and the manner in which
such production is marketed. The transportation and resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
(the "FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act
of 1978 (the "NGPA"). Sales of our natural gas currently are made at market
prices, subject to applicable contract provisions and are not subject to
federal or state price control. The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
The FERC also regulates interstate natural gas transportation rates
and service conditions, which effect the marketing of natural gas produced by
us, as well as the revenues received by us for sales of such natural gas.
Since the latter part of 1985, the FERC has endeavored to make interstate
natural gas transportation more accessible to gas buyers and sellers on an
open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, required interstate pipelines to
"restructure" their services to provide transportation separate or
"unbundled" from the pipelines' sales of gas. Also, Order No. 636 requires
interstate pipelines to provide open-access transportation on a
nondiscriminatory basis that is equal for all natural gas shippers. Order No.
636 has been implemented through decisions and negotiated settlements in
individual pipeline services restructuring proceedings. In many instances,
the result of Order No. 636 and related initiatives has been to substantially
reduce or eliminate the interstate pipelines' traditional role as wholesalers
of natural gas, and has
35
<PAGE>
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 it
competes.
Although Order No. 636 does not regulate natural gas production
operations, the FERC has stated that Order No. 636 is intended to foster
increased competition within all phases of the natural gas industry. It is
unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on 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 it will be affected by any action taken with respect
to Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC has recently announced its intention to 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. In as much as such
laws and regulations are frequently expanded, amended or reinterpreted, we
are unable to predict the future cost or impact of complying with such
regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in
1993, which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute,
the party transferring the oil field site may not thereafter be held liable
by the state for any site restoration costs or actions associated with the
transferred oil field site. The parties to a transfer may elect not to
establish a site-specific trust account. However, in the absence of such an
account, the transferring party will continue to have liability for the costs
of restoration of the site. If the parties to a transfer elect to establish a
site-specific trust account pursuant to the statute, the Louisiana Department
of Natural Resources (the "DNR") requires an oil field site restoration
assessment to be made at the time of the transfer or within one year
thereafter, to determine the site restoration requirements existing at the
time of transfer. Based upon the site restoration assessment, the parties to
the transfer must propose to the DNR a funding schedule for the site-specific
trust account, providing for some contribution to the account at the time of
transfer and at least quarterly payment thereafter. If the DNR approves the
establishment and funding of the site-specific trust account, the purchaser
will thereafter be the
36
<PAGE>
responsible party to the state, except that the failure of a transferring
party to make a good faith disclosure of all oil field site conditions
existing at the time of the transfer will render that party liable for the
costs of restoration of such undisclosed conditions in excess of the balance
of the site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates
and service conditions for interstate transportation of crude oil, liquids
and condensate, which can affect the amount we receive from the sale of these
products. Rates for such transportation are generally subject to an indexing
system under which rates may be increased as long as they do not exceed an
index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. Sales of crude oil, condensate and gas liquids by us
are not regulated and are made at market prices. The price 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, such as the Environmental Protection Agency (the "EPA"), issue
regulations to implement and enforce such laws, which often require difficult
and costly compliance measures that carry substantial civil and criminal
penalties for failure to comply. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentrations of various substances that can be released into
the environment in connection with drilling and production activities, limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands, ecologically sensitive and other protected areas, require some form
of remedial action to prevent pollution from former operations, such as
plugging abandoning wells, and impose substantial liabilities for pollution
resulting from 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. The regulatory burden on the oil and gas industry
increases the cost of doing business and consequently affects our
profitability. Changes in environmental laws and regulations occur
frequently, and any changes that result in more stringent and costly waste
handling, disposal or cleanup requirements could adversely affect 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:
The Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA") also known as "Superfund," imposes liability
without regard to fault or the legality of the original conduct, on certain
classes of persons who are considered to be responsible for the release of a
"hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of the facility at the time the disposal
of hazardous substances took place, (iii) generators of hazardous substances
who arranged for the disposal or treatment at or transportation to such
facility of hazardous substances and (iv) transporters of hazardous
substances to disposal or treatment facilities selected by them.
Under CERCLA, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have
been released into the environment, for damages to natural resources and for
the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances or
other pollutants into the environment. Furthermore, although petroleum,
including crude oil and natural gas, is exempt from CERCLA, at least two
courts have ruled that certain wastes associated with the production of crude
oil may be classified as "hazardous substances" under CERCLA, and thus such
wastes may become subject to liability and regulation under CERCLA.
Regulatory programs aimed at remediation of environmental releases could have
a similar impact on us.
The Federal Water Pollution Control Act of 1972 ("FWPCA") as
amended, also known as the Clean Water Act (the "CWA"), imposes restrictions
and strict controls regarding the discharge of pollutants, including produced
waters and other oil and gas wastes, into waters of the United States (as
defined in the CWA). The discharge of pollutants into regulated waters is
prohibited, except in accordance with the terms of a permit issued by the EPA
or the state. These proscriptions also prohibit certain activities in
wetlands unless authorized by a permit issued by the U.S. Army Corps
37
<PAGE>
of Engineers. Sanctions for unauthorized discharges include administrative,
civil and criminal penalties, as well as injunctive relief.
The Oil Pollution Act of 1990 (the "OPA") amends certain provisions
of the CWA, and other statutes as they pertain to the prevention of and
response to spills or discharges of hazardous substances or oil into
navigable waters. Under the OPA, a person owning or operating a facility or
equipment (including land drilling equipment) from which there is a discharge
or threat of a discharge of oil into or upon navigable waters or adjoining
shorelines is liable, regardless of fault, as a "responsible party" for
removal costs and damages. Federal laws impose strict, joint and several
liability on facility owners for containment and clean up cost and certain
other damages, including natural resource damages, arising from a spill.
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.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
generally does not regulate most wastes generated by the exploration and
production of oil and gas. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of crude oil,
natural gas or geothermal energy." However, these wastes may be regulated by
the EPA or state agencies as solid waste. Moreover, ordinary industrial
wastes, such as paint wastes, waste solvents, laboratory wastes, and waste
compressor oils, may be regulated as hazardous waste. Pipelines used to
transfer oil and gas may also generate some hazardous wastes. Although the
costs of managing solid and hazardous waste may be significant, we do not
expect to experience more burdensome costs than similarly situated companies
involved in oil and gas exploration and production.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty,
carried working, net profits, working and other similar interests and
contractual arrangements customary in the oil and gas industry, liens for
current taxes not yet due and other encumbrances. As is customary in the
industry in the case of undeveloped properties, little investigation of
record title is made at the time of acquisition (other than a preliminary
review of local records). Investigations, including a title opinion covering
the drill site by local counsel, generally are made before commencement of
drilling operations. With respect to acquisitions of producing properties, it
is customary to review title opinions, review engineering reserve reports and
conduct environmental and operational reviews before the closing of the
purchase.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, 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 which
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 it
maintains is customary in the industry, it does not provide complete coverage
against all operating risks. An uninsured or partially insured claim, if
successful and of sufficient magnitude, could have a material adverse effect
on 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.
38
<PAGE>
LEGAL PROCEEDINGS
We are involved in routine litigation arising in the ordinary course of
business. Management believes that the results of each proceedings, individually
and in the aggregate, will not have a material adverse effect on 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 have 21 full-time employees in our Houston, Texas office as of June
30, 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.
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
serve until the next annual shareholders' meeting or until their successors have
been duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------- ------ ---------------
<S> <C> <C>
Prentis B. Tomlinson, Jr. (1) .......... 56 Chairman of the Board, President and Chief Executive Officer
Robert S. Herlin (1)(2) ................ 44 Director, Senior Vice President and Chief Financial Officer
Todd E. Grabois ........................ 39 Vice President, Treasurer & Secretary
Robert L. Zorich (1) ................... 49 Director
Yale Fisher (2) ........................ 53 Director
David P. Quint (3) ..................... 48 Director
Gary Petersen (3) ...................... 53 Director
Russell Cleveland (3) .................. 60 Director
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) New directors elected by the Board on June 2, 1999 to fill vacant seats.
Elected to serve until next annual shareholders' meeting.
PRENTIS B. TOMLINSON, JR. has been involved in the oil and gas industry
for the past 30 years and has been involved with us as our Chief Executive
Officer since our inception in October 1996. He was named our President in July
of 1999. 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
39
<PAGE>
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 our Senior Vice President, Chief Financial
Officer and Director since November 1997, when he joined us. Mr. Herlin has 17
years experience in finance, planning and corporate development in the oil and
gas industry with several companies, including his own management consulting
firm. Most recently, he was vice president of Enron Liquids Services, a
subsidiary of Enron Corporation, and Manager of Planning and Investor Relations
for Kelley Oil & Gas Corporation.
TODD E. GRABOIS has been our Vice President, Treasurer and Secretary
since November 1997. Prior, thereto, 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.
ROBERT L. ZORICH has been one of our Directors since November 1997. 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. EnCap recently
announced its sale to El Paso Field Services.
YALE FISHER has been one of our Directors since January 1997. He is,
and has been, an independent investment banker based in California since July
1994. Before that he was head of trading at Bank of America in Los Angeles and
San Francisco, California and New York, New York.
DAVID P. QUINT was elected by our Board to serve as a director on June
2, 1999. Mr. Quint has been Managing Director of RP&C International, Inc., an
international investment banking firm based in London and Zurich, for over five
years.
GARY PETERSEN, was elected by our Board to serve as a director on June
2, 1999. Mr. Petersen has been Managing Director of EnCap, a Houston-based
venture capital and mezzanine fund for the energy industry for the past five
years.
RUSSELL CLEVELAND was elected by our Board to serve as a director on
June 2, 1999. Mr. Cleveland is the principal founder and the majority
shareholder of Renaissance Capital Group Inc. Renaissance Capital provides
capital to emerging publicly owned companies. Mr. Cleveland currently serves as
President of the Managing General Partner of Renaissance Capital Partners,
Limited., President and Director of Renaissance Capital Growth & Income Fund
III, Inc. (which is traded on NASDAQ), and a Director of Renaissance U.S. Growth
and Income Trust PLC, which is traded on the London Stock Exchange. Mr.
Cleveland also currently serves as a director of Danzer Corp. (formerly Global
Environmental Corp.), Feminique, Inc. (formerly Biopharmaceutics, Inc.), Tutogen
Medical, Inc., Bentley Pharmaceuticals, Inc., and Technology Research, Inc.
AGREEMENT RELATING TO ELECTIONS OF DIRECTORS
Pursuant to an agreement dated December 16, 1998 between us, Mr.
Tomlinson and EnCap, we agreed to make certain changes in our bylaws restricting
the number of 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 during a two-year period.
RP&C has exercised the board representation right described above 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 (collectively the "Named Executive Officers").
40
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION NUMBER OF ALL
---------------- SECURITIES OTHER
YEAR ENDED UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION DECEMBER 31,(1) SALARY BONUS OPTIONS (2)
- ---------------------------- ----------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr. (6) ........... 1998 $243,750 -- -- $ 3,400
Chairman & Chief Executive Officer 1997 150,000 210,000 1,621,000 4,750
1996 (3) 25,000 -- -- --
Ernest J. LaFlure (5) ................... 1998 200,000 -- -- 2,500
Former Director, President and Chief 1997 (4) 46,282 100,000 300,000 --
Operating Officer 1996 -- -- -- --
Robert S. Herlin (6) .................... 1998 165,000 -- -- 5,250
Director, Senior Vice President and 1997 (4) 14,884 110,000 300,000 --
Chief Financial Officer 1996 -- -- -- --
Todd E. Grabois (6) ..................... 1998 105,000 -- -- 4,865
Vice President, Treasurer and Secretary 1997 85,000 -- 140,000 4,750
1996 (3) 11,577 -- -- --
</TABLE>
- --------------------------------
(1) In 1997, we changed our fiscal year end from August 31 to December 31.
(2) Other compensation includes our contributions made to each person's
respective account under our 401(k) plan.
(3) 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.
(4) Salary for Messrs. LaFlure and Herlin represent amounts paid from date of
hire to the end of the year.
(5) Mr. LaFlure resigned as our President and Chief Operating Officer
effective February 15, 1999; and as Director in April 1999.
(6) Effective February 1, 1999, the salaries of Messrs. Tomlinson, Herlin and
Grabois were reduced to $184,248, $105,000 and $84,000, respectively.
Effective May 17, 1999, the salary of Mr. Grabois was reinstated.
DIRECTOR COMPENSATION
Certain non-employee directors are individually awarded stock options
and receive cash compensation at the Board's discretion.
EMPLOYMENT AND TERMINATION AGREEMENTS
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 (as each such term is
defined in the agreement) at any time before the expiration thereof, then we
were obligated to pay Mr. LaFlure $1,500,000 minus (i) the amount of monthly
salary for each month Mr. LaFlure was paid; (ii) all cash bonuses received by
Mr. LaFlure before the termination; and (iii) the value of his stock options,
such value being the difference between the option price and the value of the
option shares as of the date of termination.
We terminated Mr. LaFlure's employment without cause effective January
15, 1999 and requested Mr. LaFlure to resign all of his positions with us except
his position as our director. Mr. LaFlure resigned as a director in April of
1999. Pursuant to a settlement agreement, Mr. LaFlure was entitled to receive
$1,150,000 payable as follows:
- Payments of $10,000 per month for 12 months commencing
February 15, 1999;
41
<PAGE>
- Payment of $400,000 on January 15, 2000
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted, (as
described in the immediately following paragraphs,) on
January 15, 2001.
In addition, Mr. LaFlure was granted new stock options in lieu of the
previous options for 300,000 shares of Common Stock granted on December 18,
1997. The new stock option agreement dated February 15, 1999 is for 500,000
shares of Common Stock at an exercise price of Cdn.$0.53 per share. The
remaining amounts due under the settlement agreement payable on January 15,
2001, shall be reduced by the difference between the option price under the new
option agreement for 500,000 shares of Common Stock and the 500,000 option
shares as of the date the payment of the balance of the agreed amounts. All cash
payments payable to Mr. LaFlure shall be reduced by applicable federal, state of
local withholding taxes. 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 employment agreement, Mr. Herlin receives an
initial monthly salary of $11,250 and an initial bonus of $110,000. Mr. Herlin
is entitled to participate in all other employee compensation and welfare
benefit plans and programs available to 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 thereof, 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.
In the event of termination of Mr. Herlin for cause, such agreement
terminates immediately and our sole remaining obligation is to pay any amounts
accrued thereunder through the date of termination.
On December 16, 1998, we entered into an agreement with EnCap, our
largest secured creditor, 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 and EnCap has
agreed to provide financing to fund such payment obligation.
OPTION REPRICING
In February 19, 1999, the board re-priced stock options previously
awarded to certain of our employees, including the Named 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 the Common Stock
as reported on Canada Stockwatch. Such re-pricing of options held by the Named
Executive Officers and the director is subject to shareholder and regulatory
approval.
OPTION GRANTS
No options were granted to the Named Executive Officers in 1998. See
"Management-Executive Compensation."
42
<PAGE>
OPTION EXERCISE AND YEAR-END VALUES
The following table provides information with respect to options to
purchase Common Stock exercised by the Named Executive Officers during 1998 and
with respect to the number and value of unexercised options held by the Named
Executive Officers at December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER VALUE NUMBER OF SECURITIES IN-THE-MONEY
OF SHARES REALIZED UNDERLYING OPTIONS AT
ACQUIRED UNEXERCISED OPTIONS AT DECEMBER 31, 1998
ON DECEMBER 31, 1998 CDN
---------- ---------- ------------------------------- ----------------------------
EXERCISE CDN EXERCISABLE (1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ---------- --------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr... -- -- 983,700 -- -- --
Ernest J. LaFlure (2) ..... -- -- 300,000 -- -- --
Robert S. Herlin .......... -- -- 300,000 -- -- --
Todd Grabois .............. -- -- 140,000 -- -- --
</TABLE>
- ---------------------------------
(1) All options held by our employees as of February 19, 1999, including Named
Executive Officers, were re-priced to Cdn$0.50, subject to shareholder
approval.
(2) Subject to the terms of a settlement agreement of Mr. LaFlure's employment
contract, his original options were replaced with 500,000 options with an
exercise price of Cdn$0.53 and a term through January 15, 2001.
43
<PAGE>
CERTAIN 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;
- BOCP Energy Partners, L.P. a partnership managed by 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 Mr. Novak, and which is
managed by Heather Tomlinson;
- Lasco, an affiliate of EnCap;
- Texstar Holdings, L.L.C., a private limited liability company owned
by certain of our shareholders;
- 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 bears interest at 10.0%
per annum, and was due, with accrued interest, in December 1998. The
supplemental note, which has been repaid in full, bore interest at 10.0% per
annum until July 1, 1998 and at 18.0% per annum thereafter. Under the terms of
the supplemental note, EnCap was issued warrants for the purchase of 1.5 million
shares of our common stock at an exercise price of $1.28 per share. The original
note is secured by a first lien on the properties acquired and a second lien on
certain other properties. The original note has been guaranteed by Mr.
Tomlinson, Calibre and certain of Calibre's affiliates.
Under the original note, we agreed to convey to EnCap a 25.0% net
profit interest from the properties acquired with the proceeds of the borrowing.
EnCap also required Slattery Trust, Texstar Holdings and certain of our
shareholders to enter into a put/call agreement pursuant to which those
shareholders, under certain conditions, have the right to obtain or "call" the
EnCap NPI in exchange for 1.5 million shares of our common stock. The put/call
agreement also gives EnCap the right, under certain conditions, to sell, or put,
portions of the EnCap NPI to the shareholders for $1.5 million or 3.5 million
shares of our common stock as of December 31, 1998 or March 31, 1999,
respectively. The shareholders' rights and obligations under the put/call
agreement have been transferred to us.
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 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 such
legislation, we advanced funds to Calibre Ecuador to generate the prospect. All
rights to 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.
The advances were non-interest bearing and due upon demand. Due to the
write-off, we obtained rights to substantially all of Calibre Equador's common
stock.
44
<PAGE>
In November, 1998, we entered into a participation agreement with
Burlington Resources International Inc. to develop the gas fields in Ecuador. We
and Burlington have participation interests of 25% and 75%, respectively.
Burlington has not renewed the agreement; however, we retain 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, Todd Grabois,
Robert Novak, Prentis B. Tomlinson, Jr., and Calibre Oil & Gas, Inc. The shares
of Calibre Oil & Gas, Inc. were valued at $3,820,713 and were paid for through
the issuance to Calibre of 1,927,426 shares of 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, paid 10% annual
interest and were to be repaid in two equal installments due on April 1, 1998
and September 1, 1998. The purchase price was to be adjusted by a credit for
proceeds from production attributable to each property through January 31, 1998.
In connection with the acquisition of the oil and gas properties and
shares of Calibre Oil & Gas, Inc., $1.45 million of the advances to Calibre Oil
& Gas, Inc. were reclassified as an assumption of payables and the remaining
$318,772 was written off as a bad debt. Calibre Oil & Gas, Inc. was subsequently
merged into 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 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. Starbucks Trust is a grantor trust with the sole beneficiary
and trustee being Heather Tomlinson, Prentis Tomlinson's spouse. Total advances
and accrued interest under the note are $2.9 million as of March 31, 1999. The
loan was intended to (i) give us a greater return on investment than we were
receiving at the time; (ii) 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 Benz common stock; and (iii)
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 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 owe the Starbucks Trust $213,918 and Prentis
Tomlinson $1,588,489 inclusive of accrued interest. On December 28, 1998, as
part of the Shell transaction, the above parties and Texstar Holdings, LLC and
Security Oil, LLC signed a standstill agreement wherein all parties mutually
deferred payments and further agreed not to pursue collection of any amounts
until the Termination Date of the Shell transaction and to toll the applicable
statutes of limitations related to claims arising from any such amounts until
the earlier of the Termination Date or December 31, 2003.
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 is subject to
certain post-closing adjustments relating to purchase value. The purchase value
is guaranteed and secured by 2.1 million shares of our common stock owned by the
Starbucks Trust.
45
<PAGE>
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. During the four months ended December 31, 1997, we paid DWB
Cdn.$8,000. 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. Pursuant to a pooling
agreement dated April 18, 1997, as amended on September 11, 1997, between us,
certain of our shareholders, including Mr. Tomlinson, and our other 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 April 18,
2000, subject to earlier release from the pool in certain circumstances. As of
April 19, 1999, a total of 313,000 shares of our common stock are held by
Montreal Trust pursuant to the terms and conditions of the pooling agreement.
Pursuant to an agreement dated September 15, 1997, between us, certain
of our shareholders, 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 April 19, 1999, a total of 10, 804,624 shares of
our common stock are held in escrow by Montreal Trust pursuant to the escrow
agreement.
Pursuant to an option agreement between Boone Petroleum Inc., a
corporation controlled by Mr. Busby, and Texstar Petroleum, L.L.C., a company
controlled by Mr. Tomlinson, Boone Petroleum Inc. granted Texstar Petroleum,
L.L.C. an option to purchase 1,200,000 shares of 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 April 19, 1999, the remaining 100,000 shares of Common Stock have not been
transferred within escrow.
Pursuant to an unsigned agreement dated October 9, 1997, between EnCap
Energy, Montreal Trust, us, Texstar Holdings, L.L.C. and the Slattery Trust,
Texstar Holdings, L.L.C. and the Slattery Trust granted to EnCap Energy a
security interest in 535,521 shares of our common stock owned by Texstar
Holdings, L.L.C. and 5,525,000 shares of our common stock owned by the Slattery
Trust subject to the escrow agreement.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of July 15,
1999, with respect to the common stock owned, directly or indirectly, by (i)
each director; (ii) each of our named executive officers; (iii) each person
known by management to own beneficially more than 5% of our outstanding
common stock; (iv) the selling shareholders; and (v) all directors and
executive officers as a group. Unless otherwise noted, the persons named
below have sole voting and investment power with respect to such shares. 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>
PREFERRED STOCK COMMON STOCK
---------------------- ------------------------
NAME OF BENEFICIAL OWNER PERCENT OF PERCENT OF
- ------------------------ NUMBER(1) CLASS(2) NUMBER(3) CLASS(4)(5)
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr.(6) ......................... -- * 15,881,910 9.2%
Ernest J. LaFlure(7) ................................. -- * 300,000 *
Robert S. Herlin(8) .................................. -- * 365,000 *
Todd E. Grabois(9) ................................... -- * 453,335 *
Yale E. Fisher(10) ................................... -- * 288,313 *
Robert L. Zorich(11) ................................. -- * 1,536,895 *
David P. Quint(12) ................................... 2,046 * 4,103,819 2.4%
Gary Petersen(11)..................................... -- * 1,536,895 *
Russell Cleveland(13) ................................ 16,300 6.8% 6,895,831 4.0%
Donald W. Busby(14) .................................. -- * 1,866,392 1.1%
Lasco Energy Partners ................................ -- * 3,228,269 1.9%
Heather Tomlinson(15) ................................ -- * 2,950,000 1.7%
ABN Amro Bank (Schweiz) .............................. 3,900 1.6% 1,649,923 *
Anarema Stiftung ..................................... 6,000 2.5% 2,538,343 1.5%
Apple Inc. ........................................... 24,000 10.1% 10,153,371 5.9%
Bank Leumi ........................................... 1,350 * 571,127 *
Banca del Gottardo ................................... 13,200 5.5% 5,584,354 3.2%
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 2.2%
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 4.3%
Credit Suisse First Boston Zurich .................... 11,385 4.8% 4,816,506 2.8%
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 1.9%
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 4.3%
47
<PAGE>
Lombard Odier & Co. .................................. 3,360 1.4% 1,421,472 *
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 5.4%
Ron Langden .......................................... 650 * 274,987 *
Rothschild Bank AG ................................... 450 * 190,376 *
Royal Bank of Scotland ............................... 900 * 380,751 *
Sreedeswar, Inc. ..................................... 13,794 5.8% 7,231,145 4.2%
UBS .................................................. 9,335 3.9% 3,949,238 2.3%
UBS Merlo ............................................ 5,150 2.2% 2,178,744 1.3%
UBS Lottenbach ....................................... 900 * 380,751 *
Union Bancaire Privee ............................... 5,200 2.2% 2,199,897 1.3%
Westgate LP .......................................... 17,650 7.4% 7,466,959 4.3%
Xanthus Limited ...................................... 6,000 2.5% 2,538,343 1.5%
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 *
All Directors and executive officers (9 persons) ..... 18,346 7.7% 31,361,999 18.1%
</TABLE>
- --------------------
* Less than one percent
(1) Includes all shares of convertible preferred stock owned by each
holder prior to this offering.
(2) Based on 238,201 shares of convertible preferred stock outstanding as
of July 15, 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 such shares, to dispose or direct the
disposition of such shares or that may be purchased upon the exercise
of stock options or warrants exercisable within 60 days. Assumes
conversion of 100% of all convertible preferred stock or warrants held.
(4) Based on 37,254,360 shares of common stock outstanding or reserved for
issuance at July 9, 1999, plus for each executive officer or director
those number of shares underlying exercisable options held by such
executive officer or director or, in the case of holders of convertible
preferred stock or warrants, the number of shares of common stock
underlying their convertible preferred stock or warrants.
(5) Assumes that 100% of all shares of convertible preferred stock have
been converted into common stock and all warrants held by the selling
shareholder have been converted into common stock.
(6) Includes the following: (i) 983,700 shares issuable upon the exercise
of stock options; (ii) 5,525,000 shares in the name of Slattery Trust,
a trust which Mr. Tomlinson is the beneficiary; (iii) 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;
(iv) 2,452,774 shares of common stock in the name of Texstar Holding
LLC, a private company (v) 1,927,426 shares of common stock issued to
Calibre, controlled by Mr. Tomlinson; and (vi) 2,950,000 shares of
common stock beneficially owned by Mr. Tomlinson's wife.
48
<PAGE>
(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 exercise of
stock options.
(11) Includes 1,536,895 shares of common stock issuable upon the exercise
of warrants issued to EnCap, an investment company which is managed
by Messrs. Zorich and Petersen.
(12) Includes 865,575 shares of common stock issuable upon the conversion
of preferred stock, 2,984,526 common shares to be issued and 253,714
shares issuable upon the exercise of warrants all issued to RP&C
International (Guernsey) Limited, an investment company of which
Mr. Quint is a Managing Director.
(13) Includes 6,895,831 shares issuable upon the conversion of preferred
stock held through Renaissance U.S. Capital Growth and Income Trust,
PLC, an investment company of which Mr. Cleveland is a director.
(14) Includes 1,666,392 shares of common stock held through Boone
Petroleum, Inc., a private corporation wholly owned by Mr. Donald
W. Busby. Mr. Busby resigned as chairman of the Company on
October 2, 1997, and as Director of the Company on October 8, 1997.
Also includes 200,000 shares of common stock issuable upon exercise
of stock options.
(15) Includes 2,930,000 shares of common stock held of record by
Starbucks Trust of which Mrs. Tomlinson is the Trustee.
49
<PAGE>
PLAN OF DISTRIBUTION
This prospectus relates to the resale of:
- 238,201 shares of our convertible preferred stock;
- 100,772,634 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;
- 2,984,526 shares of our common stock issued as commission and
fees related to the offering of convertible preferred stock;
- 541,700 shares of our common stock issued in exchange for
certain convertible debentures; and
- 1,057,500 shares of our common stock issued in lieu of
interest payments.
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 convertible preferred stock or common stock issued upon
exercise of the warrants 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 such
methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. Such 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 such 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. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling securityholders and/or the purchasers of
warrants for whom such 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 such 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 conversion of 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.
50
<PAGE>
Selling securityholders also may resell all or a portion of the
conversion of 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 such 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 through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the
name of each such selling securityholder and of the participating
broker-dealer(s), (ii) the type and number of securities involved, (iii) the
price at which such securities were sold, (iv) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigations to verify the information
set out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction.
51
<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 July 15, 1999, 34,785,224 shares of common stock, 9,488,140
Class A, Series I Preferred Stock and 238,201 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 such amounts and at such times as may be declared by
our board of directors out of funds legally available therefor. Upon liquidation
or dissolution, holders of common stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment of any
liquidation preferences to holders of preferred stock. Holders of common stock
have no redemption, conversion or preemptive rights.
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 rights,
preferences, privileges and restrictions thereof, including dividend rights,
voting rights, redemption and conversion rights and liquidation preferences of
such series, without further action by the stockholders. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of the common stock.
SERIES 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 such
dividends have been paid. Dividends are payable, at our option, in
freely tradeable common stock valued at the average of the market price
thereof 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. In the event of 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 thereof
into common stock at an initial conversion rate equal to CDN $0.45. 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 such
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
52
<PAGE>
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 for 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 (i) at 115% of the redemption value if our
market capitalization is $300 million or more on such date or (ii) 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 of 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 will 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
convertible 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, each such series having such 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.
The above provisions may have the effect of deterring certain tender
offers or hostile takeovers or may delay or prevent changes in control of our
management.
LIMITATION OF DIRECTOR LIABILITY
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. 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: (i) for any breach of the director's
duty of loyalty to us or our stockholders, (ii) for acts or omissions not in
good faith or that involves
53
<PAGE>
intentional, misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
INDEMNIFICATION
To the maximum extent permitted by law, the Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors, and
permit indemnification of 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 ("Section 203")
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85% of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless (i)
before such date, the corporation's board of directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder, or (ii) the Business Combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Under Section 203, these restrictions will
not apply to certain Business Combinations proposed by an Interested Stockholder
following the earlier of the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who 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 such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
Interested Stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder, or transactions in which the Interested Stockholder receives
certain other benefits.
The provisions of Section 203, together with the ability of 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 such 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. Neither our Certificate of
Incorporation nor Bylaws currently exclude us from the restrictions imposed by
Section 203.
54
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the 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, Fruchter, Rosen & Corso, P.C., independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon such reports given upon the authority of that firm as experts in accounting
and auditing.
Certain information set forth herein relating to our estimated proved
oil and gas reserves at January 1, 1999, the related calculations of future net
revenues and the discounted future net income thereof have been derived from
independent petroleum engineering reports prepared by R.A. Lenser and
Associates, Inc., petroleum engineers. Such information has been included herein
in reliance on such firm as an expert in petroleum engineering.
55
<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 Statements 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-5
Audited Consolidated Statements of Income for the year ended December 31,
1998, the four months ended December 31, 1997 and the ten months ended
August 31, 1997 ......................................................... F-6
Audited Consolidated Statements of Stockholders' Equity for the periods
ended December 31, 1998 and December 31, 1997 ........................... F-7
Audited Consolidated Statements 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-10
Notes to Audited Consolidated Financial Statements ........................ F-11
Unaudited Consolidated Balance Sheets as of March 31, 1999 and 1998 ....... F-45
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 ........................................... F-47
Unaudited Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1999 and 1998 .............................. F-48
Unaudited Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1999 and 1998 .............................. F-49
Unaudited Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 ........................................... F-51
Notes to Unaudited Consolidated 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,
18 and 22 as to which the date is
July 20, 1999
F-2
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------ ------------
ASSETS
<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 668,647 --
Available for sale marketable securities 195,671 1,289,781
Prepaid expenses 493,459 109,016
------------ ------------
Total Current Assets 9,138,644 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
Available for sale marketable securities -- 22,872
Other assets 1,402,022 153,173
------------ ------------
Total Other Assets 6,689,362 1,783,188
------------ ------------
TOTAL ASSETS $ 95,240,247 $ 36,216,129
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
F-3
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
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-4
<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-5
<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-6
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Common Stock Reserved 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>
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on 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-7
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<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>
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on 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
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-8
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<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 Total
Accumulated Gain (Loss) Translation Stockholders'
Subscriptions Deficit on Securities Adjustments Equity
------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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-9
<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-10
<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 prior period presented has been restated to reflect the change in
accounting.
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-11
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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>
<CAPTION>
<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.
F-12
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
F-13
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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;
F-14
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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>
<CAPTION>
<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:
(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.
F-15
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
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.
F-16
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
------------ ------------
------------ ------------
The Company recorded the following depreciation expense related to
property and equipment in the Consolidated Statement of Operations for the
periods indicated:
<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)
------------ ------------
------------ ------------
The Company realized the following gross gains (losses) from the sale
of equity securities for the periods indicated:
<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.
F-17
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
F-18
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-19
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-20
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-21
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
F-22
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 $ -- $ -- $ --
------------ ------------ -----------
------------ ------------ -----------
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
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-23
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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) $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Net operating loss carryforwards expire as follows:
<S> <C>
2011 $ 4,535,000
2012 $ 6,494,000
2013 $ 32,000,000
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:
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>
F-24
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-25
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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 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.
F-26
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
NOTE 14. STOCK OPTIONS
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable 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
--------- ------- -------- ---------
--------- ------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable at
Fiscal Year Share August 31, Options Exercised December 31, Date of
Granted $ CDN 1997 Granted or Cancelled 1997 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-27
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Outstanding
Outstanding and and
Per Exercisable at Options Exercisable at
Fiscal Year Share October 31, Options Exercised August 31, Date of
Granted $ CDN 1996 Granted or Cancelled 1997 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-28
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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)
</TABLE>
<TABLE>
<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.
F-29
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-30
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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".
F-31
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
F-32
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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.
F-33
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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>
F-34
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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>
F-35
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Year Ended For the Four Months Ended For the Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 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.
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.
F-36
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
- 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.
- The Company has executed a letter of intent to sell 37.5% of its
interest in the Old Ocean Prospect for approximately $5.5 million.
The potential purchaser will also have the option to purchase an
additional 12.5% of the Company's interest for approximately
$2 million. Additionally, the letter of intent contains 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.
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.
F-37
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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>
December 31, 1998 December 31, 1997 August 31, 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>
CAPITALIZED COSTS INCURRED - The following table sets forth the
capitalized costs incurred in oil and gas producing activities for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 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>
F-38
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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-39
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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.
F-40
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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>
December 31, 1998 December 31, 1997 August 31, 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.
F-41
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the principal sources of change in the
discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended Four Months Ended Ten Months Ended
December 31, 1998 December 31, 1997 August 31, 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 (605,200) (717,000) (36,000)
costs
Extensions, discoveries and improved 34,438,200 -- 1,979,000
recovery, net of related costs
Net change in estimated future 91,000 (680,000) (741,000)
development costs
Revision of previous quantity (4,055,800) (1,523,000) (8,532,000)
estimates
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 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-42
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
BENZ ENERGY INC.
We have reviewed the accompanying consolidated balance sheets of Benz Energy
Inc. as of March 31, 1999 and 1998 and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
three-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has experienced significant delays in the
completion of certain wells and its limited capital resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 17. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 4, 1999 except for Notes 8, 17 and 21, as to which
the date is July 20, 1999
F-43
<PAGE>
AUDITORS REVIEW
F-44
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 565,183 $ 15,631,424
Receivables, net of allowance for doubtful accounts of $257,009 and $-0-,
respectively 5,039,201 8,542,734
Advances to related parties 685,955 987,932
Available for sale marketable securities 25,969 369,071
Prepaid expenses 325,533 299,577
------------ ------------
Total Current Assets 6,641,841 25,830,738
------------ ------------
OIL AND GAS PROPERTIES, Using Full Cost Accounting
Costs being amortized 51,161,009 32,566,598
Costs not being amortized 38,148,243 13,286,254
------------ ------------
89,309,252 45,852,852
Less: Accumulated amortization (4,901,920) (1,615,368)
Net Oil and Gas Properties 84,407,332 44,237,484
------------ ------------
PROPERTY AND EQUIPMENT 1,636,538 1,098,454
Less: Accumulated depreciation (580,027) (226,801)
------------ ------------
Net Property and Equipment 1,056,511 871,653
------------ ------------
Debt issuance costs, net of accumulated amortization of $1,815,378 and
$96,634, respectively 4,819,933 3,008,133
Available for sale marketable securities -- 22,989
Other assets 965,308 1,368,383
------------ ------------
Total Other Assets 5,785,241 4,399,505
------------ ------------
TOTAL ASSETS $ 97,890,925 $ 75,339,380
------------ ------------
------------ ------------
</TABLE>
See accountant's review report and notes to consolidated financial statements.
F-45
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ 304,706 $ --
Accounts payable 16,805,075 5,561,757
Revenue payable 520,687 422,731
Accrued interest 1,630,520 552,544
Accrued preferred dividends 476,339 --
Accrued loss on termination of employee 981,957 --
Other accrued expenses 1,028,492 2,967,735
Drilling advances 20,774 134,902
Notes payable 109,425 --
Current maturities of long-term debt, net of unamortized discount of $-0-
and $1,530,149, respectively 19,899,554 13,652,167
------------ ------------
Total Current Liabilities 41,777,529 23,291,836
------------ ------------
LONG-TERM DEBT, net of unamortized discount of $937,500 and $-0-, respectively 41,972,032 27,500,000
OTHER LONG-TERM LIABILITIES 258,904 --
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK, no par value; unlimited shares authorized; 9,488,140
and 12,000,000 shares issued and outstanding, respectively; redemption value of
$9,488,140 and $12,000,000, respectively
9,488,140 12,000,000
STOCKHOLDERS' EQUITY:
Common Stock, no par value; unlimited shares authorized, 33,727,724 shares
and 32,708,357 shares issued and outstanding
20,424,996 19,308,350
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 (19,237,436) (7,021,626)
Unrealized losses on available for sale marketable securities (72,882) (123,921)
Cumulative foreign currency translation adjustment (94,455) 16,860
------------ ------------
Total Stockholders' Equity 4,394,320 12,547,544
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,890,925 $ 75,339,380
------------ ------------
------------ ------------
See accountant's review report and notes to consolidated financial statements.
</TABLE>
F-46
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Oil and gas sales $ 1,370,957 $ 1,040,780
------------ ------------
EXPENSES
Depreciation, depletion and amortization 1,163,845 676,572
Lease operating 137,971 111,135
Production taxes 30,197 18,048
General and administrative 933,965 1,486,157
Interest expense 981,193 1,198,040
Debt issuance costs 582,030 53,777
------------ ------------
3,829,201 3,543,729
------------ ------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) AND
PROVISION FOR INCOME TAXES (2,458,244) (2,502,949)
------------ ------------
Interest income 88,219 29,016
Gain (loss) on sale of investments (58,553) 108,770
------------ ------------
Total Other Income (Expense) 29,666 137,786
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,428,578) (2,365,163)
Provision for income taxes -- --
------------ ------------
NET LOSS (2,428,578) (2,365,163)
Cumulative preferred stock dividends (237,204) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,665,782) $ (2,365,163)
------------ ------------
------------ ------------
BASIC LOSS PER SHARE $ (0.08) $ (0.08)
------------ ------------
------------ ------------
DILUTED LOSS PER SHARE $ (0.08) $ (0.08)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE:
Basic Loss per Share 33,727,724 30,656,598
Diluted Loss per Share 33,727,724 30,656,598
</TABLE>
See accountant's review report and notes to consolidated financial statements.
F-47
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss applicable to common stockholders $(2,665,782) $(2,365,163)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 56,526 53,932
Unrealized gains on marketable securities 12,748 (33,873)
----------- -----------
Comprehensive loss $(2,596,508) $(2,345,104)
----------- -----------
----------- -----------
</TABLE>
See accountant's review report and notes to consolidated financial statements.
F-48
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Common Stock Reserved for Issuance
-------------------------------------------------------------
Shares Amount Number Amount
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1998 33,727,724 $ 20,424,996 1,927,436 $ 2,496,030
Foreign currency
translation
adjustments -- -- -- --
Unrealized gains -- -- -- --
Net loss -- -- -- --
---------- ------------ --------- ------------
Balance,
March 31, 1999 33,727,724 $ 20,424,996 1,927,436 $ 2,496,030
---------- ------------ --------- ------------
---------- ------------ --------- ------------
<CAPTION>
Additional Unrealized Total
Paid-in Accumulated Gain (Loss) Translation Stockholders'
Capital Deficit on Securities Adjustments Equity
------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 $ 878,067 $(16,571,654) $ (85,630) $ (150,981) $ 6,990,828
Foreign currency
translation
adjustments -- -- -- 56,526 56,526
Unrealized gains -- -- 12,748 -- 12,748
Net loss -- (2,665,782) -- -- (2,665,782)
------------ ------------ ------------ ------------ -----------
Balance,
March 31, 1999 $ 878,067 $(19,237,436) $ (72,882) $ (94,455) $ 4,394,320
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
See accountant's review report and notes to consolidated financial statements.
F-49
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid in
Shares Amount Capital
---------- ------------ ------------
<S> <C> <C> <C>
Balance,
December 31, 1997 29,878,985 $ 16,222,198 $ 367,881
Exercise of stock
options 87,000 16,152 --
Issued for properties 2,542,372 3,000,000 --
Issued in legal
settlement 200,000 70,000 --
Foreign currency
translation
adjustments -- -- --
Unrealized losses -- -- --
Net loss -- -- --
---------- ------------ ------------
Balance,
March 31, 1998 32,708,357 $ 19,308,350 $ 367,881
---------- ------------ ------------
---------- ------------ ------------
<CAPTION>
Unrealized Total
Accumulated Gain (Loss) Translation Stockholders'
Deficit on Securities Adjustments Equity
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1997 $ (4,656,463) $ (90,048) $ (37,072) $ 11,806,496
Exercise of stock
options -- -- -- 16,152
Issued for properties -- -- -- 3,000,000
Issued in legal
settlement -- -- -- 70,000
Foreign currency
translation
adjustments -- -- 53,932 53,932
Unrealized losses -- (33,873) -- (33,873)
Net loss (2,365,163) -- -- (2,365,163)
------------ ------------ ------------ ------------
Balance,
March 31, 1998 $ (7,021,626) $ (123,921) $ 16,860 $ 12,547,544
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accountant's review report and notes to consolidated financial statements.
F-50
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,428,578) $ (2,365,163)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 1,163,845 676,572
Amortization of deferred loan costs 659,858 566,183
(Gain) loss on sale of stock held for investment 58,553 (108,770)
Reserve for bad debt 68,328 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables 353,757 (1,889,715)
(Increase) decrease in prepaid expenses 168,133 (190,561)
Increase in amounts due from related parties (21,363) (3,088,389)
Decrease in other assets 425,000 312,354
Decrease in accounts payable and accrued expenses (601,091) (1,807,262)
Decrease in drilling advances -- (254,446)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (153,558) (8,149,197)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (4,225,656) (5,749,841)
Proceeds from sale of oil and gas properties -- 600,000
Proceeds from sale of stock held for investment 128,091 991,578
Other capital expenditures, net (64,196) (316,098)
Other, net 68,596 --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,093,165) (4,474,361)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 2,699,554 3,000,000
Payments on long-term debt (381,379) (5,000,000)
Net increase in short-term borrowings -- 2,431,458
Proceeds from issuance of convertible debentures and special notes -- 27,500,000
Proceeds from issuance of common stock and warrants -- 86,152
Cost of debt and equity transactions (129,951) (2,981,896)
Cash overdraft position 304,706 --
Other (55,900) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,437,030 25,035,714
------------ ------------
Effect of change in translation 55,574 56,948
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,754,119) 12,469,104
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,319,302 3,162,320
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 565,183 $ 15,631,424
------------ ------------
------------ ------------
</TABLE>
See accountant's review report and notes to consolidated financial statements
F-51
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Benz Energy Inc. ("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 87 percent of Benz's 1999 first quarter
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.
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of Benz Energy Inc. 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.
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.
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.
F-52
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capitalized internal costs were as follows for the periods indicated:
<TABLE>
<CAPTION>
<S> <C>
Three months ended March 31, 1999 $146,343
Three months ended March 31, 1998 $285,933
</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-53
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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 13 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.
F-54
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PER SHARE OF COMMON STOCK - Per share amounts have been computed based
on the average number of common shares outstanding during the period.
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. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
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 pay-out. The Company owns a 53.8% interest in
the pipeline and the Fairchild #1 well and a 50.5% interest in the A. Foote
Estate #1 well. Gas reserves net to the Company are estimated to be in excess of
150 MMCFG and net production of over 150 MCFGPD.
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 15, "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.
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.
F-55
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DIVESTITURES
In the first quarter of 1998, Benz received $600,000 from the sale of
non-strategic oil and gas properties related to three separate transactions. No
gain has been recognized; capitalized oil and gas property costs have been
reduced by the amount of sales proceeds.
NOTE 3. RESTRICTED CASH
Included in cash and cash equivalents at March 31, 1999 and 1998
is $110,139 and $129,615, respectively, which is restricted to
expenditures on certain petroleum interests.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ----------
<S> <C> <C>
3-D Workstations $ 313,117 $ 313,117
Furniture and Fixtures 375,397 206,730
Telephone and Computer Equipment 450,097 372,475
Leasehold Improvements 357,406 138,882
Software 71,472 67,250
Other 69,049 ---
------------ ----------
1,636,538 1,098,454
Less: Accumulated Depreciation (580,027) (226,801)
------------ ----------
Net Property and Equipment $ 1,056,511 $ 871,653
------------ ----------
------------ ----------
The Company recorded the following depreciation expense related to
property and equipment in the Consolidated Statement of Operations for the
periods indicated:
<S> <C>
Three months ended March 31, 1999 $ 102,529
Three months ended March 31, 1998 $ 54,982
NOTE 5. INVESTMENTS IN EQUITY SECURITIES
At March 31, 1999 and 1998, marketable investments classified as
available for sale were comprised of the following:
March 31, March 31,
1999 1998
----------- ----------
<S> <C> <C>
Common Stocks:
Market value $ 25,969 $ 392,060
Cost 98,851 515,981
----------- ----------
Gross Unrealized Holding Losses $ (72,882) $ (123,921)
----------- ----------
----------- ----------
</TABLE>
F-56
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company realized the following gross gains (losses) from the sale
of equity securities for the periods indicated:
<TABLE>
<CAPTION>
<S> <C>
Three months ended March 31, 1999 $ (58,553)
Three months ended March 31, 1998 $ 108,770
</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 6. 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 March 31, 1999, the Company had invested $316,470 in the
venture. Burlington has 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 7. DRILLING ADVANCES
As of March 31, 1999 and 1998, the Company has received drilling
advances from joint interest owners in the amounts of $20,774 and $134,902,
respectively. These advances will be applied toward the payment of drilling
costs to be incurred in the future.
NOTE 8. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
EnCap Credit Agreement
(Face Value of $12,000,000, respectively) $ 12,000,000 $ 10,469,850
BOCP Credit Facility 5,699,554 3,143,225
Shell Financing (Face Value of $7,000,000) 5,710,032 ---
Mobil Financing 2,200,000 ---
Cogniseis Development -- 39,092
Convertible Debentures 27,250,000 27,500,000
Special Notes 9,012,000 ---
------------ ------------
Total 61,871,586 41,152,167
Current Portion 19,899,554 (1) 13,652,167
------------ ------------
Total Long-Term Debt $ 41,972,032 $ 27,500,000
------------ ------------
------------ ------------
</TABLE>
- ------------------
(1) Excludes $1,656,699 related to the Shell financing which is considered
long-term until the related production is accrued.
F-57
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
March 31,
1999
--------------------
<S> <C>
1999 $ 21,556,253
2000 2,776,667
2001 1,276,666
2002 --
2003 36,262,000
--------------------
$ 61,871,586
--------------------
--------------------
</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 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.
F-58
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 21,
"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 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.
F-59
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 extended 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.
F-60
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 21, "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 register 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 completing the registration.
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 March 31, 1999, $164,348 remained unamortized.
F-61
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 March 31,
1999, the obligation was repaid.
NOTE 9. INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- ----------
<S> <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
----------- ----------
----------- ----------
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
March 31, March 31,
1999 1998
----------- ----------
<S> <C> <C>
Federal Income Tax Rate (34.0)% (34.0)%
Deferred Tax Charge (Credit) -- --
Effect of Valuation Allowance 34.0 % 34.0 %
State Income Tax, Net of Federal Benefit -- --
----------- ----------
Effective Income Tax Rate 0.0 % 0.0 %
----------- ----------
----------- ----------
</TABLE>
F-62
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At March 31, 1999 and 1998 the Company had net carryforward losses of
approximately $49,748,000 and $15,653,000, 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.
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>
March 31, March 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Non-Current Deferred Tax Assets (Liabilities):
Exploration and development costs capitalized
for financial purposes, expensed for tax
purposes $ (13,402,673) $ (3,455,593)
Depreciation Expense 674,966 226,688
Loss Carry-forwards 16,914,218 5,321,850
--------------- ----------------
4,186,511 2,092,945
Less: Valuation Allowance (4,186,511) (2,092,945)
--------------- ----------------
Net Deferred Tax Assets (Liabilities) $ -- $ --
--------------- ----------------
--------------- ----------------
Net operating loss carryforwards expire as follows:
<S> <C>
2011 $ 4,535,000
2012 $ 6,494,000
2013 $ 32,000,000
2014 $ 6,719,000
NOTE 10. 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:
March 31, March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Canada $ 4,195,203 $ 5,381,199
United States 93,695,722 69,958,181
-------------- --------------
Total identifiable assets $ 97,890,925 $ 75,339,380
-------------- --------------
-------------- --------------
</TABLE>
F-63
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11. 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 (See
Note 21). On the fifth anniversary of the sale of the Preferred Shares, the
Company is required to redeem all of the Preferred Shares. The Preferred Shares
are redeemable at an amount equal to the purchase price plus any dividends
cumulated but not paid. At March 31, 1999, 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 12. 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.
F-64
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(iii) 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.
(iv) 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 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
(v) 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.
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-65
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13. STOCK OPTIONS
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
Outstanding and Outstanding
Per Exercisable at Options and
Fiscal Year Share December 31, Options Exercised Exercisable at Date of
Granted $ CDN 1998 Granted or Cancelled March 31, 1999 Expiration
- ------------- ------- --------------- --------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 2.60 298,700 -- -- 298,700 1/16/00
1997 3.45 550,000 -- -- 550,000 4/25/00
1997 1.95 1,531,539 -- -- 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
--------------- --------- ------------ --------------
2,890,239 -- -- 2,890,239
--------------- --------- ------------ --------------
--------------- --------- ------------ --------------
Outstanding
Outstanding and Options and
Per Exercisable at Exercised Exercisable
Fiscal Year Share December 31, Options or at March 31, Date of
Granted $ CDN 1997 Granted 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 -- -- 1,738,764 12/19/02
1997 2.98 300,000 -- -- 300,000 10/17/00
--------------- --------- ------------ --------------
3,014,464 -- (87,000) 2,927,464
--------------- --------- ------------ --------------
--------------- --------- ------------ --------------
</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 March 31, 1999. 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.
F-66
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 18, "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>
Four Months
Year Ended Ended Ten Months
December 31, December 31, Ended August
1998 1997 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 quarter of 1999 or 1998. 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:
F-67
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Net Loss $ (2,801,905) $ (2,508,105)
Net Loss Per Basic Share (0.08) (0.08)
March 31, March 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Weighted Average Option Price Per Share
(Cdn$):
Granted $ -- $ --
Exercised -- 0.27
Cancelled -- --
Outstanding at End of Period 2.39 2.41
Exercisable at End of Period 2.39 2.41
Weighted Average Remaining Life of Options
Outstanding 33 months 44 months
</TABLE>
NOTE 14. 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 March 31, 1999
and 1998 totaled $8,042 and $15,676, respectively.
NOTE 15. 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 March 31, 1999 advances totaling $2.9
million plus accrued interest remained outstanding.
F-68
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 March 31, 1999, $1.2 million remained
outstanding and is currently subject to a standstill agreement described below.
The 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. At March 31, 1999, $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
8, "Long-term Debt" for a description of the Shell financing).
F-69
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain debt, as described in Note 8, "Long-term Debt" is guaranteed by
Mr. Tomlinson, Slattery Trust, whose beneficiary is Mr. Tomlinson, Calibre,
certain affiliates of Calibre, and Texstar Holdings.
During the three months ended March 31, 1998, the Company made advances
to Calibre Ecuador of $136,607 that were written off.
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 March 31, 1999 and 1998, balances with related parties were as
follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Joint Interest Billing Receivable $ 899,282 (1) $ 965,433
Other Receivables 95,000 95,000
</TABLE>
(1) Includes amount currently involved in litigation. See Note 18,
"Commitments and Contingencies".
During the periods ended March 31, 1999 and 1998, the Company was
charged $9,923 and $10,487, respectively for management, professional and office
services provided by companies under significant influence of former directors
of the Company.
NOTE 16. 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>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Warrants 2,493,903 4,799,936
Options 2,890,239 2,927,464
--------- ---------
Total Shares 5,384,142 7,727,400
--------- ---------
--------- ---------
</TABLE>
F-70
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17. 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 18. 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. 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.
F-71
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
March 31, 1999, 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.
EMPLOYMENT AGREEMENT - On December 16, 1998, the Company entered into
an agreement with EnCap, the largest secured creditor of the Company, that
should Prentis Tomlinson's employment be terminated, except for cause, following
certain events, then EnCap will make a cash payment to Mr. Tomlinson of $1.0
million within 30 days of severance, enter into a consulting agreement with a
three year term providing for payments of $185,000 per annum, and grant Mr.
Tomlinson an overriding royalty interest in certain properties. These payments
are obligations of the Company and EnCap has agreed to provide financing to fund
such payment obligation.
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-72
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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 $111,692 and
$62,306 for the periods ended March 31, 1999 and 1998, respectively.
Future minimum lease payments under the lease agreement for each of the
years ended December 31, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 396,187
2000 396,187
2001 396,187
2002 396,187
2003 33,016
--------------
$ 1,617,764
--------------
--------------
</TABLE>
NOTE 19. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
A summary of non-cash investing and financing activities for the three
months ended March 31, 1999 and 1998 is presented below:
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. There were no non-cash
investing and financing activities in the first quarter of 1999.
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts
capitalized $ 1,197,296 $ 400,385
Income and other taxes, net of
refunds -- --
</TABLE>
F-73
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20. 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.
NOTE 21. SUBSEQUENT EVENTS
The following events took place subsequent to March 31, 1999:
- The Company executed the Seventh through Ninth Amendments to
the BOCP Credit Facility wherein the maturity of such facility was
extended to JuLY 31, 1999. The Company has been advanced
$3,000,000 from this facility during the first four months of 1999.
- 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 described in Note 11 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 1999.
- On May 18, 1999, the Company migrated from the Yukon
Territory, Canada and became a Delaware Corporation.
Authorized capital stock will be 400,000,000 shares consisting
of 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 have been
reflected in the Company's accounts payable.
- The Company has executed a letter of intent to sell 37.5% of its
interest in the Old Ocean Prospect for approximately $5.5 million.
The potential purchaser will also have the option to purchase an
additional 12.5% of the Company's interest for approximately
$2 million. Additionally, the letter of intent contains 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 8 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.
F-74
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 22. CUSTOMER INFORMATION
MAJOR PURCHASERS - During the three months ended March 31, 1999, Coral
Energy LP and Tejas Gas Corporation accounted for approximately 60% and 14 %,
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 23. SUPPLEMENTAL OIL AND GAS DISCLOSURES
The following includes supplemental information regarding the Company's
oil and gas activities:
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>
<CAPTION>
<S> <C>
Three months ended March 31, 1999 $1.30
Three months ended March 31, 1998 $1.34
</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>
March 31, March 31,
1999 1998
------------- --------------
<S> <C> <C>
Property acquisition costs $ 32,767,775 $ 12,714,993
Exploration and development 5,380,468 571,261
------------- --------------
Total $ 38,148,243 $ 13,286,254
------------- --------------
------------- --------------
</TABLE>
F-75
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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>
Three Months Ended
March 31,
1999 1998
----------------- --------------------
<S> <C> <C>
Acquisition of proved properties $ 575,046 $ 479,234
Acquisition of unproved properties 2,909,867 18,813,309
Exploration costs 1,478,771 667,647
Development costs 1,147,670 618,252
Capitalized interest 1,039,897 171,398
Property sales -- (600,000)
----------------- --------------------
Total $ 7,151,251 $ 20,149,840
----------------- --------------------
----------------- --------------------
</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>
March 31, March 31,
1999 1998
----------------- --------------------
<S> <C> <C>
Proved properties $ 51,161,009 $ 32,566,598
Unproved properties 38,148,243 13,286,254
----------------- --------------------
89,309,252 45,852,852
Less: Accumulated DD&A (4,901,920) (1,615,368)
----------------- --------------------
Total $ 84,407,332 $ 44,237,484
----------------- --------------------
----------------- --------------------
</TABLE>
F-76
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "DGCL") grants every
corporation the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, cardinal, administrative, or instigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees) judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The DGCL also grants every corporation the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses which the court
shall deem proper.
The DGCL provides that to the extent that a present or former director
or officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in the statute, or in the
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonable incurred by him in
connection therewith.
The Registrant's Certificate of Incorporation contains provisions which
indemnify and exculpate the directors and officers of the Registrant from and
against certain liabilities. The Registrant's Certificate of Incorporation
provides that each person who at any time is or was a director or officer of the
Registrant, and is threatened to be or is made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, whether the basis of the proceeding is an alleged action in such
person's official capacity or in another capacity while holding such office,
shall be indemnified and held harmless by the Registrant to the fullest extent
authorized by the DGCL, except that such person shall not be indemnified if he
is convicted of a crime in a criminal proceeding. The Registrant's Certificate
of Incorporation provides that a director of the Registrant shall have no
personal liability to the Registrant or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Registrant or its shareholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) for acts or omissions specified in
Section 174 of the DGCL regarding the unlawful payment of dividends and the
unlawful purchase or redemption of the Registrant's stock, and (d) for any
transaction from which the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND REGISTRATION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All expenses of
registration of the Shares will be borne by us. All of the amounts shown are
estimates except the registration fee.
II-1
<PAGE>
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ........................... $
Legal fees and expenses .......................................................
Accounting fees and expenses ..................................................
Printing expenses .............................................................
Blue sky fees and expenses ....................................................
Miscellaneous .................................................................
Total Expenses .............................................................. $
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
DATE OF TRANSACTION PERSONS TO WHOM TYPE OF SECURITIES AMOUNT OF DESCRIPTION OF THE TRANSACTION
------------------- SECURITIES WERE SOLD ------------------ SECURITIES SOLD ------------------------------
-------------------- ---------------
<S> <C> <C> <C>
March 26, 1998 Convertible Debt $10.0 million Private Placement
March 16, 1998 Convertible Debt $27.5 million Private Placement
</TABLE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
-------
<S> <C>
+2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust,
Houston Trust, Starbucks Trust, Todd Grabois, Robert Novak and
Benz Equities Ltd.
+3.1 Certificate of Incorporation.
+3.2 By-Laws.
+5.1 Opinion of Porter & Hedges, L.L.P.
*10.1 The Stock Option Plan
*10.2 Employment Agreement Prentis B. Tomlinson, Jr.
*10.3 Termination Agreement Ernest J. LaFlure
*10.4 Purchase and Sale Agreement between Texstar Petroleum, Inc.
and Shell Capital Inc.
+10.5 Bank One Credit Facility
*10.6 First Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.7 Second Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.8 Third Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.9 Fourth Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.10 Participation Agreement between BOCP Energy Partners, L.P.
and Bank One, Texas, N.A.
*10.11 Agreement among Texstar Petroleum, Inc., Benz Energy LTD,
Calibre Energy, L.L.C., BOCP Energy Partners, L.P. and EnCap
Energy Capital Fund IV, L.P.
*10.12 First Amendment to the Participation Agreement between BOCP
Energy Partners, L.P. and Bank One, Texas, N.A.
*10.13 Assignment of oil, gas and mineral leases and Bill of Sale
*10.14 Loan Agreement among Texstar Petroleum, Inc., Perry Limited
Sreedeswar, Inc., Dalworth Capital, James Ladner, RP & C
International Limited and Energy Capital Investment Company
*10.15 Assignment of contract rights and term assignment of oil
and gas lease, Old Ocean Area, Brazoria and Matagorda
Counties, Texas
*15.1 Letter re-unaudited interim financial information
*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 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
+ To be filed by amendment
II-2
<PAGE>
ITEM 28. UNDERTAKINGS
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement; provided, however, that subparagraphs
(i) and (ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities and
Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the Securities offered herein,
and the offering of such Securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to officers, directors and controlling persons of
the Registrant pursuant to the provisions described under Item 24 of this
registration statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the Securities being registered, the Registrant will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on our behalf by the undersigned, thereon duly authorized
in the City of Houston, State of Texas on July 13, 1999.
BENZ ENERGY INC.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------------------
Prentis B. Tomlinson, Jr.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed below by the
following persons in the capacities and on the dates indicated and each of the
undersigned officers and directors of Benz Energy Inc. hereby severally
constitutes and appoints Prentis B. Tomlinson, Jr. and Robert S. Herlin, his
true and lawful attorney-in-fact, and each of them, to sign for him, and in his
name in the capacity indicated below, such Registration Statement on Form SB-2
and for the purpose of registering such securities under the Securities Act of
1933, as amended, and any and all amendments (including post-effective
amendments) thereto, hereby ratifying and confirming our signatures as they may
be signed by our attorneys-in-fact to such Registration Statement and any and
all amendments thereto.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Prentis B. Tomlinson, Jr.
- ------------------------------ Chairman of the Board, President and Chief July 13, 1999
Prentis B. Tomlinson, Jr. Executive Officer
/s/ Robert S. Herlin
- ------------------------------ Director, Senior Vice President and Chief July 12, 1999
Robert S. Herlin Financial Officer
/s/ Todd E. Grabois
- ------------------------------
Todd E. Grabois Vice President, Treasurer & Secretary July 12, 1999
/s/ Kirsten A. Hink
- ------------------------------
Kirsten A. Hink Controller (Principal Financial Officer) July 20, 1999
/s/ Robert L. Zorich
- ------------------------------
Robert L. Zorich Director July 13, 1999
- ------------------------------
Yale Fisher Director July __, 1999
/s/ David P. Quint
- ------------------------------
David P. Quint Director July 14, 1999
II-4
<PAGE>
<S> <C> <C>
/s/ Gary Petersen
- ------------------------------
Gary Petersen Director July 14, 1999
- ------------------------------
Russell Cleveland Director July __, 1999
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
-------
<S> <C>
+2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust,
Houston Trust, Starbucks Trust, Todd Grabois, Robert Novak and
Benz Equities Ltd.
+3.1 Certificate of Incorporation.
+3.2 By-Laws.
+5.1 Opinion of Porter & Hedges, L.L.P.
*10.1 The Stock Option Plan
*10.2 Employment Agreement Prentis B. Tomlinson, Jr.
*10.3 Termination Agreement Ernest J. LaFlure
*10.4 Purchase and Sale Agreement between Texstar Petroleum, Inc.
and Shell Capital Inc.
+10.5 Bank One Credit Facility
*10.6 First Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.7 Second Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.8 Third Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.9 Fourth Amendment to Loan Agreement between Texstar
Petroleum, Inc. and Bank One, Texas, N.A.
*10.10 Participation Agreement between BOCP Energy Partners, L.P.
and Bank One, Texas, N.A.
*10.11 Agreement among Texstar Petroleum, Inc., Benz Energy LTD,
Calibre Energy, L.L.C., BOCP Energy Partners, L.P. and EnCap
Energy Capital Fund IV, L.P.
*10.12 First Amendment to the Participation Agreement between BOCP
Energy Partners, L.P. and Bank One, Texas, N.A.
*10.13 Assignment of oil, gas and mineral leases and Bill of Sale
*10.14 Loan Agreement among Texstar Petroleum, Inc., Perry Limited
Sreedeswar, Inc., Dalworth Capital, James Ladner, RP & C
International Limited and Energy Capital Investment Company
*10.15 Assignment of contract rights and term assignment of oil
and gas lease, Old Ocean Area, Brazoria and Matagorda
Counties, Texas
*15.1 Letter re-unaudited interim financial information
*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 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
+ To be filed by amendment
<PAGE>
BENZ ENERGY LTD.
STOCK OPTION PLAN
JANUARY 14, 1998
ARTICLE ONE (1)
DEFINITIONS AND INTERPRETATION
Section 1.1 DEFINITIONS: For purposes of the Plan, unless such word or
term is otherwise defined herein or the context in which such word or term is
used herein otherwise requires, the following words and terms with the
initial letter or letters thereof capitalized shall have the following
meanings:
(a) "1993 Act" means the Securities Act of 1993 of the United States,
as amended;
(b) "Committee" means the Directors or, if the Directors so determine
in accordance with section 2.3 of the Plan, the committee of the
Directors authorized to administer the Plan;
(c) "Common Shares" means the common shares of the Corporation, as
adjusted in accordance with the provisions of Article Six of the
Plan;
(d) "Corporation" means Benz Energy Ltd., a corporation continued
pursuant to the provisions of the BUSINESS CORPORATIONS ACT (Yukon);
(e) "Directors" means the directors of the Corporation from time to
time;
(f) "Eligible Directors" means the Directors or the Directors of any
subsidiary of the Corporation from time to time who, by the nature
of their positions are, in the opinion of the Committee, in a
position to contribute to the success of the Corporation;
(g) "Eligible Employees" means employees, including officers, whether
Directors or not, and including both full-time and part-time
employees, of the Corporation or any subsidiary of the Corporation
who, by the nature of their positions or jobs are, in the opinion
of the Committee, in a position to contribute to the success of the
Corporation;
(h) "Employment Contract" means any contract between the Corporation or
any subsidiary of the Corporation and any Eligible Employee or
Other Participant relating to, or entered into in connection with,
the employment of the Eligible Employee or the engagement of the
Other Participant;
(i) "Option" means an option to purchase Common Shares granted pursuant
to, or governed by, the Plan;
<PAGE>
- D 2 -
(j) "Optionee" means a Participant to whom an Option has been granted
pursuant to the Plan;
(k) "Option Period" means the period of time during which the
particular Option may be exercised;
(l) "Other Participants" means any person or corporation engaged to
provide ongoing management or consulting services for the
Corporation or for any entity controlled by the Corporation other
than an Eligible Director or an Eligible Employee;
(m) "Participant" means each Eligible Director, Eligible Employee and
Other Participant;
(n) "Plan" means this stock option plan;
(o) "Share Compensation Arrangement" means any stock options, stock
option plan, employee stock purchase plan or any other compensation
or incentive mechanism involving the issuance or potential issuance
of Common Shares, including a share purchase from treasury which is
financially assisted by the Corporation by way of a loan, guarantee
or otherwise; and
(p) "Insider" means
(i) an insider of the Corporation, other than a person who is
an insider of the Corporation solely by virtue of being a
director or senior officer of a subsidiary of the
Corporation; and
(ii) an associate of any person who is an insider of the
Corporation within the meaning of paragraph (i) of this
definition.
Section 1.2 SECURITIES DEFINITIONS: In the Plan, the terms "associate",
"subsidiary" and "insider" shall have the meanings given to such terms in the
SECURITIES ACT (Ontario).
Section 1.3 HEADINGS: The headings of all articles, sections, and
paragraphs in the Plan are inserted for convenience of reference only and
shall not affect the construction or interpretation of the Plan.
Section 1.4 CONTEXT, CONSTRUCTION: Whenever the singular or masculine are
used in the Plan, the same shall be construed as being the plural or feminine
or neuter or vice versa where the context so requires.
Section 1.5 REFERENCES TO THE PLAN: The words "herein", "hereby",
"hereunder", "hereof" and similar expressions mean or refer to the Plan as a
whole and not to any particular article, section, paragraph or other part
hereof.
<PAGE>
- D 3 -
Section 1.6 CANADIAN FUNDS: Unless otherwise specifically provided, all
references to dollar amounts in the Plan are references to lawful money of
Canada.
ARTICLE TWO (2)
PURPOSE AND ADMINISTRATION OF THE PLAN
Section 2.1 PURPOSE OF THE PLAN: The Plan provides for the grant of
Options to Participants for the purpose of advancing the interests of the
Corporation through the motivation, attraction and retention of key employees
and directors of the Corporation and subsidiaries of the Corporation and to
secure for the Corporation and the shareholders of the Corporation the
benefits inherent in the ownership of Common Shares by key employees and
directors of the Corporation and subsidiaries of the Corporation, it being
generally recognized that stock option plans aid in attracting, retaining and
encouraging employees and directors due to the opportunity offered to them to
acquire a proprietary interest in the Corporation.
Section 2.2 ADMINISTRATION OF THE PLAN: The Plan shall be administered by
the Committee and the Committee shall have full authority to administer the
Plan including the authority to interpret and construe any provision of the
Plan and to adopt, amend and rescind such rules and regulations for
administering the Plan as the Committee may deem necessary in order to comply
with the requirements of the Plan. All actions taken and all interpretations
and determinations made by the Committee in good faith shall be final and
conclusive and shall be binding on the Participants and the Corporation. No
member of the Committee shall be personally liable for any action taken or
determination or interpretation made in good faith in connection with the
Plan and all members of the Committee shall, in addition to their rights as
Directors, be fully protected, indemnified and held harmless by the
Corporation with respect to any such action taken or determination or
interpretation made. The appropriate officers of the Corporation are hereby
authorized and empowered to do all things and execute and deliver all
instruments, undertakings and applications and writings as they, in their
absolute discretion, consider necessary for the implementation of the Plan
and of the rules and regulations established for administering the Plan. All
costs incurred in connection with the Plan shall be for the account of the
Corporation.
Section 2.3 DELEGATION TO COMMITTEE: All of the powers exercisable
hereunder by the Directors may, to the extent permitted by applicable law and
as determined by resolution of the Directors, be exercised by a committee of
the Directors comprised of not less than three Directors.
Section 2.4 RECORD KEEPING: The Corporation shall maintain a register in
which shall be recorded:
(a) the name and address of each Optionee;
(b) the number of Common Shares subject to Options granted to each
Optionee; and
(c) the aggregate number of Common Shares subject to Options.
<PAGE>
- D 4 -
Section 2.5 PREVIOUSLY GRANTED OPTIONS: The options to purchase an
aggregate of 2,967,464 Common Shares granted by the Corporation to
Participants before January 14, 1998 shall continue to be exercisable, and
upon the Plan becoming effective, shall be governed by and be subject to the
Plan and shall be deemed to be Options granted under the Plan. The
Corporation may, after adoption of the Plan by the Corporation's Board of
Directors, grant Options under the Plan, but no Common Shares may be issued
pursuant to such Options until the Plan is effective. To the extent that the
terms and conditions of any of the aforesaid options are inconsistent with
the terms and conditions of the Plan, the terms and conditions of the Plan
shall govern.
ARTICLE THREE (3)
ELIGIBILITY AND PARTICIPATION
IN THE PLAN AND GRANT OF OPTIONS
Section 3.1 ELIGIBILITY: Options shall only be granted to Participants.
Section 3.2 DETERMINATION OF OPTION RECIPIENTS: The Committee shall from
time to time determine the Participants to whom Options shall be granted to
each Participant and the other terms of each Option granted to each
participant, all such determinations to be made in accordance with the terms
and conditions of the Plan, and the Committee may take into consideration the
present and potential contributions of and the services rendered by the
particular Participant to the success of the Corporation and any other
factors which the Committee deems appropriate and relevant. Each Option
granted to a Participant shall be evidenced by a stock option agreement
containing terms and conditions consistent with the provisions of the Plan,
which terms and conditions need not be the same in each case. No Participant
who is a Director shall vote on any motion considered by the Directors
granting any Option to such Director.
ARTICLE FOUR (4)
NUMBER OF COMMON SHARES SUBJECT TO THE
PLAN, EXERCISE PRICE AND TERM OF OPTIONS
Section 4.1 NUMBER OF SHARES: The maximum aggregate number of Common Shares
which may be made subject to Options shall be 3,020,998 Common Shares and in no
event shall the aggregate number of Common Shares reserved for issue pursuant
to the provisions of the Plan exceed 3,020,998 Common Shares, subject in each
case to adjustment in accordance with Article Six of the Plan. In addition,
the maximum aggregate number of Common Shares which, together with Common
Shares subject to a Share Compensation Arrangement with such Participant or
Participants, as the case may be, may be:
(a) reserved for issue pursuant to Options granted to Participants
who are Insiders shall not exceed 10% of the number of Common
Shares then outstanding;
<PAGE>
- D 5 -
(b) issued pursuant to Share Compensation Agreements granted to
Participants who are Insiders within a one-year period shall not
exceed 10% of the number of Common Shares then outstanding;
(c) issued pursuant to Share Compensation Agreements granted to any
one Participant who is an Insider and the associates of such
Participant within a one-year period shall not exceed 5% of the
number of Common Shares then outstanding; and
(d) reserved for issue pursuant to Options granted to any one
Participant shall not exceed 5% of the number of Common Shares
then outstanding.
For purposes of this section 4.1, the number of Common Shares then
outstanding means the number of Common Shares outstanding on a non-diluted
basis immediately prior to the proposed grant of the applicable Option,
excluding Common Shares issued pursuant to Share Compensation Arrangements
over the preceding one-year period. If Options are surrendered, terminate or
expire in accordance with the terms of the Plan without being exercised in
whole or in part, the Common Shares which were the subject of such Options
and which were not purchased may again be made subject to an Option.
Section 4.2 EXERCISE PRICE: The price per share at which any Common Share
which is the subject of an Option may be purchased shall be determined by the
Directors at the time the Option is granted, provided that such price shall
be not less than the closing price of the Common Shares on The Toronto Stock
Exchange or if the Common Shares are not then listed on The Toronto Stock
Exchange, on such other exchange or market as the Common Shares are then
listed, on the last trading day immediately preceding the date of grant of
such Option.
Section 4.3 TERMS OF OPTIONS: The Option Period for each Option shall be
such period of time as shall be determined by the Committee, subject to any
Employment Contract, provided that no Option Period shall exceed 10 years.
The Committee may determine the number or percentage of Common Shares which
may be purchased by an Optionee during any particular time period within the
Option Period.
ARTICLE FIVE (5)
EXERCISE OF OPTION, EFFECT OF
DEATH AND TERMINATION OF EMPLOYMENT
AND WITHHOLDING TAXES
Section 5.1 EXERCISE OF OPTION:
(a) EXERCISE: Subject to any restriction on the number or
percentage of Common Shares which may be purchased by the
Optionee during any particular time period within the Option
Period determined by the Committee, an Option may be exercised
by the Optionee in whole at any time, or in part from time to
time, during the Option Period, provided however that, except as
otherwise specifically provided in section 5.2
<PAGE>
- D 6 -
or section 5.3 hereof or in any Employment Contract, no Option
may be exercised unless the Optionee at the time of exercise
thereof is:
(i) in the case of an Eligible Employee, in the employment of
the Corporation or a subsidiary of the Corporation and
has been continuously so employed since the date of grant
of such Option, provided however, that a leave of absence
with the approval of the Corporation or such subsidiary
of the Corporation shall not be considered an
interruption of employment for purposes of the Plan;
(ii) in the case of an Eligible Director who is not also an
Eligible Employee, a director of the Corporation or a
subsidiary of the Corporation and has been such a
director continuously since the date of grant of such
Option; and
(iii) in the case of an Other Participant, engaged in providing
ongoing management or consulting services for the
Corporation or an entity controlled by the Corporation
and has been so engaged since the date of grant of such
Option.
(b) PAYMENT OF EXERCISE PRICE: The exercise of any Option shall be
contingent upon receipt by the Corporation of payment of the
aggregate purchase price for the Common Shares in respect of
which the Option has been exercised. No Optionee or legal
representative, legalee or distributee of any Optionee will be,
or will be deemed to be, a holder of any Common Shares with
respect to which such Optionee was granted an Option, unless and
until certificates for such Common Shares are issued to such
Optionee, or them, under the terms of the Plan. Subject to
section 9.4 hereof, upon an Optionee exercising an Option and
paying the Corporation the aggregate purchase price for the
Common Shares in respect of which the Option has been exercised,
the Corporation shall as soon as practicable issue and deliver a
certificate representing the Common Shares so purchased.
Section 5.2 EFFECT OF DEATH: If a Participant shall die while an Optionee,
any Option held by such Optionee at the date of death shall be exercisable in
whole or in part only by the person or persons to whom the rights of the
Optionee under the Option shall pass by the will of the Optionee or the laws
of descent and distribution for a period of one year after the date of death
of the Optionee or prior to the expiration of the Option Period in respect of
the Option, whichever is sooner, and then only to the extent that such
Optionee was entitled to exercise the Option at the date of death of such
Optionee, subject to the provisions of any Employment Contract.
Section 5.3 EFFECT OF TERMINATION OF EMPLOYMENT: If an Optionee shall cease
to be a Participant for cause, no Option held by such Optionee shall be
exercisable following the date on which such Optionee ceases to be a
Participant. If an Optionee ceases to be Participant for any reason other
than for cause or by virtue of death, any Option held by such Optionee at
such time shall remain exercisable in full at any time, and in part from time
to time, for a period of 30 days after the date on which the Optionee ceases
to be a Participant or prior to the expiration of the Option Period in
<PAGE>
- D 7 -
respect of the Option, whichever is sooner, and then only to the extent that
such Optionee was entitled to exercise the Option at such time, subject to
the provisions of any Employment Contract.
Section 5.4 WITHHOLDING TAXES: The Corporation or any subsidiary of the
Corporation may take such steps as are considered necessary or appropriate
for the withholding of any taxes which the Corporation or any subsidiary of
the Corporation is required by any law or regulation of any governmental
authority whatsoever to withhold in connection with any Option including,
without limiting the generality of the foregoing, the withholding of all or
any portion of any payment or the withholding of the issue of Common Shares
to be issued upon the exercise of any Option until such time as the Optionee
has paid the Corporation or any subsidiary of the Corporation for any amount
which the Corporation or subsidiary of the Corporation is required to
withhold with respect to such taxes.
ARTICLE SIX (6)
CAPITAL CHANGES
Section 6.1 CAPITAL CHANGES: In the event there is any change in the Common
Shares, whether by reason of a stock dividend, consolidation, subdivision,
reclassification or otherwise, an appropriate adjustment shall be made by the
Directors in:
(a) the number of Common Shares available under the Plan;
(b) the number of Common Shares subject to the Options; and
(c) the exercise price of the Common Shares subject to Options.
If the foregoing adjustment shall result in a fractional Common Share, the
fraction shall be disregarded. All such adjustments shall be conclusive,
final and binding for all purposes of the Plan.
Section 6.2 AMALGAMATION, CONSOLIDATION OR MERGER: If the Corporation
amalgamates with, consolidates with or merges with or into, or participates
in a statutory arrangement with, another corporation, any Common Shares
receivable on the exercise of an Option shall be converted into the
securities, property or cash which the Optionee would have received upon such
amalgamation, consolidation, merger or arrangement had the Option been
exercised to such event becoming effective.
ARTICLE SEVEN (7)
EFFECTIVE TIME OF PLAN, AMENDMENT
OF PLAN AND TERMINATION OF PLAN
Section 7.1 EFFECTIVE TIME OF PLAN: The Plan shall become effective upon the
approval of the Plan by:
<PAGE>
- D 8 -
(a) The Toronto Stock Exchange and any other exchange upon which the
Common Shares of the Corporation may be listed and posted for
trading; and
(b) the shareholders of the Corporation, given by the affirmative vote
of a majority of the votes attached to the Common Shares of the
Corporation entitled to vote and represented and voted at an annual
or special meeting of the holders of the such Common Shares held,
among other things, to consider and approve the Plan.
Section 7.2 AMENDMENT OF PLAN: The Directors may from time to time in the
absolute discretion of the Directors amend, modify and change the provisions
of the Plan, provided that any amendment, modification or change of the
provisions of the Plan which would:
(a) materially increase the benefits under the Plan;
(b) increase the number of Common Shares, other than by virtue of
Article Six of the Plan, which may be issued pursuant to the
exercise of Options granted pursuant to the Plan; or
(c) materially modify the requirements as to eligibility for
participation in the Plan;
shall only be effective upon such amendment, modification or change being
approved by the shareholders of the Corporation in a manner similar to the
approval contemplated by section 7.1 of the Plan. Any amendment, modification
or change of any provision of the Plan shall be subject to approval, if
required, by any regulatory body having jurisdiction.
Section 7.3 TERMINATION OF THE PLAN: The Plan may be terminated at any time
by the Directors. Notwithstanding the termination of the Plan, any Option
outstanding under the Plan at the time of termination shall remain in effect
until such Option has been exercised, has expired, has been surrendered to
the Corporation or has been terminated.
ARTICLE EIGHT (8)
U.S. MATTERS
Section 8.1 ADDITIONAL RESTRICTIONS ON TRANSFER: By accepting Options
and/or Common Shares under the Plan, an Optionee will be deemed to represent,
warrant and agree as follows:
(a) SECURITIES ACT OF 1933: The Optionee understands that the Common
Shares have not been registered under the 1933 Act, and that such
shares are not freely tradeable and must be held indefinitely unless
such shares are either registered under the 1933 Act
or
an exemption from such registration is available. The Optionee
understands that the Corporation is under no obligation to register
the Common Shares under applicable securities laws.
<PAGE>
- D 9 -
(b) OTHER APPLICABLE LAWS: The Optionee further understands that
transfer of the Common Shares requires full compliance with the
provisions of all applicable laws.
(c) INVESTMENT INTENT: Unless a registration statement is in effect
with respect to the sale of Common Shares obtained through exercise
of Options granted hereunder: (i) Upon exercise of any Option, the
Optionee will purchase the Common Shares for his or her own account
and not with a view to distribution within the meaning of the
1933 Act, other than as may be effected in compliance with the
1933 Act and the rules and regulations promulgated thereunder;
(ii) no one else will have any beneficial interest in the Common
Shares; and (iii) he or she has no present intention of disposing of
the Common Shares at any particular time.
Section 8.2 COMPLIANCE WITH LAW: Notwithstanding any other provision of the
Plan, Options may be granted pursuant to the Plan, and Common shares may be
issued pursuant to the exercise thereof by an Optionee, only after there has
been compliance with all applicable federal and state securities laws, and
all of the same will be subject to this overriding condition. The Corporation
will not be required to register or qualify Common Shares with the United
States Securities and Exchange Commission or any State agency, except that
the Corporation will register with, or as required by local law, file for and
secure an exemption from such registration requirements from, the applicable
securities administrator and other officials of each jurisdiction in which a
Participant would be granted an Option hereunder prior to such grant.
Section 8.3 EXERCISE OF OPTIONS: In addition to any other requirements set
out in the Plan or a stock option agreement, the following conditions will
apply to the exercise of Options under the Plan:
(a) MECHANICS: Upon exercise of an Option, an Optionee provides
(i) full payment of the exercise price thereof and the amount of
withholding taxes pursuant to subsection 8.3(b) below; and
(ii) assurances satisfactory to the Corporation that the Common
Shares to be purchased upon such exercise are being purchased for
investment and not with a view to resale in connection with any
distribution of such shares in violation of the 1933 Act; provided,
however, that in the event the Common Shares called for under the
Option are registered under the 1933 Act, or in the event resale of
such Common Shares without such registration would otherwise be
permissible, this second condition will be inoperative if, in the
opinion of counsel for the Corporation, such condition is not
required under the 1933 Act, or any other applicable law,
regulation or rule of any governmental agency.
(b) WITHHOLDING TAXES: As a condition to the issuance of the Common
Shares upon full or partial exercise of an Option granted under the
Plan, the Optionee will pay to the Corporation in cash, or by way of
certified cheque, bank draft or money order the amount of the
Corporation's tax withholding liability required in connection with
such exercise. For purposes of this subsection 8.3(b), "tax
withholding liability" means all federal and state income taxes,
social security tax, and any other taxes applicable to the
compensation income arising from the transaction required by
applicable law to be withheld by the Corporation.
<PAGE>
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ARTICLE NINE (9)
MISCELLANEOUS PROVISIONS
Section 9.1 NON-ASSIGNABLE: No rights under the Plan an no Option awarded
pursuant to the provisions of the Plan are assignable or transferable by any
Participant other than pursuant to a will or by the laws of descent and
distribution.
Section 9.2 RIGHTS AS A SHAREHOLDER: No Optionee shall have any rights as a
shareholder of the Corporation with respect to any Common Shares which are
the subject of an Opinion. No Optionee shall be entitled to receive, and no
adjustment shall be made for, any dividends, distributions or other rights
declared for shareholders of the Corporation for which the record date is
prior to the date of exercise of any Option.
Section 9.3 NO CONTRACT OF EMPLOYMENT: Nothing contained in the Plan shall
confer or be deemed to confer upon any Participant the right to continue in
the employment of the Corporation or any subsidiary of the Corporation nor
interfere or be deemed to interfere in any way with any right of the
Corporation or any subsidiary of the Corporation to discharge any Participant
at any time for any reason whatsoever, with or without cause.
Section 9.4 NECESSARY APPROVALS: The obligation of the Corporation to grant
any Option pursuant to the Plan and to issue, sell and deliver any Common
Shares on the exercise of an Option is subject to the approval of any
governmental authority or regulatory body required in connection with the
grant of such Option or the issue, sale and delivery of such Common Shares by
the Corporation. In the event that any Common Shares cannot be issued to any
Optionee pursuant to the exercise of an Option as a result of the failure to
obtain any required regulatory approvals, then the obligation of the
Corporation to issue such Common Shares shall terminate and any money paid to
the Corporation in connection with the exercise of such Option shall be
returned to the Optionee without interest or deduction.
Section 9.5 NO REPRESENTATION OR WARRANTY: The Corporation makes no
representation or warranty as to the value of any Option granted pursuant to
the Plan or as to the future value of any Common Shares issued pursuant to
the Exercise of any Option.
Section 9.6 COMPLIANCE WITH APPLICABLE LAW: If any provision of the Plan
or any Option contravenes any law or any order, policy, by-law or regulation
of any regulatory body having jurisdiction, then such provision shall be
deemed to be amended to the extent necessary to bring such provision into
compliance therewith.
Section 9.7 APPLICABLE LAW: The Plan and all of the rights and obligations
arising herefrom shall be interpreted and applied in accordance with the laws
of the Province of British Columbia.
Approved and adopted by the directors of the Corporation on the
14th day of January, 1998.
Approved by the shareholders of the Corporation on the day
of , 1998.
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT dated December 15, 1998 is between BENZ ENERGY LTD. ("Benz") and
its wholly owned subsidiary TEXSTAR PETROLEUM, INC. ("Texstar") (both referred
to as the "Company"), and Prentis B. Tomlinson, Jr. ("Employee").
NOW THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT. The Company hereby employs Employee as the Chairman of the
Board and Chief Executive Officer of the Company and Employee hereby accepts
such employment and agrees to perform the services specified in Section 6 below
upon the terms and conditions hereinafter set forth. Employee shall serve as a
member of the Board of Directors of the Company as well as a member of the
Executive Committee. Employee shall report directly to the Board of Directors
of the Company in accordance with the by-laws of the Company and any provisions
of applicable law.
2. TERM. The term of this Agreement, and the employment arrangement
hereunder, shall commence on the Effective Date hereof and shall continue for a
term (the "Term") commencing on the Effective Date and ending on the date five
(5) years after the Effective Date ("Expiration Date"), provided, however, that
either party hereto may terminate the employment of Employee prior to the
Expiration Date upon thirty (30) days prior written notice to the other party.
3. COMPENSATION. The Company shall pay to Employee or his designee a
salary of Twenty-Two Thousand Nine Hundred and Sixteen and 67/100 Dollars
($22,916.67) per month, payable in accordance with the Company's standard
payroll procedures ("Salary"). Of Said Salary, Five Thousand Four Hundred
Fifty and 00/100 Dollars ($5,450.00) will be accrued and paid on the earlier
of January 1, 2002 and termination of the Encap Credit Agreement. Employee's
Salary shall be subject to withholding for all applicable taxes and insurance
premiums and may be increased during the term of this agreement at the
election of the Company.
4. COMPENSATION - VARIABLE. The Company will pay a bonus to Employee or
his designee based on a percentage of the gross revenue and a percentage of
net income as audited on a quarterly basis by the Company's auditors. The
goal would be that Employee would receive on an annual basis a bonus equal to
one to two times the annual compensation in paragraph 3 above.
5. ASSIGNMENT. Simultaneous with entry into this Agreement Employee or his
designee shall be assigned an overriding royalty interest equal to one percent
(1%), proportionately reduced to Texstar's working interest, in Texstar's
Oakvale, LaHinch, and Rayburn/Plum Grove properties, and a .25% net revenue
interest (calculated on an 8/8ths basis), in Texstar's Old Ocean properties,
subject in each case to all liens, burdens, and encumbrances on Texstar's title
at such time and reduced by the amount of any royalties already existing on such
properties in favor of Employee, his family members, or any
Guarantors/Shareholders other than Benz or Texstar, excluding only approximately
a .38% overriding royalty presently owned by Heather Tomlinson in the Oakvale
Dome properties.
<PAGE>
6. DUTIES. Employee shall have the responsibilities and authority usually
associated with the offices of Chairman of the Board and Chief Executive
Officer of the corporations having assets in value equal to the assets of the
Company, and such other duties as the Board of Directors of the Company shall
determine from time to time. Company agrees that the removal of Employee
from the position of Chairman of the Board and Chief Executive Officer during
the Term of the Agreement shall constitute a material breach of this
Agreement hereof and a basis for the Employee terminating employment for
cause.
7. EXTENT OF SERVICE. Employee shall devote the necessary time, attention,
and energies to the business of the Company. The foregoing shall not be
construed as preventing Employee from making any investments, or engaging in
other activities, provided such investments and activities do not require any
material services on the part of Employee. Additionally, during the term of
Employee's employment with the Company, Employee shall not invest in, be
employed by, or otherwise be associated or affiliated with any company or
business that is in competition with the Company. This latter condition shall
not include normal investments in other companies in which the Employee is not
active in the management of such company.
8. WORKING FACILITIES. The Company shall furnish office facilities,
supplies, secretarial help, and other facilities and services suitable to
Employee's position and adequate for the performance of Employee's duties
hereunder. The Company will provide Employee with one (1) parking space in
the parking garage used by the Company; or at Employee's option, Employee may
elect to receive the amount of the monthly parking fee in cash and make his
own parking arrangements.
9. FRINGE BENEFITS. Employee shall be entitled such group insurance, 401K
Plan and other fringe benefit programs as are established for the other
executive employees of the Company, on the same basis as such other employees
are entitled thereto, it being understood that the establishment,
termination, or change of such programs shall be at the sole discretion of
the board of directors of the Company. Notwithstanding the foregoing,
Employee shall have the option (exercisable by written notice to the Company)
to waive participation in the Company's group insurance program and receive a
monthly premium otherwise applicable to Employee, in which event Employee
shall be responsible for obtaining his own insurance coverage. Company shall
reimburse Employee any dental costs incurred prior to the inclusion of a
dental plan as part of the Company's group insurance program.
10. EXPENSES. Employee is authorized to incur reasonable expenses in the
performance of his duties and the promotion of the business of the Company,
including expenses for business entertainment, travel, basic cellular phone
monthly fees and business calls, and similar items, subject, however, to the
Company's standard expense reimbursement policies. The Company will reimburse
Employee for all such expenses upon the presentation by Employee of an itemized
account of such expenditures in a timely manner.
11. VACATION AND SICK LEAVE. Employee shall be entitled to four (4) weeks
annual vacation which shall be used (non-cumulative) during each calendar year.
Employee shall be entitled to five (5) days annual sick leave which shall
accumulate if not completely taken during each calendar year.
2
<PAGE>
12. TERMINATION OF EMPLOYMENT. Except as otherwise provided in Sections 13,
14, and 16, the employment, compensation and benefit arrangements hereunder
shall be terminated upon the occurrence of the first to occur of any of the
following events:
(a) thirty (30) days after written notice of termination is given by
either party to the other; or
(b) Employee's death;
(c) At Employee's option, upon the occurrence of a Change in Control
of the Company; or
(d) the expiration of the Term of this Agreement.
As used herein "Change of Control" means any of the following:
(i) Any person or group of persons (as defined in Rule 13d-5 of the
Securities Exchange Act of 1934), together with its affiliates, becomes
the beneficial owner, directly or indirectly, of 33% or more of Benz's
then outstanding common stock or 33% or more of the voting power of
Benz's then outstanding securities entitled generally to vote for the
election of Directors; or
(ii) The occurrence of, or the approval by, Benz's stockholders of a
merger or consolidation of Benz or Texstar with any other corporation or
entity, the sale of a majority of the assets of Benz or Texstar or the
liquidation or dissolution of Benz; or
(iii) At least a majority of the Directors in office immediately prior
to any other action taken or proposed to be taken by Benz stockholders
or by the Board of Directors of Benz determines that such action
constitutes, or that such proposed action, if taken, would constitute, a
change of control of Benz, and such action is taken.
Any notice of termination given by Employee to Company under Sections 12(a)
or 12(c) above shall specify whether such termination is made with or without
Cause (as defined below). Employee must exercise his option to terminate this
Agreement upon the occurrence of a Change in Control as set out in Section
12(c) within ninety (90) days after the occurrence of such Change in Control.
13. SEVERANCE AFTER TERMINATION BY EMPLOYEE. If the Employee terminates his
employment without Cause during the term of this Agreement, the Employee
shall not be entitled to any severance payment upon termination of this
Agreement. If the Employee terminates his employment during the term of this
Agreement with Cause, then the following shall occur:
(a) The Company shall within thirty (30) days of termination pay to
Employee or his designee the sum of One Million Dollars ($1,000,000); and
3
<PAGE>
(b) The Company and Employee shall execute a consulting agreement in
a mutually acceptable form. The agreement shall provide that for a three
(3) year period after termination, Employee or his designee shall receive
Fifteen Thousand Four Hundred and Sixteen and 67/100 ($15,416.67) per month
in exchange for devoting a substantial portion of his time as required to
assist the Company with its oil and gas operations.
14. SEVERANCE AFTER TERMINATION BY COMPANY. If during the term of this
Agreement the Company terminates Employee's employment without Cause, the
following shall occur:
(a) The Company shall within thirty (30) days of termination pay to
Employee or his designee the sum of One Million Dollars ($1,000,000); and
(b) The Company and Employee shall execute a consulting agreement in
a mutually acceptable form. The agreement shall provide that for a three
(3) year period after termination, Employee or his designee shall
receive Fifteen Thousand Four Hundred and Sixteen and 67/100 ($15,416.67)
per month in exchange for devoting a substantial portion of his time as
required to assist the Company with its oil and gas operations.
During the term of this Agreement, if the Company terminates Employee's
employment with Cause, the Employee shall not be entitled to receive any
severance payment upon termination of this Agreement.
15. CAUSE. As used in this Agreement, the term "Cause" means (i) the breach
of any material provision of this Agreement by either the Company or
Employee; (ii) willful misconduct by the Employee, (iii) the gross neglect
by Employee of his duties as an employee, officer or director of the Company
which continued for more than five (5) days after written notice from the
Company to Employee specifically identifying the gross negligence of Employee
and directing Employee to discontinue same; or (iv) the occurrence of a
Change in Control of the Company.
16. LIABILITY OF EMPLOYEE. Company agrees that Employee will not be liable
for any losses, expenses, costs, or damages caused by or resulting from the
recommendations, suggestions, actions, errors, omissions, or mistakes (the
"Management") of the Employee undertaken or proposed by Employee in the
exercise of his good faith business judgment in the prosecution and
management of the business and operations of the Company resulting from his
willful misconduct or gross negligence.
17. INDEMNIFICATION. The Company agrees to indemnify the Employee to the
fullest extent authorized under the laws of Texas for all claims, demands and
causes of action arising out of Employee's Management of the Company while the
Employee is employed pursuant to this Agreement.
18. DISCLOSURE OF CONFIDENTIAL INFORMATION. Employee recognizes and
acknowledges that Employee will have access to certain confidential
information of the Company and that such information constitutes valuable,
special, and unique property of the Company. Employee
4
<PAGE>
agrees that during and after the termination of this Agreement, howsoever the
termination is accomplished, Employee will not disclose to any person, firm,
corporation, association, or other party, any confidential or proprietary
information, knowledge or data relating to the Company's business. The
records, documents, data, and similar items relating to the business, which
are owned by the Company, including, but not limited to, certain geological
data, computer data base information, and prospect lists shall remain the
property of the Company upon the termination of this Agreement. The files,
records, documents, data and similar items, including, but not limited to,
certain geological data, computer data and basic information which are the
property of Employee or affiliates of Employee shall not be considered
property of the Company.
19. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Houston, Texas, in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from,
or modify any provision hereof nor to award punitive damages to any injured
party. The arbitrators shall have the authority to determine whether
Employee was terminated for Cause, as defined in Section 15, or that Company
or Employee has otherwise materially breached this Agreement. A decision by a
majority of the arbitration panel shall be final and binding. Judgment may be
entered on the arbitrators' award in any court having jurisdiction. The
direct expense of any arbitration proceeding shall be borne by Company.
20. MISCELLANEOUS.
(a) Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by certified mail: (a)
to Employee's residence in the case of Employee, or (b) to the principal
office of the Company in the case of the Company.
(b) The waiver by the Company of a breach of any provision of this
Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in
writing and signed by Company.
(c) This Agreement contains the entire understanding of the parties
and may not be amended except by a writing signed by both parties.
(d) This Agreement shall be binding upon the parties to this
Agreement and their heirs, executors, administrators, successors, and
assigns. The Company may not assign its obligations hereunder except by
operation of law. Employee may not assign Employee's duties hereunder.
(e) This Agreement shall be subject to and governed by the laws
of the State of Texas.
(f) The invalidity or unenforceability of any provision herein shall
not affect the validity or enforcement of any other provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above
5
<PAGE>
written.
COMPANY:
Benz Energy Ltd.
By: /s/ Todd Grabois
Name: Todd Grabois
Title: Vice President
Texstar Petroleum, Inc.
By: /s/ Todd Grabois
Name: Todd Grabois
Title: Vice President
EMPLOYEE:
------
Prentis B. Tomlinson, Jr.
6
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT dated November 15, 1997 is between Benz Energy, Ltd. and
its wholly owned subsidiary TEXSTAR PETROLEUM, Inc., (both referred to as the
"Company"), and Robert S. Herlin ("Employee").
NOW THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT. The Company hereby employs Employee as the Senior
Vice-President and Chief Financial Officer of the Company and Employee hereby
accepts such employment and agrees to perform the services specified in
Section 4 below upon the terms and conditions hereinafter set forth.
Additionally, Employee would serve as a member of the Board of Directors of
the Company as well as a member of the Executive Committee. Employee
represents and warrants to the Company that Employee's employment hereunder
will not constitute a breach of, or default under, any contract or covenant
by which Employee is bound, and Employee agrees to indemnify the Company
against any expenses or losses suffered by the Company as a result of any
action arising out of any such contract or covenant.
2. TERM. The term of employment shall commence on the effective date
of this Agreement and continue for a period of 24 months or until terminated
pursuant to the provisions of Section 9; provided, however, no termination of
employment, howsoever caused, shall release Employee from the covenants
contained in Section 12 of this Agreement, which covenants shall survive the
termination of this Agreement.
3. COMPENSATION. For all services rendered by Employee under this
Agreement, the Company shall pay to Employee a salary of Eleven Thousand Two
Hundred and Fifty Dollars ($11,250.00) per month, payable in accordance with
the Company's standard payroll procedures ("Salary"). Employee's Salary shall
be subject to withholding for all applicable taxes and insurance premiums and
may be increased during the term of this agreement at the election of the
Company.
4. COMPENSATION - VARIABLE. Employee shall be granted and fully vested
in 300,000 shares of options of Benz Energy Ltd. on the first day of
employment. Such options shall have a term of three years from the grant
date. Additionally, Employee shall be granted an additional 100,000 shares
when the share price reaches $4.00 per share for a 30 day trading period. If
Employee elects to terminate employment prior to the end of the two (2) year
term as discussed in paragraph 11(c) below, any unearned options shall
terminate and any options not exercised shall terminate with ninety (90) days
from the date of termination. However, if Employee leaves the Company after
two (2) years then such option shares shall terminate after the first three
years of this Agreement. All unearned option shares shall terminate. Such
option shares will not terminate if Employee leaves the Company after the
first three years. Also, Employee shall be paid a signing bonus of $110,000
on the first day of employment. Finally, a bonus plan will be instituted,
wherein the Company will pay a bonus to Employee based on a percentage of the
gross revenue and a percentage of net income as audited on a quarterly basis
by the Company's
<PAGE>
auditors. The goal would be that Employee would receive on an annual basis a
bonus equal to one to two times the annual compensation in paragraph 2 above.
5. DUTIES. During the term of this Agreement, as Senior
Vice-President and Chief Financial Officer of the Company, Employee agrees to
be responsible for the daily execution of the Companies financial operations.
Employee also shall perform such duties as are normally incident to that
position and shall perform such other duties and responsibilities as may be
prescribed from time to time by the board of directors of the Company.
6. EXTENT OF SERVICE. Employee shall devote Employee's entire time,
attention, and energies to the business of the Company and shall not during
the term of this Agreement be engaged in any other business activity, if
pursued for gain, profit, or other pecuniary advantage. The foregoing shall
not be construed as preventing Employee from making investments, provided
such investments do not require any material services on the part of the
Employee. Additionally, during the term of the Employee's employment with the
Company, Employee shall not invest in, be employed by, or otherwise be
associated or affiliated with any company or business that is in competition
with the Company. This latter condition shall not include normal investments
in other companies in which the Employee is not active in the management of
such company.
7. WORKING FACILITIES. The Company shall furnish such office
facilities, supplies, secretarial help, and other facilities and services
suitable to Employee's position and adequate for the performance of
Employee's duties hereunder. The Company will provide Employee with one (1)
parking space in the parking garage used by the Company; or at Employee's
option, Employee may elect to receive the amount of the monthly parking fee
in cash and make his own parking arrangements.
8. FRINGE BENEFITS. Employee shall be entitled to such group
insurance, 401K Plan and other fringe benefit programs as are established
for the other executive employees of the Company, on the same basis as such
other employees are entitled thereto, it being understood that the
establishment, termination, or change of such programs shall be at the sole
discretion of the board of directors of the Company. Notwithstanding, the
foregoing, Employee shall have the option (exercisable by written notice to
the Company) to waive participation in the Company's group insurance program
and receive a monthly premium otherwise applicable to Employee, in which
event Employee shall be responsible for obtaining his own insurance coverage.
Company shall reimburse Employee any dental costs incurred prior to the
inclusion of a dental plan as part of the Company's group insurance program.
9. EXPENSES. Employee is authorized to incur reasonable expenses in
the performance of his duties and the promotion of the business of the
Company, including expenses for business entertainment, travel, basic
cellular phone monthly fees and business calls, and similar items, subject,
however, to the Company's standard expense reimbursement policies. The
Company will reimburse Employee for all such expenses upon the presentation
by Employee of an itemized account of such expenditures in a timely manner.
10. VACATION AND SICK LEAVE. Employee shall be entitled to four (4)
weeks annual vacation which shall be used (non-cumulative) during each
calendar year. Employee shall be
<PAGE>
entitled to five (5) days annual sick leave which shall accumulate if not
completely taken during each calendar year.
11. TERMINATION. Employee's employment with the Company shall be
terminated upon the first of the following events to occur:
(a) DISABILITY. If Employee is unable to perform Employee's
services by reason of illness or incapacity and the board of
directors of the Company determines Employee to be disable,
Employee shall receive the full monthly Salary provided in
Section 3 hereof for a period of three (3) months following the
date of disability (as determined by the board of directors of
the Company), plus any amounts paid under disability or
hospitalization plan initiated and maintained by the Company,
and a proration of Employee's Commissions, at which time this
Agreement shall automatically terminate and the Company shall
have no further obligations to Employee.
(b) DEATH. If Employee dies during the term of this
Agreement, the Company shall pay to Employee's executors or
administrators the monthly Salary for the month in which
Employee dies, together with any fringe benefits which may be
provided by the Company in accordance with Section 7 hereof,
and a proration of Employee's Commissions after which this
Agreement shall automatically terminate and the Company shall
have no further obligations to Employee's estate or heirs.
(c) NOTICE BY EMPLOYEE. After the first two (2) years, this
Agreement may be terminated by Employee without cause, upon 30
days advance written notice from Employee to Company. Unless
otherwise agreed to by the Company and Employee, Employee's
employment responsibilities and compensation shall continue
until the end of the notice period, at which time the Company
shall have no further obligations to Employee. However, if
Employee determines to leave the Company prior the end of
the two (2) year term, any unearned options shall terminate and
any options not exercised shall terminate.
(d) WITH CAUSE. The Company may terminate Employee's
employment without advance notice for "cause", with no
further obligation to Employee under this Agreement other
than the payment of Salary only accrued through the
termination date. The term "cause" as used herein shall
mean any of the following, each as determined by the board
of directors of the Company: (i) Employee's conduct which
constitutes an act of fraud, theft, dishonesty, or
violation of any statutory or common law duty of loyalty
to the Company, (ii) Employee's conviction of a felony or
any crime of moral turpitude, (iii) Employee's grossly
negligent actions or omissions or willful refusal to
discharge the duties assigned by the board of directors of
the Company to Employee hereunder, or (iv) Employee's
unreasonable absence from employment without excuse or
justification.
<PAGE>
(e) WITHOUT CAUSE. The Company may terminate Employee's
employment upon thirty (30) days advance written notice
from the Company to Employee. Unless otherwise agreed to
in writing, in such event Company shall pay to Employee
the remaining amount of Employee Salary accrued or
otherwise to be paid throughout the remainder of the Term
of this Agreement provided that the remaining amount shall
be no less that twelve (12) months of Employee's Salary.
In the event such Termination is due to a change of control
of the Company, the minimum remaining amount shall be equal
to twenty-four (24) months of Employee's Salary. Termination
with cause shall be deemed to have occurred in the event
Employee's Salary is reduced, Employee's position or
responsibilities are materially reduced or Employee is
required by the Company to move outside of Houston.
12. DISCLOSURE OF CONFIDENTIAL INFORMATION. Employee recognizes and
acknowledges that Employee will have access to certain confidential information
of the Company and that such information constitutes valuable, special, and
unique property of the Company. Employee agrees that during and after the
termination of this Agreement, howsoever the termination is accomplished,
Employee will not disclose to any person, firm, corporation, association, or
other party, any information, knowledge, data, or customer list relating to
the Company's business, work, customers, or clientele. All files records,
documents, data, and similar items relating to the business, customers, and
clientele of the Company, including, but not limited to customer lists,
geological data, computer data base information, and prospect lists (whether
prepared by Employee or otherwise) shall be and remain the exclusive
property of the Company upon the termination of this Agreement. In the
event of a breach or threatened breach by Employee of the provisions of this
Section 10, the Company shall be entitled an injunction restraining Employee
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of damages from Employee.
13. ARBITRATION. Any unresolved dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of three (3) arbitrators in Houston,
Texas, in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to,
detract from, or modify any provision hereof nor to award punitive damages to
any injured party. The arbitrators shall have the authority to determine
whether Employee was terminated without disability or good cause, as defined
in Section 9(a) and 9(d), respectively, or that Company or Employee has
otherwise materially breached this Agreement. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on
the arbitrators' award in any court having jurisdiction. The direct expense
of any arbitration proceeding shall be borne by Company.
14. MISCELLANEOUS.
(a) Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by certifies
mail: (a) to Employee's residence in
<PAGE>
the case of Employee, or (b) to the principal office of the
Company in the case of the Company.
(b) The waiver by the Company of a breach of any provisions of
this Agreement by Employee shall not operate or be construed as
a waiver of any subsequent breach by Employee. No waiver shall
be valid unless in writing and signed by Company.
(c) This Agreement contains the entire understanding of the
parties and may not be amended except by a writing signed by
both parties and may not be amended except by a writing signed
by both parties.
(d) This Agreement shall be binding upon the parties to this
Agreement and their heirs, executors, administrators, successors,
and assigns. The Company may not assign its obligations hereunder
except by operation of law. Employee may not assign Employee's
duties hereunder.
(e) This Agreement shall be subject to and governed by the
laws of the State of Texas.
(f) The invalidity or unenforceability of any provision herein
shall not affect the validity or enforcement of any other
provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
Benz Energy, Ltd.
By: PRENTIS B TOMLINSON, JR.
-------------------------------------
Prentis B. Tomlinson, Jr.
Chairman and CEO
EMPLOYEE:
ROBERT S. HERLIN
------------------------------------
Robert S. Herlin
<PAGE>
TERMINATION AGREEMENT
This Termination Agreement is entered into this the 11th day of February
1999, effective as of January 15, 1999, by and between Texstar Petroleum, Inc.,
a wholly owned subsidiary of Benz Energy Ltd. (the "Company"), Ernest J. LaFlure
("LaFlure"), Prentis B. Tomlinson, Jr. ("Tomlinson") and Benz Energy Ltd., a
Yukon territories corporation ("Benz")
W I T N E S S E T H:
WHEREAS, the Company entered into an Employment Agreement with LaFlure
dated September 30, 1997, effective as of October 15, 1997, to which Employment
Agreement reference is hereby made; and
WHEREAS, Tomlinson executed a guaranty in favor of LaFlure guaranteeing
the payment of $1,500,000 less all forms of compensation actually received by
LaFlure under Paragraphs 3 and 4 of the Employment Agreement (other than any
overriding royalties received from the Partnership during the three years
LaFlure is employed by the Company) to which Guaranty reference is hereby made;
and
WHEREAS, Benz granted to LaFlure a Stock Option dated December 18, 1997
covering 300,000 shares of Benz common stock, to which Stock Option Agreement
reference is hereby made; and
WHEREAS, the Company desires to terminate LaFlure's employment without
cause; and
WHEREAS, the Company, LaFlure, Benz and Tomlinson desire to modify the
payment of the Agreed Liquidated Damages as set forth in Paragraph 15 of the
Employment Agreement, to which reference is hereby made; and
WHEREAS, Benz desires to grant to LaFlure a new Stock Option as hereinafter
set forth in lieu of the Stock Option for 300,000 shares of Benz dated December
18, 1997; and
<PAGE>
WHEREAS, the parties hereto agree that Tomlinson's personal Guaranty dated
October 15, 1997 effective as of September 15, 1997, will remain in full force
and effect; and
WHEREAS, the Company and Benz have requested LaFlure to resign all of his
positions with the Company and Benz except his position as a Director of the
Company and Benz upon the execution of this Termination Agreement.
NOW, THEREFORE, for and in consideration of the mutual benefits to be
gained by the performance hereof, the Company, LaFlure, Tomlinson and Benz do
hereby agree as follows:
1. RESIGNATION. Contemporaneously herewith, LaFlure shall execute a
resignation resigning all of his positions with the Company and Benz,
except as a Director of Benz and the Company in the form attached hereto
as Exhibit "A". In addition LaFlure shall execute an additional
Resignation as a Director of Benz in the form attached hereto as
Exhibit "A-1".
2. LIQUIDATED DAMAGES. Paragraph 15 of the Employment Agreement with respect
to the Agreed Liquidated Damages for termination of LaFlure's employment
without cause, is hereby amended as follows:
LaFlure is entitled to Agreed Liquidated Damages, and not as a penalty, in
the amount of $1,150,000 payable as follows:
1. Payments of $10,000 per month for 12 months commencing February 15,
1999;
2. Payment of $400,000 on January 15, 2000;
3. Payment of $200,000 on July 15, 2000; and
4. Payment of the Balance, as adjusted below, on January 15, 2001.
The remaining Agreed Liquidated Damages due on January 15, 2001 shall be
reduced by the difference between the Option Price under the new Option
Agreement for 500,000 shares of Benz common stock, $0.01 par value and
value of the aforesaid 500,000 Option Shares as of the date the payment of
the balance of
-2-
<PAGE>
the Agreed Liquidated Damages. All cash payments payable to LaFlure
hereunder shall be reduced by applicable federal, state or local
withholding taxes. Notwithstanding anything herein contained to the
contrary, the unpaid Agreed Liquidated Damages hereinabove set forth
shall be immediately due and payable upon the occurrence of the following
events:
1. Merger of the Company and Benz with another domestic or foreign
corporation in which there is a substantial change of control of Benz.
A substantial change of control of Benz is defined on Exhibit "B"
attached hereto and made a part hereof.
2. Removal of Prentis B. Tomlinson, Jr. as Chief Executive Officer of
the Company and Benz.
3. Upon the filing of a voluntary or involuntary petition for bankruptcy
of either the Company or Benz under applicable federal bankruptcy
laws.
4. Failure of the Company to make any of the payments as hereinabove set
forth at the time such payments are due and payable. All past due
payments shall bear interest at the rate of ten percent (10%) per
annum from the date such payments are due and payable.
3. NEW STOCK OPTIONS. Contemporaneously herewith and in lieu of the Stock
Option referred to in Paragraph 4 of the Employment Agreement and the
Stock Option Agreement dated December 18, 1997 for 300,000 of Benz common
stock, Benz shall grant to LaFlure a new Stock Option Agreement for 500,000
of Benz common stock $0.01 par value in the form of Stock Option Agreement
attached hereto and marked Exhibit "C", and incorporated herein by
reference. Upon receipt of the new Stock Option Agreement LaFlure shall
execute a document terminating all of his rights and titles under the
Stock Option Agreement dated as of December 18, 1997.
4. DIRECTOR'S LIABILITY INSURANCE. So long as LaFlure continues to serve as a
Director of the Company and Benz, the Company shall continue to provide
LaFlure with the same Director's Liability Insurance provided to other
Directors.
-3-
<PAGE>
The Company and Benz make no representation or warranty that LaFlure will
be nominated to serve as a Director at the next Annual Meeting of the
Shareholders nor is there any assurance that LaFlure will not be removed
as a Director of the Company or Benz by the Company's and Benz's
shareholders. Notwithstanding anything contained herein to the contrary,
in the event there is a change of the Board of Directors under the Encap
Agreement pursuant to which Prentis B. Tomlinson, Jr. has the right to
appoint one Director, LaFlure agrees to resign as a Director of either the
Company or Benz if requested by Prentis B. Tomlinson, Jr.
5. GUARANTY. Notwithstanding the terms and provisions of this Termination
Agreement, Tomlinson agrees and does hereby acknowledged that the Guaranty
Agreement dated October 15, 1997, effective as of September 15, 1997,
shall remain in full force and effect and Tomlinson joins herein for the
sole purpose of ratifying and reaffirming his obligation and guarantee
under the aforesaid Guaranty Agreement.
6. HEALTH INSURANCE. The Company agrees that at its sole cost and expense to
continue current health insurance coverage for LaFlure as required by
applicable law until January 15, 2000 and thereafter LaFlure shall have
the option, at his election, to continue to have health insurance
coverage under the Company's health insurance policies with cost of
continuing such health insurance coverage to be deducted from all cash
payment paid by the Company to LaFlure hereunder. The Company will
prepare and file all required COBRA notices.
7. MUTUAL RELEASES. Contemporaneously herewith the Company, LaFlure and Benz
have executed a Mutual Release in the form attached hereto and marked
Exhibit "D", and incorporated herein by reference.
8. CORPORATE RESOLUTION. Contemporaneously herewith the Company and Benz
will deliver to LaFlure a Certified Resolution of the Board of Directors
of the Company and Benz authorizing and approving this Termination
Agreement for and on behalf of the Company and Benz and as the act and
deed of the Company and Benz.
-4-
<PAGE>
9. THIRD-PARTY APPROVAL. The Company and Benz warrant and represent that
they have obtained the required approval from certain lenders of the
Company and Benz and the Vancouver Stock Exchange prior to the execution
of this Termination Agreement.
10. PARTNERSHIP INTERESTS. The Company and Benz shall cause LGR Resources,
Limited, a Texas Limited Partnership to provide, within ninety (90) days
from the date hereof, a recordable assignment to LaFlure of his
overriding royalty partnership interest as a Generator and Limited
Partner with respect to the prospect identified on Exhibit "E" attached
hereto and made a part hereof, conveying to LaFlure his overriding
royalty partnership interest as set forth in the Limited Partnership
Agreement of LGR Resources, Limited, a Texas Limited Partnership dated
January 14, 1997.
11. JOINT PRESS RELEASE. The Company, Benz and LaFlure agree that any press
release concerning the termination of LaFlure's employment with the
Company shall be subject to the joint prior written approval of all
parties.
12. PERSONAL PROPERTY. The Company and Benz agree that LaFlure shall have the
right to remove all of his personal property from the Company's offices,
including one Dell Inspiron N. 3000 lap top computer.
13. EFFECT ON EMPLOYMENT AGREEMENT. Except as herein amended, and
notwithstanding anything herein contained to the contrary, the provisions
of Paragraphs 12, 13, 14, 16, and 18 of the Employment Agreement dated
September 30, 1997, effective as of October 15, 1997, shall remain in
full force and effect.
14. CONFLICT. In the event of any conflict between terms and provisions of
the Employment Agreement and this Termination Agreement, the terms and
provisions of this Termination Agreement shall govern and control.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Termination Agreement
as the day first above written.
TEXSTAR PETROLEUM, INC.
By /s/ Prentis B. Tomlinson, Jr.
----------------------------------
Title:
President and CEO
"COMPANY"
/s/ Ernest J. LaFlure
-------------------------------------
ERNEST J. LAFLURE
"LAFLURE"
BENZ ENERGY LTD.
By /s/ Prentis B. Tomlinson, Jr.
-------------------------------------
Prentis B. Tomlinson, Jr.
Chairman and CEO
"BENZ"
/s/ Prentis B. Tomlinson, Jr.
-------------------------------------
Prentis B. Tomlinson, Jr.
Individually
"TOMLINSON"
-6-
<PAGE>
EXHIBIT "A"
to
Termination Agreement
The Board of Directors of Texstar Petroleum, Inc.
and Benz Energy Ltd.
Gentlemen:
Please be advised I do hereby tender my resignation as President and as
a member of the Executive Committee and any other elected positions with
Texstar Petroleum, Inc. and Benz Energy Ltd. effective as of February 15,
1999, except I am not resigning as a Director of either Texstar Petroleum,
Inc. or Benz Energy Ltd.
I respectfully request that a copy of this resignation be included in
the Minutes of the Board of Directors of Texstar Petroleum, Inc. and Benz
Energy Ltd.
Very truly yours,
/s/ Ernest J. LaFlure
-----------------------------------------
Ernest J. LaFlure
Dated: February 11, 1999
-----------------
Per the execution
of the attached.
<PAGE>
EXHIBIT "A-1"
February 15, 1999
Mr. Prentis B. Tomlinson, Jr.
Benz Energy, Ltd.
1000 Louisiana, Suite 1500
Houston, Tx 77002
Prentis,
The undersigned member of the Benz Energy Ltd. Board of Directors hereby
tenders for future consideration and action this conditional offer to resign
from the Benz Energy Ltd. Board of Directors.
This letter is not to be considered by Benz Energy Ltd. prior to the
occurrences of a Stakeholder Election as that term is defined in the Letter
Agreement dated December 16, 1998, by and between Texstar Petroleum, Inc.,
Benz Energy Ltd., Calibre Energy, L.L.C., Benz Properties Ltd., Prentis B.
Tomlinson, Jr., Texstar Holdings, L.L.C., Prentis B. Tomlinson, Jr., Trustee
for and on behalf of the Slattery Trust, Ruston Trust and Houston Trust, and
Heather J. Tomlinson, Trustee for and on behalf of the Starbucks Trust. My
resignation shall be effective only if and when this offer is accepted in
writing by Prentis Tomlinson on behalf of Benz Energy Ltd. and only in the
event of a Stakeholder Election. My position on the Board of Directors shall
be unaffected by this letter until this offer of resignation is accepted in
writing by Prentis Tomlinson on behalf of Benz Energy Ltd.
By: /s/ Ernest J. LaFlure
Ernest J. LaFlure
Director
Benz Energy Ltd.
<PAGE>
EXHIBIT "B"
to
Termination Agreement
For purposes of the Termination Agreement, a "Substantial Change of
Control of Benz" is hereby defined as follows:
A "Substantial Change of Control" with respect to Benz shall be deemed
to have occurred in the event that (1) any person or group of persons (within
the meaning of Section 13(d) of the Securities Exchange Act of 1934, as
amended the ("Exchange Act")), acquires beneficial ownership (within the
meaning of the aforesaid Section 13(d)) of 50% of the shares of the common
stock of Benz or (2) the conveyance, sale, lease, assignment, transfer or
other disposal of all or substantially of Benz's property, business or assets
to an unrelated third party.
<PAGE>
EXHIBIT C
BENZ ENERGY, LTD.
OPTION AGREEMENT
OPTION AGREEMENT dated as of February 15, 1999 between Benz Energy Ltd.,
a Yukon Territories corporation (the "Company"), and the undersigned employee
(the "Optionee").
In consideration of the services rendered to the Company by the
Optionee, the Board of Directors of the Company (the "Board"), upon the
recommendation of its Executive Committee (the "Committee"), has granted to
the Optionee an option to purchase shares of common stock of the Company (the
"Common Stock") under the Company's Stock Option Plan dated January 14, 1998,
as amended (the "Plan"). Accordingly, the parties hereto agree as follows.
1. GRANT OF OPTION. The Company hereby grants to the Optionee the right
and option (the "Option") to purchase the number of shares of Common Stock
(the "Shares") set forth on the signature page hereto at the exercise price
set forth on the signature page hereto, reflecting the fair market value (as
defined in the Plan) of the Common Stock as of the date hereof. This grant
replaces, supercedes and fully terminates any prior option award or agreement
to award options at a future date, subject to any required regulatory or
shareholder approval. The shares, when issued to the Optionee upon exercise
of the option, will be fully paid and non-assessable.
2. OPTION PERIOD. The Option shall expire on the date set forth on the
signature page hereto, subject to earlier termination as provided herein (the
"Option Period"). If the Optionee ceases to be an employee of the Company or
any subsidiary of the Company before the end of the Option Period, the Option
shall expire on the earlier of the end of the Option Period or January 15,
2001, except as otherwise provided by Section 5 hereof. In the event he
ceases to be an employee, and there is no prohibition on exercise under
Section 5 of the Plan, he may exercise his Option at any time prior to its
expiration with respect to all or any part of the Shares subject thereto in
which the right to purchase Shares had accrued or vested at the time he
ceased to be an employee, except that the Option shall expire no later than
the date that the Company fully prepays amounts due under the terms of a
termination agreement.
3. EXERCISE OF OPTION.
(a) The Option shall vest immediately. The vested portion of the Option
shall be exercisable in whole or in part at any time for the duration of the
Option Period, except as provided by Sections 2 and 5 hereof.
(b) To the extent vested, the Option may be exercised by the Optionee
delivering to the Company's offices at 1000 Louisiana, 15th floor, Houston,
Texas 77002, Attention: Chief Financial Officer (or any alternative address
designated by the Company pursuant to the Plan) a written notice (an Exercise
Notice) signed by the Optionee stating the number of Shares that the Optionee
has elected to purchase and accompanied by payment (in the form specified in
following Section 4 of this Agreement) of an amount equal to the full
purchase price for the Shares to be purchased along with an address for
delivery. Following receipt by the Company of the Exercise Notice and full
payment of the purchase price for the Shares covered thereby, the Company
shall instruct its stock transfer agent to issue, as soon as practicable, a
certificate representing the Shares so purchased in the name of the Optionee
or any nominee designated in the Exercise Notice and to deliver the
certificate to the Optionee or any designated nominee.
<PAGE>
Option Agreement, E. J. LaFlure, page 2
4. PAYMENT UPON EXERCISE. The purchase price for Shares purchased under
the Option shall be payable by (a) personal check or official bank check, (b)
shares of Common Stock, or (c) any combination of (a) and (b). Any shares of
Common Stock used to satisfy the purchase price of Shares purchased under the
Option shall be valued on the last trading day preceding the delivery of the
Exercise Notice. If the Optionee elects to pay any portion of the purchase
price for Shares in accordance with clauses (b) or (c) above, the Exercise
Notice shall state the portion to be applied toward the purchase price and
shall be accompanied by the certificate(s) representing the surrendered
shares of the Common Stock together with stock powers therefor duly executed
by the Optionee in favor of the Company.
5. EMPLOYMENT. This Option Agreement shall not confer on the Optionee any
right to be continued in the employ of the Company or its subsidiaries.
6. NON TRANSFERABILITY OF OPTION. The Option is not be transferable
other than by will or by the laws of descent and distribution and may be
exercised only by the Optionee.
7. OWNERSHIP OF STOCK. Without the prior approval of the Committee, the
Optionee shall not enter into any agreement or arrangement with any direct or
indirect stockholder of the Company (i) for the purpose of acquiring,
holding, voting or disposing of Stock, the Option or any other securities of
the Company or (ii) conveying to that stockholder the power to vote or direct
the voting, or the power to dispose or direct or control the disposition, of
Stock or any other voting securities of the Company.
8. INCORPORATION OF PLAN. The Option is subject to, and governed by,
the terms and conditions of the Plan, which are hereby incorporated by
reference. This Agreement, including the Plan incorporated by reference
herein, is the entire agreement among the parties with respect to the subject
matter and supersedes all prior agreements and understandings.
9. WITHHOLDING TAX LIABILITY. The Optionee agrees to pay to the Company,
in addition to the purchase price payable upon exercise of the Option, if so
requested by the Company at its sole discretion, an amount sufficient to
satisfy any withholding tax liability imposed as the result of any exercise
of the Option.
10. GOVERNING LAW. This Agreement, as well as the grant of the Option
and issuance of the Shares, shall be governed by and construed in accordance
with the laws of the State of Texas without regard to its conflicts of law
provisions.
<PAGE>
Option Agreement, E. J. LaFlure, page 3
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
Benz Energy, Ltd.
By: /s/ Robert S. Herlin
----------------------------------
Robert S. Herlin
Senior Vice President & CFO
# Common Shares in Option: 500,000
Exercise Price of Option: Cdn$.532
---------
Termination Date of Option: 1/15/2001
---------
By: /s/ Ernest J. LaFlure
----------------------------------
Ernest J. LaFlure
Date: February 11, 1999
--
<PAGE>
EXHIBIT "D"
MUTUAL GENERAL RELEASE AGREEMENT
This Mutual General Release Agreement (the "Agreement") is entered into
as of February 11, 1999, by and among Texstar Petroleum, Inc., a wholly owned
subsidiary of Benz Energy, Ltd. ("Company"), Ernest J. LaFlure ("LaFlure")
and Benz Energy, Ltd., a Yukon territories corporation ("Benz").
This Agreement is entered into pursuant to and in compliance with that
certain Termination Agreement dated February 11, 1999, among the parties,
providing, among other things, the execution and delivery of this Agreement
by the parties.
NOW, THEREFORE, in consideration of the foregoing, the respective
covenants and agreements herein contained, and in consideration of other good
and valuable consideration, each to the other, the sufficiency and receipt of
which is hereby acknowledged, the parties hereby agree, covenant and consent
as follows:
1. Except with respect to the matters, rights and obligations specified in
Paragraph 2 hereof, the parties, for themselves and on behalf of their
respective officers, directors, shareholders, representatives, agents,
attorneys, administrators, executors, heirs, assigns, predecessors and
successors in interest, hereby release and forever discharge each other and
each of their respective past, present, and future officers, directors,
shareholders, representatives, agents, administrators, executors,
predecessors in interest, successors in interest, heirs and assigns, and all
other persons, firms or corporations with whom any of the former have been,
are now, or may hereafter be affiliated (collectively, the "Released
Parties"), from all past, present and future claims, demands, obligations,
and causes of action of any nature whatsoever, whether in tort (including,
without limitation, acts of active negligence), contract or any other theory
of recovery in law, admiralty or equity, whether for compensatory or punitive
damages, equitable relief or otherwise, and whether now known or unknown,
suspected or unsuspected, which are based upon or arise out of
<PAGE>
or in connection with any matter, cause or thing existing at any time prior
to the date hereof or anything done, omitted or suffered to be done or
omitted at any time prior to the date hereof including any claims LaFlure may
have under Title VII of the Civil Rights Act of 1964 or the Age
Discrimination and Employment Act, as amended (collectively, except as set
forth in Paragraph 2 below, the "Released Matters").
Without in any way limiting the releases set forth above, such releases
shall include, but not be limited to, any claims, demands, obligations or
causes of action arising out of or related to or in any way connected with
LaFlure's employment with the Company.
2. Notwithstanding the foregoing, however, the following claims, demands,
obligations and causes of action are not released hereby:
(a) any claim of any party against any other party arising from or
related to any executory provision of this Agreement, the Termination
Agreement or any instrument or agreement executed and delivered by any of
the parties pursuant to the Termination Agreement (this Agreement, the
Termination Agreement and such other instrument and agreements being
collectively referred to herein as the "Settlement Documents");
(b) the obligation of the Company to pay LaFlure the Agreed
Liquidated Damages set forth in Paragraph 2 of the Termination Agreement
to which reference is hereby made;
(c) the obligation of Benz to grant LaFlure a new Stock Option as set
forth in Paragraph 3 of the Termination Agreement to which reference is
hereby made;
(d) the obligation of the Company to continue current health
insurance coverage for LaFlure according to applicable law until January
15, 2000;
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<PAGE>
(e) the obligation of the Company and Benz to cause LGR Resources,
L.P., a Texas limited partnership, to provide a recordable Assignment to
LaFlure of his partnership interest as a limited partner and generator in
the aforesaid partnership;
(f) the obligation of LaFlure to comply with the provisions of
Paragraph 12 of the Employment Agreement dated September 30, 1997,
effective as of October 15, 1997 relative to disclosure of confidential
information of the Company; and
(g) the Guaranty Agreement dated October 15, 1997 effective as of
September 15, 1997 executed by Prentis B. Thomlinson, Jr. in favor of
LaFlure.
3. The filing or bringing by any party to this Agreement of any claim,
demand, obligation or cause of action against any person released hereunder
in connection with any Released Matter shall constitute a breach of this
Agreement and the Termination Agreement.
4. The parties represent, warrant and agree that in executing and entering
into this Agreement, they are not relying and have not relied upon any
representation, promise or statement made by anyone which is not recited,
contained or embodied in the Settlement Documents. The parties understand and
expressly assume the risk that any fact not recited, contained or embodied
herein or therein may turn out hereafter to be other than, different from, or
contrary to the facts now known to them or believed by them to be true.
Nevertheless, the parties intend by this Agreement, and with the advice of
their respective independently selected counsel, to release fully, finally
and forever all Released Matters and agree that this Agreement shall be
effective in all respects notwithstanding any such difference in facts, and
shall not be subject to termination, modification or rescission by reason of
any such difference in facts.
5. The parties hereby represent and warrant that they have not heretofore
assigned or transferred or purported to assign or transfer to any person or
entity all or any part of or any interest in any claim, contention, demand,
cause of action relating to any Released
- 3 -
<PAGE>
Matter. Each party hereto agrees to indemnify and to hold harmless the
Released Parties against any claim, contention, demand, cause of action,
obligation and liability of any nature, character or description whatsoever,
including the payment of attorneys' fees and costs actually incurred, whether
or not litigation is commenced, which may be based upon or which may arise
out of or in connection with any such assignment or transfer or purported
assignment or transfer.
6. MISCELLANEOUS PROVISIONS:
A. This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective partners, officers, directors,
shareholders, employees, agents, independent contractors and the successors,
heirs, assigns, administrators, executors and representatives of each of the
foregoing.
B. This Agreement and the other Settlement Documents constitute and
are intended to constitute the entire agreement of the parties concerning the
subject matter hereof and thereof. No covenants, agreements, representations
or warranties of any kind whatsoever have been made by any party hereto,
except as specifically set forth herein or therein. All prior discussions
and negotiations with respect to the subject matter hereof and thereof are
superseded by this Agreement and the other Settlement Documents.
C. If any provision of this Agreement is determined by a court of
competent jurisdiction to be invalid or unenforceable, in whole or in part,
the remaining provisions, and any partially invalid or unenforceable
provisions, to the extent valid and enforceable, shall nevertheless be
binding and valid and enforceable.
D. The parties shall, from time to time, promptly execute and
deliver such further instruments, documents and papers and perform such
further acts as may be necessary or proper to carry out and effect the terms
of this Agreement.
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<PAGE>
E. This Agreement may not be modified or terminated orally and no
modification, termination or waiver shall be valid unless in writing and
signed by all of the parties.
F. This Agreement shall be construed according to and governed by
the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first set forth above.
TEXSTAR PETROLEUM, INC.
By /s/ Prentis B. Tomlinson, Jr.
-----------------------------------
Name:
President & CEO
"Company"
/s/ Ernest J. LaFlure
-----------------------------------
ERNEST J. LaFLURE
"LaFlure"
BENZ ENERGY, LTD.
By /s/ Prentis B. Tomlinson, Jr.
--------------------------------------
Prentis B. Tomlinson, Jr.
President & CEO
"Benz"
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<PAGE>
EXHIBIT "E"
TEXSTAR AND LAFLURE TERMINATION AGREEMENT
LIST OF LAFLURE'S PARTICIPATING ROYALTY POOL INTERESTS
LGR RESOURCES, L.P., A TEXAS LIMITED PARTNERSHIP
PROPERTIES:
<TABLE>
<CAPTION>
NAME STATE
- ---- ------
<S> <C>
Old Ocean TX
La Hinch TX
Sardis Church Miss.
Plum Grove TX
East Buffalo TX
Piave Miss.
Marble Creek Miss.
Greens Creek Miss.
Glancy Miss.
NE Sardis (EJL Prospect) Miss.
Rayburn TX
Smithtown Miss.
Hershey Miss.
Eucutta Miss.
Oakhill (future wells) TX
Lisbon (future wells) LA.
Baber TX
San Salvador TX
Elsa TX
San Augustine TX
</TABLE>
<PAGE>
PURCHASE AND SALE AGREEMENT
(PHASE I)
BETWEEN
TEXSTAR PETROLEUM, INC.
"Seller"
and
SHELL CAPITAL INC.
"Buyer"
DECEMBER 23, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Article I
DEFINITIONS
1.01. Certain Definitions . . . . . . . . . . . . . . . . . 1
1.02. Other Definitions . . . . . . . . . . . . . . . . . . 6
Article II
TRANSACTIONS
2.01. Purchase and Sale . . . . . . . . . . . . . . . . . . 6
Article III
REPRESENTATIONS AND WARRANTIES OF SELLER
3.01. Representations and Warranties of Seller . . . . . . . 6
Article IV
REPRESENTATIONS AND WARRANTIES OF BUYER
4.01. Representations and Warranties of Buyer . . . . . . . . 12
Article V
CONDITIONS TO CLOSING
5.01. Conditions to Obligation of Seller . . . . . . . . . . 13
5.02. Conditions to Obligations of Buyer . . . . . . . . . . 13
Article VI
PRE-CLOSING; CLOSING; POST CLOSING
6.01. Pre-Closing Date and Place. . . . . . . . . . . . . . . 16
6.02. Documents to Be Executed at Pre-Closing . . . . . . . . 16
6.03. Recording . . . . . . . . . . . . . . . . . . . . . . . 17
6.04. Title Report. . . . . . . . . . . . . . . . . . . . . . 17
6.05. Closing . . . . . . . . . . . . . . . . . . . . . . . . 17
6.06. Closing Recordings and Legal Opinions . . . . . . . . . 18
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6.07. No Duty on Buyer . . . . . . . . . . . . . . . . . . . 18
6.08. Failure to Close . . . . . . . . . . . . . . . . . . . 18
Article VII
MISCELLANEOUS
7.01. Announcements . . . . . . . . . . . . . . . . . . . . 18
7.02. Further Assurances . . . . . . . . . . . . . . . . . . 18
7.03. Survival . . . . . . . . . . . . . . . . . . . . . . . 18
7.04. Expenses . . . . . . . . . . . . . . . . . . . . . . . 18
7.05. Confidentiality . . . . . . . . . . . . . . . . . . . . 19
7.06. Certain References . . . . . . . . . . . . . . . . . . 19
7.07. Notices . . . . . . . . . . . . . . . . . . . . . . . . 19
7.08. Indemnification . . . . . . . . . . . . . . . . . . . . 20
7.09. Governing Law . . . . . . . . . . . . . . . . . . . . . 21
7.10. Successors and Assigns . . . . . . . . . . . . . . . . 21
7.11. Schedules and Exhibits . . . . . . . . . . . . . . . . 21
7.12. Entire Agreement; Amendments; Waivers . . . . . . . . . 21
7.13. Headings . . . . . . . . . . . . . . . . . . . . . . . 22
7.14. Counterparts . . . . . . . . . . . . . . . . . . . . . 22
7.15. Assistance . . . . . . . . . . . . . . . . . . . . . . 22
7.16. Arbitration . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
EXHIBITS
Exhibit A -- Subject Interests
Exhibit B -- Seller's Disclosure Statement
Exhibit C -- Prior Liens to be Assigned on or Before Closing
Exhibit D-1 -- Conveyance of Overriding Royalty Interest (Permanent)
Exhibit D-2 -- Conveyance of Overriding Royalty Interest (Terminable)
Exhibit E -- Mortgage
Exhibit F -- Texstar Gas Purchase Contract
Exhibit G -- Legal Opinions
Exhibit H -- Operations Agreement
-ii-
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") is made and entered
into this 23rd day of December, 1998, by and between TEXSTAR PETROLEUM, INC., a
Texas corporation, ("Seller"), and SHELL CAPITAL INC., a Delaware corporation,
herein referred to as "Buyer".
W I T N E S S E T H:
WHEREAS, Seller desires to sell and Buyer desires to purchase two separate
overriding royalty interests in certain oil and gas leases, record title to
which is owned by Seller;
NOW, THEREFORE, in consideration of the mutual benefits and obligations of
the parties contained herein, Buyer and Seller agree as follows:
ARTICLE I
DEFINITIONS
1.01. CERTAIN DEFINITIONS. As used herein, the following terms shall
have the meanings set forth below, except as otherwise expressly provided:
"Acceptable Title" means such record and beneficial title that (i) entitles
the party named to receive from its ownership of record in each Lease, a
percentage of all Hydrocarbons produced, saved and marketed from each well
located on each Lease, not less than the net revenue interest set forth in
Exhibit A for the respective Subject Interest pertaining to that Lease, without
reduction, suspension or termination for the respective productive life of such
well; (ii) obligates the party named to bear a percentage of the costs and
expenses relating to operations on and the maintenance and development of each
Lease and each well located on each Lease not greater than the leasehold
interest or operating rights interest percentage set forth in Exhibit A for the
respective Lease without increase for the respective productive life of each
such well unless there is a corresponding and proportionate increase in the net
revenue interest as set forth in Exhibit A associated therewith; (iii) entitles
the party named to a share of the working interest or operating rights in each
Lease which is not less than the leasehold interest or operating rights
interest percentage set forth in Exhibit A for the respective Lease; and (iv) is
free and clear of any encumbrances, liens, mortgages, or pledges, preferential
purchase rights or requirements for consents to assignment applicable to or
exercisable as a result of the Conveyances, and any other defects that would
materially adversely affect or interfere with the operation, use, possession,
ownership or value thereof, except for Permitted Encumbrances, or would impair,
impede or prohibit the granting of the Overriding Royalty Interests to Buyer or
any other transaction contemplated herein.
<PAGE>
"Affiliate" shall mean any entity which either directly or indirectly
controls or manages, is controlled or managed by or under common control or
management with the party. For purposes hereof, "control" means the right or
power to direct the policies of another through management authority, stock
ownership, delegated authority, voting rights or otherwise.
"Assets" or "Asset" means, collectively or singularly, (i) the Subject
Interests, together with all rights, titles, interests, appurtenances,
benefits and privileges of Seller attributable to each Subject Interest; (ii)
all of the real, immovable, personal and mixed property of Seller (whether
located on or off the Subject Interests) used in connection with or
attributable in any way to the exploration or development of the Subject
Interests for Hydrocarbons or the operation of the Subject Interests for
producing, treating, storing or transporting of production from the Subject
Interests; (iii) all rights of Seller with respect to all contracts,
agreements, instruments, governmental orders, and contractual rights which
cover or relate in any way whatsoever to the Subject Interests; (iv) all
rights of Seller with respect to all easements, rights-of-ways, rights,
permits, licenses and servitudes which are used or held in connection with
the exploration, development or operation of the Subject Interests or the
transportation of production therefrom; and (v) all files, records, data and
documentation of Seller pertaining or related to the Subject Interests and/or
assets described in clauses (i) through (iv).
"Basic Data" means the written information, reports and other data
furnished to Buyer by Seller relating to the Assets or in connection with the
transactions contemplated in this Agreement.
"British Thermal Unit" or "Btu" means the amount of energy required to
raise the temperature of one (1) pound of pure water one degree Fahrenheit (1F.)
from fifty-nine degrees Fahrenheit (59F.) to sixty degrees Fahrenheit (60F.)
under a constant pressure of 14.73 pounds per square inch absolute.
"Casualty Defect" means, with respect to all or any material portion of an
Asset, any destruction by fire, blowout, leak, explosion or other casualty
(above or below ground) or any taking, or pending or threatened taking, in
condemnation or under the right of eminent domain, of any Asset or portion
thereof.
"Central Time" means Central Standard Time or Central Daylight Savings
Time in effect on the date in question.
"Closing" means the consummation of the transactions contemplated hereby
as provided in Article VI.
"Closing Date" means the date of Closing pursuant to Article VI.
"Closing Documents" means, collectively, the Conveyances, the Operations
Agreement, the Texstar Gas Purchase Contract, the Mortgage, and any other
documents executed or delivered at or in connection with the Pre-Closing or
Closing.
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<PAGE>
"Confidential Information" is defined in Section 7.05.
"Conveyances" means collectively, (i) the Permanent Conveyance and (ii)
the Terminable Conveyance.
"Coral" means Coral Energy Resources, L.P., a Delaware limited partnership.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended and any successor statute.
"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with the Seller would be deemed to be a "single
employer" within the meaning of Section 4001(b)(1) of ERISA or subsections (b),
(c), (m) or (o) of Section 414 of the Code.
"ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043
of ERISA and the regulations issued thereunder, (ii) the withdrawal of the
Seller or any ERISA Affiliate from a Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the
filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under Section 4041 of ERISA, (iv) the institution of
proceedings to terminate a Plan by the PBGC or (v) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan.
"Hydrocarbons" means all oil, condensate, gas and other liquid and gaseous
hydrocarbon substances.
"Indemnified Parties" is defined in Section 7.08.
"Lease" means an oil and gas lease described, referred to or identified in
Exhibit A attached hereto and made a part hereof for all purposes, as to all
lands (or waterbottoms) and depths described in such lease (or the applicable
part or portion thereof if specifically limited in depth and/or areal extent in
Exhibit A), together with any renewal or extension of such lease (as to all or
any part or portion thereof), and any replacement lease taken upon or in
anticipation of expiration or termination of such lease (if executed and
delivered during the term of or within one (1) year after expiration of the
predecessor lease), as to all lands (or waterbottoms) and depths described in
the predecessor lease (unless the predecessor lease is specifically limited in
depth or areal extent in Exhibit A in which event only such portion of such
lease shall be considered a renewal or extension or a replacement lease and
subject to the terms of this Agreement), and all renewals and extensions of
such replacement leases.
"Legal Requirement" means any requirement imposed pursuant to any statute,
rule, regulation, order, permit or license of any applicable governmental
authority or by any applicable court order.
-3-
<PAGE>
"MMBtu" means 1,000,000 British Thermal Units.
"Mortgage" means the Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement created by Seller for the benefit
of Buyer in the form of Exhibit E as the same may be amended, modified or
restated from time to time.
"Operations Agreement" means the Operations Agreement by and between
Seller and Buyer in the form of Exhibit H as the same may be amended,
modified or restated from time to time.
"Overriding Royalty Interests" means collectively, (i) the Terminable
Overriding Royalty Interest and (ii) the Permanent Overriding Royalty
Interest.
"Permanent Conveyance" means the Conveyance of Overriding Royalty
Interest (Permanent) from Seller to Buyer covering the Leases in the form
attached hereto as Exhibit D-1, as the same may be amended from time to time.
"Permanent Overriding Royalty Interest" means the overriding royalty
interest in and to the Subject Interests that is more particularly described
in the Permanent Conveyance.
"Permitted Encumbrances" means the following:
(a) the agreements, contracts and other documents described in Exhibit A
(to the extent the same are valid and enforceable and burden the
Subject Interests) and valid and subsisting lessors' royalties,
overriding royalties, reversionary interests and similar burdens
which affect the Subject Interests, to the extent the foregoing
taken in the aggregate (i) do not reduce Seller's net revenue
interest in Hydrocarbons produced from any Lease to less than the
net revenue interest set forth in Exhibit A for the Subject
Interest pertaining to that Lease and (ii) do not increase Seller's
portion of costs and expenses relating to operation and development
of any Lease to a portion greater than the leasehold interest or
operating rights interest percentage for that Lease shown in
Exhibit A;
(b) division orders and sales contracts terminable without penalty upon
no more than thirty (30) days' notice to the purchaser;
(c) liens for taxes or assessments not yet delinquent;
(d) materialman's, mechanic's, repairman's, employee's, contractor's,
operator's and other similar liens or charges arising in the
ordinary course of business, to the extent the same secure amounts
not yet due and payable or which are being contested in good faith
by appropriate proceedings diligently conducted;
-4-
<PAGE>
(e) easements, rights-of-way, servitudes, permits, surface leases and
other rights in respect of surface operations, to the extent the
same do not materially interfere with operations on, or the
operation, value or use of, any Lease or any Subject Interest;
(f) other valid and enforceable liens, charges, encumbrances, contracts,
agreements, obligations, defects and irregularities affecting the
Subject Interests which taken in the aggregate and together with
the matters identified in clauses (a) through (e) above: (i) do not
materially interfere with operations on or the operation, value or
use of any Lease or any Subject Interest; (ii) do not prevent
Seller from receiving any proceeds of production from any Lease or
Buyer from receiving Hydrocarbons, or the proceeds thereof, from
any Subject Interest; (iii) do not reduce Seller's net revenue
interest in Hydrocarbons produced from any Subject Lease to less
than the net revenue interest set forth in Exhibit A for the Subject
Interest pertaining to that Lease; (iv) do not increase Seller's
portion of costs and expenses relating to operation and development
of any Lease to a portion greater than the leasehold interest or
operating rights interest percentage shown in Exhibit A for that
Lease; and (v) do not secure an obligation in respect of borrowed
money.
"Person" means any individual, natural person, corporation, joint
venture, partnership, limited partnership, trust, estate, business trust,
association, governmental entity or other entity.
"Plan" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (a) is currently or hereafter sponsored,
maintained or contributed to by the Seller, a subsidiary or an ERISA
Affiliate, or (b) was at any time during the six calendar years preceding the
date of this Agreement, sponsored, maintained or contributed to, by the
Seller or a subsidiary or an ERISA Affiliate.
"Pre-Closing" is defined in Section 6.01.
"Reserve Reports" is defined in Section 3.01(a).
"Shell Gas Purchase Contract" means the Master Purchase Agreement between
Buyer and Coral dated effective as of January 1, 1999.
"Subject Interests" means the undivided leasehold and operating rights
interests set forth in Exhibit A in and to the Leases, and any and all
additional right, title, interest or claim of every kind and character of
Seller in and to the Leases and all lands now or hereafter pooled,
communitized or unitized therewith, even though Seller's interest may be
incorrectly or incompletely described in Exhibit A, all as the same shall be
enlarged by the discharge of any burdens, by the reversion of any interest or
by the removal of any charges or encumbrances to which any of the same may be
subject, and any and all renewals and extensions of any of the same, but
expressly excluding any additional interest in the Leases acquired by Seller
after the
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<PAGE>
Closing other than by reason of or resulting from discharge of any burden,
the reversion of any interest or the removal of any charge or encumbrance.
"Terminable Conveyance" means the Conveyance of Overriding Royalty
Interest (Terminable) from Seller to Buyer covering the Leases in the form
attached hereto as Exhibit D-2, as the same may be amended from time to time.
"Terminable Overriding Royalty Interest" means the overriding royalty
interest in and to the Subject Interests that is more particularly described
in the Terminable Conveyance.
"Texstar Gas Purchase Contract" means the Gas Purchase Contract between
Seller and Coral in the form attached hereto as Exhibit F as the same may be
amended, modified or restated from time to time.
"Taxes" means all ad valorem, property, occupation, severance, production,
gathering, pipeline, gross production, windfall profit, energy, Btu, excise
and other taxes, governmental charges and assessments imposed on the Assets
or the Overriding Royalty Interests, other than income taxes.
1.02. OTHER DEFINITIONS. Other terms defined elsewhere in this
Agreement shall have the meanings so given them herein.
ARTICLE II
TRANSACTIONS
2.01. PURCHASE AND SALE. Subject to and in accordance with the terms
hereof, Seller agrees to sell and Buyer agrees to purchase the Overriding
Royalty Interests for a purchase price (the "Phase I Purchase Price") of
$7,000,000 U.S. Dollars, and the parties agree to execute and deliver the
Closing Documents.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
3.01. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents
and warrants to Buyer as follows:
(a) All of the Basic Data are accurate and complete in all material
respects; and Seller has not made in any Basic Data any untrue statement of a
material fact, or failed to correct such an untrue statement, or omitted any
material fact which is necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
reserve and cash flow reports prepared by Seller or an Affiliate of Seller
(the "Reserve
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<PAGE>
Reports"), were prepared in accordance with customary oil and gas engineering
practices and are based on historical information which is accurate and
complete in all material respects.
(b) The actions of Seller in furnishing information to Buyer in
connection with the transactions described herein do not and will not violate
any duty owed by Seller to any person to which such information relates or
any obligation of Seller under any existing agreement.
(c) In the aggregate Seller owns Acceptable Title to the Assets and the
Subject Interests, except for the liens and production payments described in
Exhibit C which shall be assigned to BOCP Energy Partners, L.P. on or before
Closing.
(d) All Taxes previously imposed or assessed with respect to or
measured by or charged against or attributable to the Subject Interests and
the Assets have been duly paid.
(e) Except as may be set forth on Exhibit B, there are no suits or
proceedings pending or, to the knowledge of Seller, threatened against Seller
or the Assets before any court, or by or before any governmental commission,
bureau or any regulatory authority, that if decided adversely to the interest
of Seller could materially adversely affect Seller, any of the Assets or the
rights of Buyer under the Closing Documents.
(f) The Leases and all other agreements, contracts or instruments
associated with the Assets are in full force and effect and constitute legal,
valid and binding obligations of the Seller and to the Knowledge of Seller
the other Party thereto and neither Seller nor to the knowledge of Seller any
other party thereto is materially in breach or default of their obligations
thereunder; and Seller has complied with the terms of all suspensions of
production granted by any lessor applicable to the Leases and all
governmental orders or directives naming Seller or applicable directly to the
Leases.
(g) All rents and royalties with respect to the Leases have been paid
in a timely manner, and all liabilities of any kind or nature incurred with
respect to the Leases have been paid before delinquent; Seller has not
received any notice of default or claimed default with respect to the Subject
Interests or any Lease or any part thereof; and all wells, facilities and
equipment which constitute part of the Assets are in good repair and working
condition (ordinary wear and tear excepted) and have been designed, installed
and maintained in accordance with good industry standards and all applicable
Legal Requirements.
(h) The natural gas attributable to the Subject Interests is not
currently dedicated or committed to interstate commerce within the meaning of
the Natural Gas Act.
(i) Except as set forth on Exhibit B, neither the Subject Interests nor
the Hydrocarbons attributable thereto are subject, committed or dedicated to
any contract, agreement or arrangement regarding the gathering,
transportation, processing, storing, delivery, sale, use or marketing
thereof; Seller has disclosed to Buyer the effect of all such agreements, the
Btu content of the Hydrocarbons to be produced from the Subject Interests and
the value of such Hydrocarbons; and,
-7-
<PAGE>
except as shown on Exhibit B, no third party has any call, right of first
refusal or preferential right to purchase such Hydrocarbons which has not
been waived by such third party or the appropriate time for asserting such
rights has not expired.
(j) Except as set forth on Exhibit B, no owner is a party to or bound
by, and the Subject Interests and the Hydrocarbons attributable thereto are
not encumbered or affected by, any gas balancing, deferred production, gas
banking or similar agreement or arrangement; and except as shown on Exhibit
B, no Owner is in an "overlift," over-produced," or similar status under any
such agreement or arrangement.
(k) Except as shown on Exhibit B, neither the Subject Interests nor the
Hydrocarbons attributed thereto is subject to any contract, agreement or
arrangement (including, without limitation, advance payment agreements,
prepayments, take-or-pay makeup obligations, gas over/short imbalances or
otherwise) whereby the owner of the Hydrocarbons attributed to the Subject
Interests or any part thereof is not entitled to convey the Hydrocarbons
attributed to the Subject Interests or to market the Hydrocarbons attributed
to the Subject Interests and to obtain the full market price or value of the
same.
(l) The Subject Interests have been operated in compliance in all
material respects with all rules and regulations of all governmental
authorities having or asserting jurisdiction relating to the ownership and
operation of the Subject Interests, including the production of Hydrocarbons
attributable thereto, and are not subject to reduced allowances or other
penalties on account of overproduction or otherwise. Seller has obtained all
necessary or appropriate franchises, licenses and permits to own and operate
its properties and to conduct its business as currently being conducted and
in accordance with all rules and regulations of any governmental authorities
and as would be obtained by a prudent operator.
(m) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the Texas; Seller is duly qualified and in
good standing under the laws of the States of Texas and Mississippi; Seller
has the legal right, power and authority, and qualifications to conduct its
business and own its properties (including the Subject Interests); Seller is
qualified to own State oil and gas leases; Seller has the legal right, power
and authority (i) to execute and deliver the Conveyances and to convey to
Buyer the Overriding Royalty Interests and all of the rights and privileges
appurtenant thereto and (ii) to execute and deliver the Mortgage, the
Operations Agreement and the Texstar Gas Purchase Contract; and Seller has
the legal right, power and authority to execute and deliver this Agreement,
and perform all of its obligations under the same.
(n) The making and performance by Seller of the Closing Documents are
within its corporate powers, have been duly authorized by all necessary
corporate action on the part of Seller and do not and will not (i) violate
any provision of law or any rule, regulation, order, writ, judgment, decree,
or determination currently in effect having applicability to Seller or of
Seller's certificate of incorporation or bylaws, (ii) result in a breach of
or constitute a default under any indenture, bank loan, or credit agreement
or farmout agreement, program agreement, operating
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agreement, or any other agreement or instrument to which Seller is a party or
by which Seller or its properties may be currently bound or affected, or
(iii) result in or require the creation or imposition of any mortgage, lien,
pledge, security interest, charge, or other encumbrance upon or of any of the
properties or assets of Seller (including the Subject Interests) under any
such indenture, bank loan, credit agreement, or other agreement or
instrument; and Seller is not in default under any such order, writ,
judgment, decree, determination, indenture, agreement, or instrument in any
way that now or in the future will materially adversely affect the ability of
Seller to perform its obligations under this Agreement or the Closing
Documents; and all consents or approvals under such indentures, agreements,
and instruments necessary to permit valid execution, delivery, and
performance by Seller of the Closing Documents and the conveying of the
Overriding Royalty Interests by Seller to Buyer have been obtained.
(o) This Agreement, the Mortgage, and the Operations Agreement have
been duly executed and delivered by Seller, and as of the Closing, will
constitute, the legal, valid, and binding acts and obligation of Seller
enforceable against Seller in accordance with their terms, subject, however,
to bankruptcy, insolvency, reorganization, and other laws affecting
creditors' rights generally and, with regard to any equitable remedies, to
the discretion of the court before which proceedings to obtain such remedies
may be pending. There are no bankruptcy, insolvency, reorganization,
receivership or arrangement proceedings pending, being contemplated by, or
threatened against Seller.
(p) As of the Closing, the Conveyances will have been duly executed and
delivered by Seller, and will constitute the legal, valid, and binding act
and obligations of Seller enforceable against Seller in accordance with their
terms and the legal, valid, and binding conveyances of the Overriding Royalty
Interests out of the entire Subject Interests.
(q) All consents and waivers of preferential purchase or other rights
necessary to permit the valid conveyance to Buyer of the Overriding Royalty
Interests and execution and delivery of this Agreement and the Closing
Documents have been obtained or the time for giving such consents or waivers
has expired following a written request therefor.
(r) All advance notifications to third parties of the transactions
contemplated herein and in the Closing Documents necessary to permit the
valid conveyance to Buyer of the Overriding Royalty Interests and execution
and delivery of this Agreement and the Closing Documents have been timely and
properly given.
(s) No authorization, consent, approval, license, or exemption of, and
no filing or registration with, any court or governmental department,
commission, board, bureau, agency, or instrumentality, domestic or foreign,
is necessary to the valid execution and delivery by Seller of, or the
performance by Seller of its obligations under this Agreement or the Closing
Documents that has not been obtained or performed or the period for objection
thereto expired.
(t) No fire, explosion, accident, earthquake, act of public enemy, or
other casualty (regardless of whether covered by insurance) adversely
affecting any material portion of the
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Subject Interests or the operation thereof, or adversely affecting the
ability of Seller to perform its obligations under this Agreement or the
Closing Documents, has occurred.
(u) Prior to the Pre-Closing, Seller shall have furnished to Buyer true
copies of all of the agreements and other instruments described in paragraph
(a) of the definition of Permitted Encumbrances.
(v) The chief executive offices of Seller and the location where it
keeps all of its records relating to the Subject Interests is located at the
following address: 1000 Louisiana Street, 15th floor, Houston, Texas 77002
and there has been no change in Seller's place of business and chief
executive offices and no change of Seller's name during the four months
immediately preceding the date hereof.
(w) With respect to the Assets operated by Seller, Seller has obtained,
and with respect to Assets operated by third parties, to the best of Seller's
knowledge the third party operator has obtained, all permits, licenses and
other authorizations which are required under federal, state and local laws
with respect to pollution or protection of the environment relating to
Subject Interests, including laws relating to actual or threatened emissions,
discharges or releases of pollutants, raw materials, products, contaminants
or hazardous or toxic materials or wastes into ambient air, surface water,
groundwater or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or hazardous or toxic materials or wastes, the
failure of which to obtain would materially affect the value, use or
operation of any of the Subject Interests; and Seller (with respect to the
Assets operated by it), and to the best of Seller's knowledge third parties
operating the Assets on behalf of Seller (with respect to the Assets not
operated by Seller) are in compliance in all material respects with all terms
and conditions of such laws, permits, licenses and authorizations, and also
are in compliance in all materials respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter
issued, entered, promulgated or approved thereunder relating to the Assets,
and have all necessary operating or environmental plans required by any law,
permit, license or authorization, the failure with which to comply would
materially affect the value, use or operation of any Subject Interest; and
Seller has not (and to Seller's knowledge and belief no third party operating
the Assets on behalf of Seller has) received notice of any violation of or
investigation relating to any federal, state or local laws with respect to
pollution or protection of the environment relating to the Assets.
(x) The financial statements of Seller dated as of October 31, 1998
furnished to Buyer have been prepared in accordance with generally accepted
accounting principles of the United States, consistently applied, and fairly
and accurately reflect the financial condition of Seller as of such date, and
since such date (i) there has been no change in the assets, liabilities or
financial condition of Seller from that set forth in such latest statement,
other than changes in the ordinary course of business that have not been,
either individually or in the aggregate, materially adverse and (ii) neither
the business, operations or affairs of Seller, nor any of its properties or
assets has
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been materially adversely affected by any occurrence or development regardless
of whether insured against.
(y) Except as expressly identified to the contrary by the terms "Before
Payout" and "After Payout" (or terms of similar import) or by the
abbreviations "BPO" and "APO", each of the interests shown on Exhibit A is a
permanent or "after payout" interest; and in each instance in which a "Before
Payout" or "BPO" or an "After Payout" or "APO" (or terms of similar import)
interest is expressly set forth on Exhibit A, the true and correct
"payout" status for that particular Subject Interest was furnished by Seller
to Buyer for the purpose of the preparation of the Reserve Reports prepared
by such party.
(z) (i) Upon the execution and delivery by Seller of the Permanent
Conveyance, (A) the Permanent Conveyances will constitute the legal, valid
and binding conveyance of the Permanent Overriding Royalty Interest out of
the leasehold interests and operating rights interests described therein, (B)
the Permanent Overriding Royalty Interest will constitute a "real property"
interest, (C) the Permanent Overriding Royalty Interest will qualify as a
Production Payment under Section 101 (42A) of the United States Bankruptcy
Code and (D) the Permanent Conveyance will or does not constitute an
executory contract or unexpired lease within the meaning of Section 365 of
the United States Bankruptcy Code and (ii) Upon the execution and delivery by
Seller of the Terminable Conveyance, (A) the Terminable Conveyances will
constitute the legal, valid and binding conveyance of the Terminable
Overriding Royalty Interest out of the leasehold interests and operating
rights interests described therein, (B) the Terminable Overriding Royalty
Interest will constitute a "real property" interest, (C) the Terminable
Overriding Royalty Interest will qualify as a Production Payment under
Section 101 (42A) of the United States Bankruptcy Code and (D) the Terminable
Conveyance will or does not constitute an executory contract or unexpired
lease within the meaning of Section 365 of the United States Bankruptcy Code.
(aa) (i) The Seller, each Affiliate and each ERISA Affiliate have
complied in all material respects with ERISA and, where
applicable, the Code regarding each Plan.
(ii) Each Plan, if any, is, and has been, maintained in
substantial compliance with ERISA and, where applicable, the Code.
(iii) No act, omission or transaction has occurred which could
result in imposition on the Seller, any Affiliate or any ERISA
Affiliate (whether directly or indirectly) of (i) either a civil
penalty assessed pursuant to Section 502(c) or (i) of ERISA or a
tax imposed by Section 4975 of the Code or (ii) breach of
fiduciary duty liability damages under Section 409 of ERISA.
(iv) No Plan (other than a defined contribution Plan) or any
trust created under any such Plan has been terminated since
September 2, 1974. No liability to the PBGC (other than for the
payment of current premiums which are not past due) by
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the Seller, any Affiliate or any ERISA Affiliate has been or is
expected by the Seller, any Affiliate or any ERISA Affiliate to be
incurred with respect to any Plan. No ERISA Event with respect to
any Plan has occurred.
(v) Full payment has been made of all amounts which the Seller,
any Affiliate or any ERISA Affiliate is required under the terms
of each Plan, if any, or applicable law to have paid as
contributions to such Plan as of the date hereof, and no
accumulated funding deficiency (as defined in Section 302 of ERISA
and Section 412 of the Code), whether or not waived, exists with
respect to any Plan.
(vi) The actuarial present value of the benefit liabilities under
each Plan, if any, which is subject to Title IV of ERISA does not,
as of the end of the Seller's most recently ended fiscal year, exceed
the current value of the assets (computed on a Plan termination basis
in accordance with Title IV of ERISA) of such Plan allocable to
such benefit liabilities. The term "actuarial present value of the
benefit liabilities" shall have the meaning specified in Section
4041 of ERISA.
(vii) Neither the Seller nor any Affiliate or ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit
Plan, as defined in Section 3(1) of ERISA, including, without
limitation, any such Plan maintained to provide benefits to former
employees of such entities, that may not be terminated by the
Borrower, such Subsidiary or ERISA Affiliate in its sole
discretion at any time without any material liability.
(viii) Neither the Seller nor any Affiliate or ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the
six-year period preceding the date of this Agreement sponsored,
maintained or contributed to, any Multiemployer Plan.
(ix) Neither the Seller nor any Affiliate or ERISA Affiliate is
required to provide security under Section 401(a)(29) of the Code
due to a Plan amendment that results in an increase in current
liability for the Plan.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
4.01. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents
and warrants to Seller that:
(a) Buyer is a corporation duly organized and validly existing under
the laws of the State of Delaware. The execution, delivery and performance of
this Agreement and the transactions described herein have been duly and
validly authorized by all requisite corporate action on the part of Buyer.
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(b) This Agreement has been and as of the Closing, the Closing
Documents will have been, duly executed and delivered on behalf of Buyer and
this Agreement constitutes, and as of the Closing the Closing Documents will
constitute, the legal, valid and binding obligations of Buyer enforceable
against it in accordance with their terms, subject, however, to bankruptcy,
insolvency, reorganization and other laws affecting creditors' rights
generally and with regard to any equitable remedies, to the discretion of the
court before which proceedings to obtain such remedies may be pending.
ARTICLE V
CONDITIONS TO CLOSING
5.01. CONDITIONS TO OBLIGATION OF SELLER. The obligation of Seller to
proceed with the Closing is subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, any one or more of which may
be waived in whole or in part in writing by Seller:
(a) Buyer shall have performed all covenants and agreements required
to be performed by it hereunder at or prior to the Closing, and each of the
representations and warranties contained in Article IV hereof shall be true
and correct on and as of the Closing Date in all material respects.
(b) Seller shall have received a certificate dated the Closing Date
of an officer of Buyer certifying as to the matters specified in Section
5.01(a); provided, however, such officer shall have no personal liability to
Seller on account of such certificate.
(c) The Closing hereunder shall not violate any order or decree of
any federal or state court or agency having competent jurisdiction, and no
suit, action or other proceeding shall be pending in which there is sought
any remedy to restrain, enjoin or otherwise prevent the consummation of this
Agreement or the transactions contemplated in connection herewith.
(d) This Agreement and the transactions contemplated hereby shall
have been approved by the Board of Directors of Seller.
5.02. CONDITIONS TO OBLIGATIONS OF BUYER. The obligation of Buyer to
proceed with the Closing is subject to the satisfaction on or prior to the
Closing Date of all of the following conditions precedent, any one or more of
which may be waived in whole or in part in writing by Buyer:
(a) Seller shall have performed all covenants and agreements required
to be performed by it hereunder at or prior to the Closing, and each of the
representations and warranties contained in Article III hereof shall be true
and correct on and as of the Closing Date in all material respects.
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(b) Buyer shall have received a certificate, dated as of the Closing
Date, of an officer of Seller certifying as to the matters specified in
Section 5.02(a); provided, however, such officer shall have no personal
liability to Buyer on account of such certificate.
(c) The Closing hereunder shall not violate any order or decree of
any federal or state court or agency having competent jurisdiction, and no
suit, action or other proceeding shall be pending in which there is sought
any remedy to restrain, enjoin or otherwise prevent the consummation of this
Agreement or the transactions contemplated in connection herewith or which
may have any material adverse effect on the Assets.
(d) Buyer shall have received opinions in form and substance
satisfactory to Buyer covering the matters outlined on Exhibit G from counsel
to Seller satisfactory to Buyer.
(e) Buyer shall have received verbal updated title reports covering
the Subject Interests as to the filing of the Closing Documents satisfactory
to Buyer, from Brunini, Grantham, Grower & Hewes, PLLC or other counsel
acceptable to Buyer, counsel for Seller.
(f) There shall not exist or have occurred any Casualty Defect that,
in the aggregate, materially adversely affects the value of the Assets or the
Overriding Royalty Interests or the use, possession or operation by Seller of
the Assets or any material part thereof.
(g) Buyer shall have received from the Secretary of Seller certified
copies of resolutions (or written consents) of the Board of Directors of
Seller, authorizing the transactions contemplated hereby and the execution of
the Closing Documents, by the officer or representative signing on behalf of
Seller.
(h) The Reserve Reports shall be acceptable to Buyer, in Buyer's sole
discretion, with respect to the proved reserves attributable to the Subject
Interests.
(i) All applicable Hydrocarbon gathering, transportation, processing
and treating agreements and arrangements, all operating agreements, and all
other agreements and arrangements with all transporting pipelines, joint
interest owners and other third parties shall be acceptable to Buyer, in
Buyer's sole discretion, and must assure to Buyer firm uninterrupted delivery
and transportation of Hydrocarbons on terms acceptable to Buyer, in Buyer's
sole discretion.
(j) Buyer, in Buyer's sole discretion, shall be satisfied with the
results of any review of the Assets which it undertakes, including without
limitation, that the wells associated with the Subject Interests
have been connected to pipelines of a transporter of Hydrocarbons.
(k) Buyer shall have received a Subordination Agreement from EnCap
Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., BOCP
Energy Partners, L.L.C., Lasco Energy Partners, L.P., and Energy Capital
Investment Company PLC and any Affiliate of any
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of the preceding (collectively, the "ENCAP ENTITIES") in form and substance
satisfactory to Buyer, in Buyer's, sole discretion.
(l) Buyer shall have received a Consent and Waiver from the relevant
EnCap Entities waiving any breach of covenant provided for in that certain
Purchase and Sale Agreement between Lasco Energy Partners, L.P., Seller, and
Benz Energy, Ltd. related to the purchase of the Lasco Properties which may
occur as a result of the consummation of the transactions contemplated hereby
or in any of the Transaction Documents in form and substance satisfactory to
Buyer, in Buyer's, sole discretion.
(m) Buyer shall have received documentation in form and substance
satisfactory to Buyer, in Buyer's sole discretion that Pioneer's receivables
will be scheduled for payment in equal monthly installments over the first
nine (9) months of 1999 together with appropriate legal opinions from legal
counsel acceptable to Buyer regarding authorization, noncontravention and
enforcement.
(n) Prentis B. Tomlinson, Jr. and the Starbucks Trust in form and
substance satisfactory and any related Affiliate thereto, shall have executed
an agreement whereby such parties shall defer payment of any amounts owing to
such parties from Seller or any of its Affiliates until after the Termination
Date (as such term is defined in the Terminable Conveyance), in form and
substance acceptable to Buyer together with delivery of appropriate
legal opinions regarding authorization, noncontravention and enforceability.
(o) This Agreement and the transactions contemplated hereby shall
have been approved by the Board of Directors of Buyer.
(p) Buyer shall have received drafts of pipeline interconnect
agreements from Transco and TransTexas in form and substance satisfactory to
Buyer reflecting that all wells associated with the Subject Interests have
been connected to a pipeline system permitting the flow of hydrocarbons to a
commercially viable market.
(q) One of the EnCap Entities will have purchased the Notes and
liens related to the Letter Loan Agreement between Bank One, Texas, N.A. and
Seller dated July 17, 1997.
(r) Buyer shall have received certificates from the Secretaries of
State of the States of Texas and Mississippi showing that Seller is a
corporation duly qualified and in good standing under the laws of said states.
ARTICLE VI
PRE-CLOSING; CLOSING; POST CLOSING
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6.01. PRE-CLOSING DATE AND PLACE. The pre-closing ("Pre-Closing") shall
take place at 2:00 p.m. Central Time on December 23, 1998, at the offices of
Vinson & Elkins L.L.P. in Houston, Texas, unless a different time and place
for the Pre-Closing are mutually agreed upon.
6.02. DOCUMENTS TO BE EXECUTED AT PRE-CLOSING. The following actions
shall occur at the Pre-Closing:
(a) Seller and Buyer shall duly execute, acknowledge and deliver the
following instruments:
(i) Counterparts of the Conveyances;
(ii) Counterparts of the Mortgage;
(iii) Counterparts of the Texstar Gas Purchase Contract;
(iv) Counterparts of the Shell Gas Purchase Contract;
(v) Counterparts of the Operations Agreement;
(vi) Letters in lieu of transfer orders addressed to each
purchaser of Hydrocarbons produced from or attributable to
each of the Subject Interests;
(vii) UCC-1 Financing Statements; and
(viii) Such other instruments as are necessary or appropriate to
effectuate the Conveyances to properly reflect the interest
to be acquired by Buyer pursuant hereto.
(b) Seller shall deliver to Buyer certain corporate opinions described
in Section 5.02(d);
(c) Seller shall deliver to Buyer certified resolutions of its Board of
Directors authorizing the execution and delivery of the Closing Documents; and
(d) Buyer and Seller shall exchange the officer's certificates described
in Section 5.01(b) and Section 5.02(b).
6.03. RECORDING. Promptly following the Pre-Closing, Seller will cause
counterparts of the Conveyances, Mortgage and financing statements to be
filed for record in all appropriate recording offices in Texas and
Mississippi; and Seller will pay for all documentary, filing and recording
fees required in connection with the filing and recording of such Closing
Documents.
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6.04. TITLE REPORT. As soon as possible following the Pre-Closing,
Seller shall cause its title counsel to report to Buyer (updating the title
opinions previously furnished to Buyer), to the effect that the Closing
Documents have been properly filed for record in accordance with Section 6.03
and that as of the filing of such Closing Documents (a) Seller is the owner
of the Subject Interests, less and except the Overriding Royalty Interests,
which are subject only to the Permitted Encumbrances, the Mortgage and the
Texstar Gas Purchase Contract, (b) Buyer is the owner of the Overriding
Royalty Interests, subject only to the Permitted Encumbrances, (c) all
filings in the recording offices in Texas and Mississippi which are necessary
to perfect Buyer's title to the Overriding Royalty Interests and to give
constructive notice to third parties of Buyer's interest under the Mortgage
and the Texstar Gas Purchase Contract have been made.
6.05. CLOSING. On the first business day following receipt by Buyer of
the title report described in Section 6.04 and the other conditions to
Closing have been achieved to the satisfaction of Buyer (or waived by Buyer
in its sole discretion), the following items in this Section 6.05 shall
occur, provided, however if in Buyer's sole discretion, time permits on the
date Buyer receives the title report and such conditions are satisfied or
waived, then the following items in this Section 6.05 shall occur on the date
of receipt of the title report, the following shall occur:
(a) Seller shall deliver to Buyer the legal opinions described in
Sections 5.02(d) (other than those opinions previously delivered in
accordance with Section 6.02(b));
(b) Buyer shall pay Seller the Phase I Purchase Price by wire transfer
to a Texstar account provided that certain funds related to the payments for
the matters described in Sections 5.02(p) will be held in escrow and remitted
directly to the payees for such costs as set forth on Schedule H to the
Operations Agreement;
(c) Seller shall pay to Buyer the $100,000 fee provided for in the fee
letter between Seller and Buyer dated December 23, 1998; and
(d) The parties shall take such other actions and make such other
deliveries of documents as are necessary or appropriate to effectuate the
conveyance of the Overriding Royalty Interests to Buyer.
The Closing shall be deemed to have occurred on receipt by Seller of the
Phase I Purchase Price as set forth in Section 6.05(b). Each party agrees to
execute such acknowledgment of receipt of funds pursuant to this Section 6.05
as the other party may reasonably request.
6.06. CLOSING RECORDINGS AND LEGAL OPINIONS. Within five (5) business
days following the Closing, Seller shall deliver to Buyer updated title
reports of Brunini, Grantham, Grower & Hews, PLLC or other counsel acceptable
to Buyer, counsel for Seller, in form satisfactory to Buyer, confirming the
matters orally reported to Buyer pursuant to Section 6.04.
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6.07. NO DUTY ON BUYER. Buyer shall pay the Phase I Purchase Price to
Seller as set forth above, but Buyer shall have no duty to any Seller or any
other Person with respect to the proper application of such funds.
6.08. FAILURE TO CLOSE. If all of the conditions to Closing set forth
in Article V have not been satisfied or waived on or before December 31,
1998, (or such later date as hereafter may be mutually agreed upon by the
parties in writing) this Agreement shall terminate automatically, and, except
as provided herein to the contrary, no party hereto shall have any further
obligation or any liability to the other party pursuant to this Agreement.
ARTICLE VII
MISCELLANEOUS
7.01. ANNOUNCEMENTS. Each party covenants and agrees with the other
that, subject to applicable law or stock exchange regulations, each party
shall promptly advise and consult with the other and obtain the other's
written consent before issuing any press release with respect to this
Agreement or the transactions described herein. Provided, however, Seller
shall or shall cause its parent Benz Energy Ltd., to provide Buyer an
opportunity to review and comment on any press release which may be required
to be provided to the Vancouver Stock Exchange at least three days prior to
the date that such notice is required to be delivered.
7.02. FURTHER ASSURANCES. Seller and Buyer agree to take all such
further actions and to execute, acknowledge and deliver all such further
documents that are necessary or useful to effectuate the conveyance of the
Overriding Royalty Interests and to carry out the purposes of this Agreement
or any of the Closing Documents.
7.03. SURVIVAL. The representations, warranties, covenants, agreements
and indemnities in this Agreement and the Closing Documents shall survive the
Closing and the consummation of the transactions described herein and therein.
7.04. EXPENSES. Whether or not Closing occurs, Seller shall reimburse
Buyer promptly on demand for all reasonable out-of-pocket fees, costs and
expenses incurred by Buyer in connection with the negotiation, documentation
and closing of this Agreement and the Purchase and Sale Agreement (Phase II)
between Buyer and Seller dated as of even date herewith and the Closing
Documents and the transactions contemplated herein and therein, and the
review of matters in connection with such transactions (the "Costs") up to a
maximum of $100,000 (the "Maximum Costs"). Notwithstanding the preceding
sentence, in the event that the Costs exceed the Maximum Costs, Seller shall
be required to reimburse Buyer promptly on demand for one-half of the amount
by which the Costs exceed the Maximum Costs. Seller shall bear and be
responsible for all fees, costs and expenses (including, without limitation,
legal, accounting and engineering expenses) incurred by it with respect to
the negotiation, documentation and consummation of the transactions described
herein, and (ii) indemnify and hold harmless Buyer from and against any and
all liability for any brokers' or finders' fees arising with respect to
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brokers or finders retained or engaged by Seller in respect of the transactions
described herein and Buyer shall indemnify and hold harmless Seller from and
against any and all liability for any brokers' or finders' fees arising with
respect to brokers or finders retained or engaged by Buyer in respect of the
transactions described herein.
7.05. CONFIDENTIALITY. It is recognized that in connection with Buyer's
review of the Subject Interests, Seller will furnish to Buyer the Reserve
Reports and other information of Seller dealing with reserves and geology
relating to the Subject Interests (the "Confidential Information"). For a
period of four (4) years from the date hereof Buyer agrees to keep and maintain
confidential the Confidential Information and not to disclose same to any third
party without the consent of Seller, provided that Buyer in the exercise of
good faith may disclose Confidential Information without additional consent of
Seller (a) to representatives, consultants and attorneys reviewing the Subject
Interests on behalf of Buyer, provided such Person agrees to maintain
confidential the Confidential Information so disclosed on the same terms and
conditions as Buyer; (b) to the extent necessary in connection with a bona fide
sale or financing of the Overriding Royalty Interests or "Overriding Royalty
Hydrocarbons" by Buyer, provided such Persons agree to maintain confidential
the Confidential Information so disclosed on the same terms and conditions as
Buyer; (c) to the extent required by contract, by law or in response to
deposition or subpoena, provided Buyer shall give advance notice to Seller of
such disclosure; and (d) to the extent the information is part of the public
domain or public information. In the event Closing does not occur, Buyer will
return to Seller any copies of Confidential Information which Buyer may have in
its possession. Except to the extent required to do so by applicable law or in
connection with any bona fide financing transaction or the requirements of any
stock exchange, Sellers and Buyer agree to hold confidential this Agreement and
the transactions covered hereby.
7.06. CERTAIN REFERENCES. Certain agreements, contracts and other
documents are listed in Exhibit A and included in the definition of Permitted
Encumbrances. References herein or in schedules or exhibits hereto to Permitted
Encumbrances are made solely for the purpose of protecting Seller on Seller's
warranties and representations as to the Subject Interests, and without regard
to whether or not any Permitted Encumbrance is valid, subsisting, legal or
enforceable or affects the Overriding Royalty Interests; and such references
are not intended to constitute and shall not constitute any sort of recognition
or acknowledgment by any party as to the validity, legality or enforceability
of the same or of any term, provision or condition thereof or the applicability
thereof to the Overriding Royalty Interests, and shall not revive or ratify the
same or create any rights in any third Person.
7.07. NOTICES. All notices, requests, demands, instructions and other
communications required or permitted to be given hereunder shall be in writing
and shall be delivered personally or mailed by certified mail, postage prepaid
and return receipt requested or sent by telecopier, as follows:
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If to Seller, addressed to:
Texstar Petroleum, Inc.
1000 Louisiana Street, 15th Floor
Houston, Texas 77002
Attention: Treasurer
Telecopy No. (713) 739-8402
If to Buyer, addressed to:
Shell Capital Inc.
One Shell Plaza
910 Louisiana Street
Houston, Texas 77002
Attention: Mr. M.C. McMurray
Telecopy No. (713) 241-5222
or to such other place within the United States of America as either party may
designate as to itself by written notice to the other. All notices given by
personal delivery or mail shall be effective on the date of actual receipt at
the appropriate address. Notice given by telecopier shall be effective upon
actual receipt if received during recipient's normal business hours or at the
beginning of the next business day after receipt if received after the
recipient's normal business hours. All notices by telecopier shall be confirmed
promptly after transmission, by certified mail or personal delivery.
7.08. INDEMNIFICATION. (a) Seller shall fully defend, protect, indemnify
and hold harmless Buyer and Buyer's successors, assigns and Affiliates (other
than Coral for any losses related to the Texstar Gas Purchase Contract or Shell
Gas Purchase Contract) ("Indemnified Parties") from and against any and all
losses which may be suffered by Indemnified Parties and from and against any
and all claims, demands, suits and causes of action (collectively "Claims") of
every kind and character (together with reasonable attorneys' fees and costs of
defense) of or which may be asserted by any Person (including, without
limitation, Seller, Seller's officers and Affiliates), relating to, arising out
of, or in any way incidental to the breach of any covenant, warranty or
representation made by Seller, regardless of whether Buyer may have known of
such breach or of the condition giving rise to such breach WHETHER OR NOT
ARISING OUT OF THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT
LIABILITY OF ANY INDEMNIFIED PARTY. THIS INDEMNITY SHALL APPLY, WITHOUT
LIMITATION TO ANY LIABILITY IMPOSED UPON ANY INDEMNIFIED PARTY AS A RESULT OF
ANY STATUTE, RULE, REGULATION OR THEORY OF STRICT LIABILITY.
(b) Without limiting the foregoing, Seller and Buyer agree that upon due
execution and delivery of the Conveyances neither the Conveyances nor any
leasehold interest or operating right interest out of which the Overriding
Royalty Interests is created will or does constitute an
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<PAGE>
executory contract or unexpired lease within the meaning of Section 365 of the
United States Bankruptcy Code. If for any reason the foregoing is not true and
correct in all respects and the Conveyances or any leasehold interest or
operating right interest out of which the Overriding Royalty Interests are
created is rejected as an unexpired lease or executory contract pursuant to any
of the provisions of Section 365 of the United States Bankruptcy Code, then
Buyer shall be entitled to the amount of damages suffered by Buyer as a result
of such rejection. Seller acknowledges that the Mortgage secures, among other
things, any damages to which Buyer may be entitled as a result of any such
rejection.
(c) In the event any Claim is asserted against any Indemnified Party by
a third party, the Indemnified party shall with reasonable promptness notify
the Seller of such Claim. Pursuant to its defense obligation provided in the
first sentence of Section 7.08(a), Seller shall employ counsel reasonably
satisfactory to Buyer and shall take such other steps as are reasonably
necessary or appropriate to defend the Indemnified Parties against such Claim.
7.09. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MISSISSIPPI, EXCEPT TO THE EXTENT THE
LAWS OF ANY OTHER STATE ARE MANDATORILY APPLICABLE.
7.10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and,
subject to the following restriction, shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns. Nothing contained
herein shall in any way limit or restrict the right of Buyer, or Buyer's
successors and assigns, to transfer, assign or pledge its rights or obligations
hereunder in whole or in part; provided, that Buyer shall not transfer or
assign its rights or obligations in and to this Agreement to any person not an
Affiliate of Buyer or of the Royal Dutch Shell Group of Companies unless in
Buyer's judgment prudently exercised such Person is financially responsible and
capable of properly administering this Agreement provided, however, that the
immediately preceding proscriptive provision shall never apply to any mortgage,
pledge, granting of any lien or security interest or conveyance in trust by
Buyer, its successors or assigns or any judicial, trustee's or other sale to
foreclose the same. Seller shall not transfer, assign or pledge its rights or
obligations hereunder without the prior written consent of Buyer.
7.11. SCHEDULES AND EXHIBITS. The Schedules and Exhibits attached hereto
and referred to herein constitute a part of this Agreement.
7.12. ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This Agreement and the Closing
Documents constitute the entire agreement between the parties hereto with
respect to the transactions described herein, superseding all prior
negotiations, discussions, agreements and understandings, whether oral or
written, relating to such subject matter. This Agreement may not be amended and
no rights hereunder may be waived except by a written document signed by the
party to be charged with such amendment or waiver. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver unless otherwise expressly
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<PAGE>
provided. Each party acknowledges that it has read and understands the terms
of this Agreement and the Closing Documents and has had the opportunity to
consult with legal, tax and accounting counsel and advisors of its choice
concerning the meaning and legal effect thereof. Neither party has relied
upon the other party or its counsel or advisors with respect to the meaning
or effect of any such agreement or instrument.
7.13. HEADINGS. The headings of the articles and sections of this
Agreement are for guidance and convenience of reference only and shall not
limit or otherwise affect any of the terms or provisions of this Agreement.
7.14. COUNTERPARTS. This Agreement may be executed by Buyer and Seller
in any number of counterparts, each of which shall be deemed an original
instrument, but all of which together shall constitute but one and the same
instrument.
7.15. ASSISTANCE. Seller agrees that in the event Buyer elects to
enter into a financing arrangement with respect to the Overriding Royalty
Interests it will provide reasonable assistance to Buyer in order to
facilitate Buyer obtaining such financing, including, but not limited to,
attending meetings, providing data related to the Overriding Royalty
Interests and Seller and its Affiliates and making personnel of Seller
available during normal business hours.
7.16. ARBITRATION.
(a) Any and all claims, counterclaims, demands, cause of action,
disputes, controversies, and other matters in question arising out of or
relating to this Agreement, any provision hereof, the alleged breach thereof,
or in any way relating to the subject matter of this Agreement or the
relationship between the parties created by this Agreement, involving the
parties and/or their respective representatives (all of which are referred to
herein as "Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort, or
otherwise, at law or in equity, under State or federal law, whether provided
by statute or the common law, for damages or any other relief, shall be
resolved by binding arbitration.
(b) It is the intention of the parties that the arbitration shall be
conducted pursuant to the Federal Arbitration Act and administered by the
American Arbitration Association in accordance with its then current
Commercial Arbitration Rules, as such Act and Rules are modified by this
arbitration agreement. The validity, construction, and interpretation of this
agreement to arbitrate, and all procedural aspects of the arbitration
conducted pursuant to this agreement to arbitrate, including but not limited
to, the determination of the issues that are subject to arbitration (I.E.,
arbitrability), the scope of the arbitrable issues, allegations of "fraud in
the inducement" to enter into this agreement or this arbitration provision,
allegations of waiver, laches, delay or other defenses to arbitrability, and
the rules governing the conduct of the arbitration (including the time for
filing an answer, the time for the filing of counterclaims, the times for
amending the pleadings, the specificity of the pleadings, the extent and
scope of discovery, the issuance of subpoenas, the times for the designation
of experts, whether the arbitration is to be stayed pending resolution of
related litigation involving third parties not bound by this arbitration
agreement, the receipt of evidence, and the like),
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<PAGE>
shall be decided by the Arbitrators. In deciding the substance of the
parties' Claims, the Arbitrators shall refer to the substantive laws of the
State of Mississippi for guidance (excluding Mississippi choice-of-law
principles that might call for the application of some other State's law).
Provided, however, it is expressly agreed that notwithstanding any other
provision in this arbitration agreement to the contrary, the Arbitrators
shall have absolutely no authority to award treble, exemplary or punitive
damages of any type under any circumstances regardless of whether such
damages may be available under Mississippi law, the law of any other State,
or federal law, or under the Federal Arbitration Act, or under the Commercial
Arbitration Rules of the American Arbitration Association, the parties hereby
waiving their right, if any, to recover treble, exemplary or punitive damages
in connection with any such Claims.
(c) The arbitration proceeding shall be conducted in Houston, Texas.
Within thirty days of the notice of initiation of the arbitration procedure,
each party shall select one Arbitrator. The two arbitrators shall select a
third arbitrator, failing agreement on which within ninety days of the
original notice, the parties (or either of them) shall apply to any United
States District Judge for the Southern District of Texas, Houston Division,
who shall appoint the third arbitrator. While the third arbitrator shall be
neutral, the two party-appointed Arbitrators are not required to be neutral
and it shall not be grounds for removal of either of the two party-appointed
Arbitrators or for vacating the arbitrators' award that either of such
arbitrators has past or present minimal relationships with the party that
appointed such arbitrator.
(d) In the event any matter is required to be arbitrated under this
Section 7.16, the party prevailing in such arbitration shall be entitled to
recover its costs and reasonable attorneys' fees in addition to any other
remedy or recovery to which it may be entitled.
[This space intentionally left blank]
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<PAGE>
EXECUTED on the date first set forth above.
SELLER:
TEXSTAR PETROLEUM, INC.
By: /s/ Robert S. Herlin
-------------------------------------
Robert S. Herlin
Senior Vice President
BUYER:
SHELL CAPITAL INC.
By: /s/ Michael R. Keener
-------------------------------------
Michael R. Keener
Agent and Attorney-in-Fact
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<PAGE>
FIRST AMENDMENT TO LETTER LOAN AGREEMENT
THIS FIRST AMENDMENT TO LETTER LOAN AGREEMENT (this "First Amendment") is
made and entered into as of the 10th day of October, 1997, by and between
TEXSTAR PETROLEUM, INC., a Texas corporation(the "Borrower"), and BANK ONE,
TEXAS, N.A., a national banking association (the "Lender").
WHEREAS, the Borrower and the Lender entered into that certain letter loan
agreement dated July 17, 1997 (the "Loan Agreement");
WHEREAS, the Borrower and the Lender desire to amend certain terms and
provisions of the Loan Agreement, as set forth herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. Section 1(a) of the Loan Agreement is deleted in its entirety, and
the following is substituted in its place:
(a) NOTE: Borrower's obligation to repay the Credit Facility
shall be evidenced by its execution of a Promissory Note (the
"Revolving Note") of even date with the First Amendment, payable to
the order of Lender, in the original principal amount of Ten Million
and No/100 Dollars ($10,000,000.00), and in the form attached as
Exhibit "A" to the First Amendment.
2. Section 1(d)of the Loan Agreement is deleted in its entirety, and the
following is substituted in its place:
(d) TERM: Through November 30, 1998 (the "Maturity Date").
3. Section 5(d)of the Loan Agreement is deleted in its entirety, and the
following is substituted in its place:
(d) SECURITY. The Revolving Note and the other indebtedness
hereunder shall be secured by (i) a first and prior lien on the oil
and gas properties of Borrower included in the determination of the
Borrowing Base (collectively, the "Mortgaged Property") and (ii) a
second lien on all oil and gas properties acquired by Borrower with
the proceeds of a loan (the "EnCap Loan") in an amount of up to
$12,000,000.00 from EnCap Energy Capital Fund III, L.P. ("EnCap")
pursuant to a Credit Agreement dated of even date with the First
Amendment between EnCap and Borrower (the "EnCap Credit Agreement"),
and the Promissory Note of Borrower issued thereunder (the "EnCap
Note") including, without limitation, the oil and gas properties
acquired by Borrower from Bean Industries, Inc. ("Seller") pursuant to
that certain Assignment and Bill of Sale
<PAGE>
of even date with the First Amendment executed by Seller to Borrower,
other than (A) the interest in such properties conveyed by Borrower to
EnCap and certain other parties pursuant to a Conveyance of Net Profits
Overriding Royalty Interest (the "Net Profits Conveyance") of even date
with the First Amendment and (B) a similar net profits interest in
any other oil and gas properties acquired by Borrower with the proceeds of
the EnCap Loan, conveyed by Borrower to EnCap and/or certain of its
affiliates.
4. The Lender hereby consents to the following actions being taken
concurrently herewith by the Borrower: (a) The acquisition by Borrower from
Seller of an additional working interest in the Oakvale Dome Prospect,
Jefferson Davis County, Mississippi, pursuant to the terms of that certain
Purchase and Sale Agreement of even date with the First Amendment, by and
between Borrower and Seller, and that certain Assignment and Bill of Sale of
even date with the First Amendment executed by Seller to Borrower, (b) the
assignment by Borrower to EnCap and certain other parties of a net profits
interest in the Oakvale Dome Prospect interests acquired by Borrower from
Seller pursuant to the Net Profits Conveyance,(c) the incurrence by Borrower of
up to $12,000,000.00 in indebtedness to EnCap pursuant to the EnCap Credit
Agreement and the EnCap Note, (d) the granting of a first priority mortgage by
Borrower to EnCap against the Oakvale Dome Prospect interests acquired by
Borrower from Seller and (e) the granting of a second lien mortgage by Borrower
to EnCap against the Mortgaged Property. The Lender hereby waives any default
or event of default under Section 6(e) or 6(f) of the Loan Agreement to the
extent the same is violated as a result of the actions of Borrower consented to
by Lender pursuant to this Section 4. In addition, the Lender hereby waives
any default or event of default under Section 7(c) of the Loan Agreement,
relating to the maximum Debt to Worth Ratio of the Borrower, to the extent the
same is violated as a result of the incurrence of the indebtedness of Borrower
to EnCap described in this Section 4. The actions consented to herein by
Lender, and the waivers of defaults and events of defaults set forth herein by
Lender, are limited specifically to the actions, defaults and events of default
described in this Section 4, and shall not be construed to constitute a consent
to or waiver of any further action, default or event of default that may
currently exist or subsequently arise pursuant to the Loan Agreement.
5. The Borrower hereby covenants and agrees with the Lender that,
simultaneously with the acquisition of any additional oil and gas properties
(or additional interest in oil and gas properties) acquired by Borrower with
the proceeds of the EnCap Loan, Borrower shall grant to Lender a Mortgage, Deed
of Trust, Security Agreement, Assignment of Production and Financing Statement,
in form and substance satisfactory to Lender, covering such oil and gas
properties or interests therein, subject only to a first lien against such
properties or interests in favor of EnCap. In addition, Borrower agrees to
deliver such title and other documentation relating to such properties as may
be requested by Lender. Borrower further agrees to give Lender at least
fifteen (15) days prior written notice of its intention to acquire any such
properties or interest which would be subject to the obligations contained in
this Section 5.
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<PAGE>
6. The closing of the transactions contemplated by this First Amendment
is subject to the satisfaction of the following conditions:
(a) All legal matters incident to the transactions herein
contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs,
L.L.P., counsel to the Lender;
(b) The Lender shall have received fully executed copies of (i)
this First Amendment, (ii) the Revolving Note, (iii) a Second Lien
Mortgage, Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement, covering the Oakvale Dome Prospect interests
acquired by Borrower from Seller (but subject to the Net Profits
Conveyance), (iv) an Intercreditor Agreement relating to the
indebtedness of Borrower to EnCap, and (v) a Notice of Final
Agreement;
(c) The Lender shall have received an executed copy of
resolutions of the Board of Directors of Borrower, in form and
substance satisfactory to the Lender, authorizing the execution,
delivery and performance of this First Amendment and all documents,
instruments and certificates referred to herein; and
(d) The Lender shall have received a certificate of the
Secretary of Borrower, setting forth the names of the officers of the
Borrower authorized to execute and deliver this First Amendment and
all documents, instruments and certificates referred to herein,
together with the true signatures of such officers.
7. The Borrower hereby reaffirms each of the representations, warranties,
covenants and agreements of the Borrower set forth in the Loan Agreement with
the same force and effect as if each were separately stated herein and made as
of the date hereof. Except as amended hereby, the Loan Agreement shall remain
unchanged, and the terms, conditions and covenants of the Loan Agreement shall
continue and be binding upon the parties hereto.
8. The Borrower hereby agrees that its liability under any and all
documents and instruments executed by the Borrower as security for the Credit
Facility (including, without limitation all mortgages, deeds of trust,
collateral assignments, assignments of production, security agreements and
financing statements executed by the Borrower for the benefit of the Lender)
shall not be reduced, altered, limited, lessened or in any way affected by the
execution and delivery of this First Amendment or any of the instruments or
documents referred to herein, except as specifically set forth herein or
therein, that all of such documents and instruments are hereby renewed,
extended, ratified, confirmed and carried forward by the Borrower in all
respects, that all of such documents and instruments shall remain in full force
and effect
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<PAGE>
and are and shall remain enforceable against the Borrower in accordance with
their terms and that all of such documents and instruments shall cover all
indebtedness of the Borrower to the Lender described in the Loan Agreement as
amended hereby.
9. Each of the terms defined in the Loan Agreement is used in this First
Amendment with the same meaning, except as otherwise indicated in this First
Amendment. Each of the terms defined in this First Amendment is used in the
Loan Agreement with the same meaning, except as otherwise indicated in the Loan
Agreement.
10. THIS FIRST AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER, SUBJECT
TO, AND SHALL BE CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS.
11. THIS LOAN AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
------------------------------------
Name: Prentis B. Tomlinson, Jr.
-------------------------------
Title: Chairman
------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ Gary L. Stone
------------------------------------
Name: Gary L. Stone
-------------------------------
Title: Senior Vice President
------------------------------
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<PAGE>
The undersigned Guarantors join in the execution of this First Amendment to
evidence that they hereby agree and consent to all of the matters contained in
this First Amendment and further agree that (i) their liability under those
certain Guaranty Agreements dated July 17, 1997, executed by such Guarantors for
the benefit of the Lender (the "Guarantys") shall not be reduced, altered,
limited, lessened or in any way affected by the execution and delivery of this
First Amendment or any of the instruments or documents referred to herein by the
parties hereto, except as specifically set forth herein or therein, (ii) each
Guaranty is hereby renewed, extended, ratified, confirmed and carried forward in
all respects, (iii) each Guaranty is and shall remain in full force and effect
and is and shall remain enforceable against each Guarantor in accordance with
its terms and (iv) each Guaranty shall cover all indebtedness of the Borrower to
the Lender described in the Loan Agreement as amended hereby.
/s/ Prentis B. Tomlinson, Jr.
-------------------------------------------------
PRENTIS B. TOMLINSON, JR.
BENZ ENERGY LTD.
By: /s/ Prentis B. Tomlinson, Jr.
----------------------------------------------
Name: Prentis B. Tomlinson, Jr.
-----------------------------------------
Title: Chairman
----------------------------------------
/s/ Prentis B. Tomlinson, Jr.
-------------------------------------------------
PRENTIS B. TOMLINSON, JR., Trustee of and on
behalf of The Slattery Trust, The Ruston Trust and
The Houston Trust, created by Trust Agreements
dated January 14, 1987, executed by Marjorie J.
Tomlinson, as Grantor and Prentis B. Tomlinson,
Jr., as Trustee
/s/ Heather M. Tomlinson
-------------------------------------------------
HEATHER M. TOMLINSON, Trustee of and on behalf of
The Starbucks Trust created by Trust Agreement
dated January 17, 1996, executed by Karen Rae
Halver, as Grantor and Heather M. Tomlinson, as
Trustee
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<PAGE>
EXHIBIT A
P R O M I S S O R Y N O T E
$10,000,000.00 October ___, 1997
FOR VALUE RECEIVED, after date, without grace, in the manner, on the dates
and in the amounts so herein stipulated, the undersigned, TEXSTAR PETROLEUM,
INC., a Texas corporation ("Borrower"), PROMISES TO PAY TO THE ORDER OF BANK
ONE, TEXAS, N.A., a national banking association ("Lender"), in Houston, Harris
County, Texas, the sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000) or, if
less, the aggregate unpaid principal amount of advances made by Lender to
Borrower pursuant to this Promissory Note (this "Note"), in lawful money of the
United States of America, which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, and to pay interest on
the advanced and unpaid principal amount from date until maturity at a rate
equal to the Base Rate (hereinafter defined) plus two percent (2%) per annum
("Stated Rate"), not to exceed the maximum non-usurious interest rate permitted
by applicable law from time to time in effect as such law may be interpreted,
amended, revised, supplemented or enacted ("Maximum Rate"), provided that if at
any time the Stated Rate exceeds the Maximum Rate then interest hereon shall
accrue at the Maximum Rate. In the event the Stated Rate subsequently decreases
to a level less than the Maximum Rate or if the Maximum Rate applicable to this
Note should subsequently be increased to a level greater than the Stated Rate,
then, in either case, interest hereon shall thereafter accrue at a rate equal
to the applicable Maximum Rate until the aggregate amount of interest accrued
through the term of this Note equals the aggregate amount of interest which
would have accrued at the Stated Rate without regard to any usury limit, at
which time interest hereon shall again accrue at the Stated Rate.
This Note is payable as follows:
1. Accrued and unpaid interest shall be due and payable on the first
day of each month, commencing November 1, 1997.
2. All accrued and unpaid interest and unpaid principal shall be due
and payable on November 30, 1998.
All payments under this Note shall be applied first against the accrued and
unpaid interest hereon and the remainder against the principal balance hereof.
This Note is subject to mandatory prepayments, as set forth in the Loan
Agreement (hereinafter defined). In addition, Borrower may prepay this Note, in
whole or in part, at any time prior to maturity without penalty, and interest
shall cease on any amount
<PAGE>
prepaid. Any partial prepayment shall be applied toward the payment of the
principal installments last maturing on the Note, that is, in the inverse order
of maturity, without reducing the amount or time of payment of the remaining
installments.
Any check, draft, money order or other instrument given in payment of all
or any part hereof may be accepted by Lender and handled in collection in a
customary manner, but same shall not constitute payment hereof or diminish any
rights of Lender except to the extent that actual cash proceeds of such
instrument are unconditionally received by Lender.
It is agreed that time is of the essence of this agreement. In the event of
default in the payment of any installment of principal or interest when due or
in the event of any other default hereunder, Lender may accelerate and declare
this Note immediately due and payable without notice. Any failure to exercise
this option shall not constitute a waiver by Lender of the right to exercise
the same at any other time.
In the event of default in the making of any payment herein provided,
either of principal or interest, or in the event this Note is declared due,
interest hereunder shall accrue at the Maximum Rate.
Borrower hereby agrees to pay all expenses, including reasonable attorneys'
fees, all of which shall become a part of the principal hereof, incurred by
Lender if this Note is placed in the hands of an attorney for collection or if
collected by suit or through any probate, bankruptcy or any other legal
proceedings.
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days the amounts are outstanding on the basis of a 365-day or
366-day year, as is applicable.
It is expressly stipulated and agreed to be the intent of Borrower and
Lender to comply with applicable Texas law governing the maximum non-usurious
rate or amount of interest payable on or in connection with this Note (or
applicable United States federal law to the extent that it permits Lender to
contract for, charge, take, reserve or receive a greater amount of interest
than under Texas law). Accordingly, it is agreed that notwithstanding any
provision to the contrary in this Note, or in any of the documents securing
payment hereof or otherwise relating hereto, no such provision shall require
the payment or permit the collection of interest at a rate in excess of the
Maximum Rate. If any excess of interest in such respect is provided for, or
shall be judicially interpreted to be so provided for, in this Note or in any
of the documents securing payment hereof or otherwise relating hereto, or if
the acceleration of the maturity of this Note or any prepayment by Borrower
results in Borrower's having paid any interest in excess of that permitted by
applicable law, then in any such event,
-2-
<PAGE>
it is the express intent of Borrower and Lender that (1) the provisions of this
paragraph shall govern and control, (2) neither Borrower nor any other person
primarily liable on this Note, nor their respective heirs, legal
representatives, successors or assigns, shall be obligated to pay the amount of
such interest to the extent that it is in excess of the Maximum Rate, (3) any
such excess which may have been collected shall be either applied as a credit
against the then unpaid amount hereof or refunded to Borrower, and (4) the
provisions of this Note and any documents securing payment of this Note shall
be automatically deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new document,
so that the effective rate of interest shall be reduced to the Maximum Rate.
For the purpose of determining the maximum amount of interest permitted to be
charged or collected hereunder, all sums paid or agreed to be paid to Lender
for the use, forbearance or detention of the proceeds of this Note shall be
amortized, prorated, allocated and spread throughout the full term of this Note
so that the rate or amount of interest on account of this Note is uniform
throughout the term hereof and does not exceed the applicable usury ceiling.
Borrower agrees that the Maximum Rate to be charged or collected pursuant
to this Note shall be the applicable weekly ceiling referred to in the Texas
Finance Code, provided that Lender may rely on other applicable laws, including
without limitation laws of the United States, for calculation of the Maximum
Rate if the application thereof results in a greater Maximum Rate. Except as
provided above, the provisions of this Note shall be governed by the laws of
the State of Texas.
Borrower and each other person who is a maker, surety, guarantor or
endorser of this Note hereby waives demand, grace, notice, presentment for
payment, notice of intention to accelerate the maturity hereof, notice of the
acceleration of the maturity hereof and protest, and agrees that this Note and
the liens securing its payment may be renewed, and the time of payment
extended, from time to time, without notice and without releasing any of the
foregoing. As additional security for all amounts owed by Borrower to Lender,
Borrower hereby grants to Lender a lien and security interest on (and the
express right of setoff against) any of Borrower's funds which may from time to
time be deposited with or in the possession of Lender.
As used in this Note, the term "Base Rate" shall mean at any time the
variable rate of interest then most recently announced publicly by Lender (or
any successor to all or substantially all of its assets) as its base rate of
interest and, without notice to Borrower or any other person, such rate of
interest shall change as and when changes in that base rate of interest are
announced.
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<PAGE>
The principal of this Note represents funds which Lender may advance to
Borrower, pursuant to and subject to the Loan Agreement, from time to time upon
request of Borrower. Any part of the principal may be repaid by Borrower and
thereafter reborrowed, provided the outstanding principal amount of this Note
shall never exceed the face amount of this Note. Each advance shall constitute
a part of the principal hereof and shall bear interest from the date of the
advance. The provisions of Chapter 346 of the Texas Finance Code, as the same
may be amended, shall not apply to this Note or to any of the Security
Documents.
Borrower has acquired various oil and gas properties which are described in
one or more of the Security Documents (hereinafter defined). The acquisition of
such oil and gas properties was made subject to certain indebtedness of Texstar
Petroleum, L.L.C. ("Texstar L.L.C.") to Lender, including, without limitation,
the indebtedness pursuant to that certain $750,000.00 Promissory Note dated
July 3, 1996, executed by Texstar L.L.C. and payable to the order of Lender. A
portion of the principal of this Note represents funds which will be used to
repay the indebtedness of Texstar L.L.C. secured by the existing liens on such
oil and gas properties of Borrower, including the indebtedness pursuant to the
above-described $750,000.00 Promissory Note, and the liens securing the payment
of such note, which burden the interests acquired by Borrower, are not
released, but are hereby ratified and hereby carried forward to secure this
Note.
This Note is the Revolving Note referred to in, subject to, and is entitled
to the benefits of and security afforded by the following documents (the
"Security Documents"):
(a) that certain letter loan agreement dated July 17, 1997
between Borrower and Lender, as amended by that certain First Amendment
to Letter Loan Agreement of even date herewith between Borrower and
Lender (said letter loan agreement, as amended and as it may be further
amended, modified or supplemented from time to time, is referred to
herein as the "Loan Agreement");
(b) those certain Second Lien Mortgages, Deeds of Trust, Assignments
of Production, Security Agreements and Financing Statements of even date
herewith, executed by Borrower for the benefit of Lender and covering
certain oil and gas properties in Jefferson Davis and _____________
Counties, Mississippi;
(c) those certain Mortgages, Deeds of Trust, Assignments of Production,
Security Agreements and Financing Statements dated July 17, 1997, executed
by Borrower for the benefit of Lender and covering certain oil and gas
properties in Jefferson Davis and Jones Counties, Mississippi;
-4-
<PAGE>
(d) those certain Mortgages, Collateral Assignments, Security
Agreements and Financing Statements dated July 17, 1997, executed by
Borrower for the benefit of Lender and covering certain oil and gas
properties in Ascension and Iberville Parishes, Louisiana;
(e) that certain Mortgage, Collateral Assignment, Security Agreement
and Financing Statement dated September 14, 1995, executed for the
benefit of Lender by Prentis B. Tomlinson, Jr. (the "Trustee"), Trustee
of and on behalf of The Slattery Trust, The Ruston Trust and The Houston
Trust, created by Trust Agreements dated January 14, 1987, executed by
Marjorie J. Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as
Trustee, covering certain oil and gas properties in Iberville Parish,
Louisiana, and filed for record under Mortgage Book 290, Entry 315 of the
Mortgage Records of Iberville Parish, Louisiana, as the same has been
amended by that certain Supplemental Mortgage, Deed of Trust and
Modification Agreement dated July 3, 1996 among the Trustee, Texstar
L.L.C., Prentis B. Tomlinson, Jr. ("Tomlinson") and Lender, filed for
record under Mortgage Book 296, Entry 168 of the Mortgage Records of
Iberville Parish, Louisiana, and by that certain Supplemental Mortgage,
Collateral Assignment, Security Agreement and Financing Statement dated
July 17, 1997 among the Trustee, Texstar L.L.C., Borrower and Lender;
(f) that certain Mortgage, Collateral Assignment, Security Agreement
and Financing Statement dated July 3, 1996, executed by Texstar, L.L.C.
for the benefit of Lender, covering certain oil and gas properties in
Iberville Parish, Louisiana and filed for record under Mortgage Book 296,
Entry 169 of the Mortgage Records of Iberville Parish, Louisiana, as the
same has been amended by that certain Supplemental Mortgage, Collateral
Assignment, Security Agreement and Financing Statement dated July 24,
1996 among Texstar L.L.C., Tomlinson and Lender, filed for record under
Mortgage Book 297, Entry 102 of the Mortgage Records of Iberville Parish,
Louisiana, that certain Supplemental Mortgage, Collateral Assignment,
Security Agreement and Financing Statement dated August 5, 1996, among
Texstar L.L.C., Tomlinson and Lender, filed for record under Mortgage
Book 297, Entry 103 of the Mortgage Records of Iberville Parish,
Louisiana, and that certain Supplemental Mortgage, Collateral Assignment,
Security Agreement and Financing Statement dated July 17, 1997 among
Texstar L.L.C., Borrower and Lender;
(g) that certain Mortgage, Collateral Assignment, Security Agreement
and Financing Statement dated
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<PAGE>
September 14, 1995, executed by the Trustee for the benefit of Lender,
covering certain oil and gas properties in Ascension Parish, Louisiana,
and filed for record under Clerk's File No. 363153 of the Real Property
Records of Ascension Parish, Louisiana, as the same has been amended by
that certain Supplemental Mortgage, Deed of Trust and Modification
Agreement dated July 3, 1996 among the Trustee, Texstar L.L.C., Tomlinson
and Lender, filed for record under Clerk's File No. 375873 of the Real
Property Records of Ascension Parish, Louisiana, that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement dated August 5, 1996, among Texstar L.L.C., Tomlinson
and Lender, filed for record under Clerk's File No. 377497 of the Real
Property Records of Ascension Parish, Louisiana, and by that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement dated July 17, 1997 among the Trustee, Texstar
L.L.C., Borrower and Lender;
(h) that certain Guaranty Agreement dated July 17, 1997, executed by
Benz Energy Ltd. for the benefit of Lender;
(i) that certain Guaranty Agreement dated July 17, 1997, executed by
Tomlinson for the benefit of Lender;
(j) that certain Guaranty Agreement dated July 17, 1997, for the
benefit of Lender, executed by Prentis B. Tomlinson, Jr., Trustee of and on
behalf of The Slattery Trust, The Ruston Trust and The Houston Trust,
created by Trust Agreements dated January 14, 1987, executed by Marjorie J.
Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as Trustee; and
(k) that certain Guaranty Agreement dated July 17, 1997, executed by
Heather M. Tomlinson, as Trustee of and on behalf of The Starbucks Trust,
created by Trust Agreement dated January 17, 1996, executed by Karen Rae
Halver, as Grantor, and Heather M. Tomlinson, as Trustee, for the benefit of
Lender.
This Note is subject to the provisions contained in the Security Documents
which, among other things, provide for the acceleration of the maturity hereof
upon the occurrence of certain events.
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<PAGE>
Borrower represents and warrants that this loan is for business, commercial,
investment or other similar purpose and not primarily for personal, family,
household or agricultural use.
TEXSTAR PETROLEUM, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE>
SECOND AMENDMENT TO
LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT") is entered
into as of November 18, 1997 by and between TEXSTAR PETROLEUM, INC., a Texas
corporation ("BORROWER"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION
("Lender").
WHEREAS, Borrower and Lender entered into that certain Loan Agreement
dated as of July 17, 1997, as amended from time to time (collectively, the
"LOAN AGREEMENT"); and
WHEREAS, the Loan Agreement currently governs Borrower's Credit Facility
in the maximum amount of up to $10,000,000.00, as currently evidenced by that
certain promissory note dated July 17, 1997 payable by Borrower to the order
of Lender in the stated principal amount of $10,000,000.00 (the "REVOLVING
NOTE"); and
WHEREAS, the Loan Agreement, the Note and all other documents
evidencing, securing, governing, guaranteeing and/or pertaining to the Note
are hereinafter referred to collectively as the "LOAN DOCUMENTS"; and
WHEREAS, the parties hereto now desire to modify the Loan Agreement as
hereinafter provided;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 The terms used in this Amendment to the extent not
otherwise defined herein shall have the same meanings as in the Loan
Agreement.
<PAGE>
ARTICLE II
AMENDMENTS
Section 2.01 Effective as of the date hereof, Subparagraph 5(f) of the
Loan Agreement is hereby amended in its entirety to read as follows:
"(f) GUARANTEE. THE REVOLVING NOTE AND THE OTHER INDEBTEDNESS HEREUNDER
SHALL BE GUARANTEED BY PRENTIS B. TOMLINSON, JR. ("TOMLINSON"), PRENTIS
B. TOMLINSON, JR., TRUSTEE OF AND ON BEHALF OF THE SLATTERY TRUST, THE
RUSTON TRUST AND THE HOUSTON TRUST, CREATED BY TRUST AGREEMENTS DATED
JANUARY 14, 1987 EXECUTED BY MARJORIE J. TOMLINSON, AS GRANTOR, AND
PRENTIS B. TOMLINSON, JR., AS TRUSTEE. THE FOREGOING GUARANTORS ARE
INDIVIDUALLY REFERRED TO HEREIN AS A "GUARANTOR" AND COLLECTIVELY
REFERRED TO HEREIN AS THE GUARANTORS."
ARTICLE III
NOTE
3.01 The parties hereto acknowledge and agree that notwithstanding this
Amendment, the Note continues to evidence the indebtedness arising under the
Line of Credit.
ARTICLE IV
REPRESENTATIONS, WARRANTIES, RATIFICATION AND REAFFIRMATION
Section 4.01 Borrower hereby represents and warrants that: (i) the
representations and warranties contained in the Loan Agreement are true and
correct on and as of the date hereof as though made on and as of the date
hereof, (ii) no event has occurred and is continuing that constitutes an
Event of Default or would constitute an Event of Default but for the
requirement of notice or lapse of time or both, and (iii) there are no claims
or offsets against, or defenses or counterclaims to, the Note, the
indebtedness evidenced thereby or the liens securing same (including without
limitation, any defenses or offsets resulting from or arising out of breach
of contract or duty,
<PAGE>
the amount of interest charged, collected or received on the Note heretofore,
or breach of any commitments or promises of any type).
Section 4.02 The terms and provisions set forth in this Amendment shall
modify and supersede all inconsistent terms and provisions set forth in the
Loan Agreement, but except as expressly modified and superseded by this
Amendment, the terms and provisions of the Loan Agreement are ratified and
confirmed and shall continue in full force and effect, Borrower hereby
agreeing that the Loan Agreement and the other Loan Documents are and shall
continue to be outstanding, validly existing and enforceable in accordance
with their respective terms.
Section 4.03 Guarantors previously executed those certain guaranty
agreements dated July 17, 1997, (collectively, the "GUARANTY AGREEMENTS"),
executed by the respective Guarantors for the benefit of Lender to
unconditionally guarantee the payment and performance by Borrower of all
indebtedness owing to Lender from time to time, including without limitation,
the indebtedness evidenced by the Note. Guarantors, by executing this
Amendment, hereby consent to this Amendment and agree that, notwithstanding
the execution of this Amendment, the obligations of the Guarantors under the
Guaranty Agreements remain in full force and effect with respect to the Note,
and that this Amendment does not in any manner impair, alter or modify the
obligations of the Guarantors under the Guaranty Agreements. Guarantors each
acknowledge and agree that there are no claims or offsets against, or
defenses or counterclaims to, the terms and provisions of their Guaranty
Agreements or the obligations created or evidenced thereby.
ARTICLE V
MISCELLANEOUS
Section 5.01 Each of the Loan Documents is hereby amended so that any
reference in the Loan Documents to the Loan Agreement shall mean a reference
to the Loan Agreement as amended hereby.
Section 5.02 This Amendment may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
<PAGE>
Section 5.03 This Amendment has been entered into in Harris County,
Texas and shall be performable for all purposes in Harris County, Texas. THIS
AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
Courts within the State of Texas shall have jurisdiction over any and all
disputes arising under or pertaining to this Amendment, and venue in any such
dispute shall be the courts located in Harris County, Texas.
Section 5.04 This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
THE WRITTEN LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES
EXECUTED as of the date first above written.
BORROWER:
TEXSTAR PETROLEUM, INC.,
By: /s/ Prentis B. Tomlinson, Jr.
---------------------------------
Name: Prentis B. Tomlinson, Jr.
-------------------------------
Title: Chairman & CEO
<PAGE>
GUARANTORS:
/s/ Prentis B. Tomlinson, Jr.
PRENTIS B. TOMLINSON, JR., TRUSTEE of
and on behalf of The Slattery Trust,
The Rustin Trust and The Houston
Trust, created by Trust Agreements
dated January 14, 1987, executed by
Marjorie J. Tomlinson, as Grantor and
Prentis B. Tomlinson, Jr., as Trustee
LENDER:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By: /s/ Michelle Walpert
---------------------------------
Name: Michelle Walpert
-------------------------------
Title: Vice President
<PAGE>
THIRD AMENDMENT TO LETTER LOAN AGREEMENT
THIS THIRD AMENDMENT TO LETTER LOAN AGREEMENT (this "Third Amendment") is
made and entered into as of the 4 day of November, 1998, by and between
TEXSTAR PETROLEUM, INC., a Texas corporation(the "Borrower"), and BANK ONE,
TEXAS, N.A., a national banking association (the "Lender").
WHEREAS, the Borrower and the Lender entered into that certain letter
loan agreement dated July 17, 1997, which letter loan agreement was amended
by that certain First Amendment to Letter Loan Agreement dated October 10,
1997 between Borrower and Lender and that certain Second Amendment to Loan
Agreement dated November 18, 1997 between Borrower and Lender (as amended,
the "Loan Agreement");
WHEREAS, the Borrower and the Lender desire to amend certain terms and
provisions of the Loan Agreement, as set forth herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. Section 1 of the Loan Agreement is deleted in its entirety, and the
following is substituted in its place:
Section 1. CREDIT FACILITY. Subject to the terms of this
Agreement, Lender agrees to make available to Borrower a Credit
Facility (the "Credit Facility") consisting of two tranches of loans.
The tranches are defined herein as Tranche A and Tranche B, and each
Tranche shall have the following terms and conditions:
(a) TRANCHE A:
(1) MAXIMUM AVAILABILITY: The lesser of $8,000,000 and
the Borrowing Base (as defined in Section 5(c) hereof).
(2) ADVANCE PROCEDURES: At least one (1) Business Day
(hereinafter defined) prior to the requested date of
advance, Borrower may make a written request to Lender for
direct advances under Tranche A. Prior to the requested
date of advance, Lender shall advise Borrower of whether
Lender will make the advance as requested by Borrower or
whether Lender will require additional engineering reports
or other documents prior to making the requested advance.
(3) TERM: Through February 28, 1999 ("the Maturity
Date").
(4) PURPOSE: To finance certain costs associated with
the acquisition and development of Borrower's oil and gas
properties included in the determination of the Borrowing
Base.
<PAGE>
(5) INTEREST RATE: Prime Rate (hereinafter defined)
plus two percent (2%) per annum (the "Tranche A Interest
Rate"), not to exceed the Maximum Rate (hereinafter
defined).
(6) FACILITY FEE: Borrower has previously paid to
Lender a Facility Fee in the amount of $5,000 plus two
percent (2%) of up to $3,600,000.00 in the Borrowing Base.
Borrower shall hereafter pay to Lender a Facility Fee in the
amount of two percent (2%) of any increase in the Borrowing
Base over $3,600,000.00, upon the effectiveness of such
increase.
(7) UNUSED FEE: Borrower shall pay to Lender an unused
fee equal to one half percent (1/2%) of the average amount
by which the Borrowing Base exceeds the principal amount
outstanding under Tranche A, payable in arrears on the last
day of each calendar quarter.
(8) BORROWING BASE REDETERMINATION FEES: Borrower
shall pay to Lender a fee, with respect to each
redetermination of the Borrowing Base, in the amount of
$2,500 for all engineering and related expenses (including a
reasonable charge for services performed by employees of
Lender or affiliates of Lender) incurred by Lender in
connection with such redetermination.
(9) NO FURTHER ADVANCES: Notwithstanding anything to
the contrary contained herein, Borrower acknowledges and
agrees that it shall have no right to any further advances
under Tranche A, whether availability exists under the
Borrowing Base or otherwise.
(b) TRANCHE B:
(1) MAXIMUM AVAILABILITY: $2,000,000.
(2) ADVANCE PROCEDURES: At least three (3) Business
Days prior to the requested date of advance (other than the
initial advance made on the date hereof), Borrower may make
a written request to Lender for direct advances pursuant to
Tranche B, which request shall include a detailed
description of the proposed use of the proceeds of such
advance. If all participants with respect to Tranche B
consent to the making of such advance (to the extent
required by the terms of any applicable Participation
Agreement), Lender will make the advance requested by
Borrower on the requested date.
(3) TERM: Through the Maturity Date.
(4) INTEREST RATE: Prime Rate plus eight percent (8%)
per annum (the "Tranche B Interest Rate"), not to exceed the
Maximum Rate.
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<PAGE>
(c) Borrower's obligation to repay the Credit Facility
shall be evidenced by its execution of a promissory note (the
"Note") of even date with the Third Amendment, payable to the
order of Lender, in the original principal amount of $10,000,000,
and in the form attached as Exhibit "A" to the Third Amendment.
2. Whenever the term "Revolving Note" is used in the Loan Agreement or
any other Loan Document, it shall be amended to refer to the "Note" defined
in this Third Amendment.
3. Section 2(a)(1) of the Loan Agreement is deleted in its entirety,
and the following is substituted in its place:
(1) Subject to the provisions of paragraphs (2) and (3) of this
Section 2(a), Borrower shall pay interest on the outstanding principal
amount of advances under Tranche A at the Tranche A Interest Rate, and
shall pay interest on the outstanding principal amount of advances
under Tranche B at the Tranche B Interest Rate. Accrued and unpaid
interest on the Note shall be calculated on the basis of a 365 day
year or 366 day year, as the case may be, and the actual number of
days elapsed.
4. Section 2(a)(4)(B) is deleted in its entirety and the following is
substituted in its place:
(B) "Prime Rate" shall mean that at any time the variable rate
of interest then most recently announced publicly by Lender as its
prime rate of interest and, without notice to Borrower or any other
person, such rate of interest shall change as and when changes in that
prime rate of interest are announced.
Whenever the term "Base Rate" is used in the Loan Agreement or any other Loan
Document, it shall be amended to refer to the "Prime Rate" defined in this
Third Amendment.
5. Section 2(b) of the Loan Agreement is deleted in its entirety and the
following is substituted in its place:
(b) REPAYMENT TERMS. Accrued and unpaid interest on the
outstanding principal amount of advances under Tranche A shall be due
and payable on December 1, 1998 and on the first day of each month
thereafter. Accrued and unpaid interest on the outstanding principal
amount of advances under Tranche B shall be due and payable on
December 1, 1998, and on the first day of each month thereafter,
unless prior to December 1, 1998 Borrower elects by written notice
given to Lender to defer the Tranche B interest payments due on or
after December 1, 1998 until February 28, 1999, and on or prior to
December 1, 1998 all participants with respect to Tranche B consent in
writing to such deferral, in which event such Tranche B interest
payment shall be so deferred. A principal payment on Tranche A in the
amount of $1,500,000.00 shall be due and payable on December 18, 1998
unless on or prior to December 18, 1998, Lender and Borrower have
agreed (by appropriate amendment to the Loan Agreement) that an amount
(the "Additional Participation Amount") of principal outstanding under
Tranche A equal to the difference between $1,500,000.00 and the amount
paid on Tranche A on such date by Borrower shall be deemed paid
through an advance under Tranche B and, simultaneously therewith,
Lender shall have sold an additional participation in Tranche B in the
amount of the Additional
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<PAGE>
Participation Amount, all upon such terms and conditions as may be
reasonably satisfactory to Lender. The principal portion of the
Note is subject to mandatory prepayments as set forth in Section 5(c)
hereof. For purposes of determining any principal prepayments
required by Section 5(c), the principal payment due December 18,
1998 (and, if applicable, the reduction of outstanding principal
from Tranche A through an advance under Tranche B on December 18,
1998) shall not be deemed to reduce the outstanding indebtedness
pursuant to the Credit Facility. The balance of unpaid principal
and accrued and unpaid interest on the Note shall be due and
payable on the Maturity Date.
6. Section 4(e) of the Loan Agreement is deleted in its entirety, and the
following is substituted in its place:
(e) [intentionally omitted]
7. Section 5(f) of the Loan Agreement is deleted in its entirety, and
the following is substituted in its place:
(f) GUARANTEE. The Note and other indebtedness hereunder shall
be guaranteed by Benz Energy Ltd., a Yukon Territory corporation
(hereinafter sometimes referred to as "Benz Energy" and sometimes
referred to as "Guarantor").
8. There is added to the Loan Agreement a new section 5(g) which shall
read as follows:
(g) LOCK BOX ACCOUNT: Borrower will, upon execution of the Third
Amendment, arrange for all payments by account debtors on accounts
receivable of Borrower, purchasers of hydrocarbons from Borrower, and
operators or other payors with respect to proceeds from hydrocarbons
to which Borrower is entitled but as to which payment thereon is not
made directly to Borrower, to be sent directly to a lock box
maintained with Lender pursuant to a Lock Box Agreement to be entered
into between Lender and Borrower in a form satisfactory to Lender.
Such Lock Box Agreement shall provide, INTER ALIA, that Lender shall
not "sweep" such lock box account or otherwise exercise control over
the funds in such lock box account unless and until there exists a
payment default under the Credit Facility, and that, upon payment in
full of all amounts under the Credit Facility, this Loan Agreement and
all other documents and instruments executed in connection with or as
security for the indebtedness described in this Loan Agreement,
Borrower shall have the right, upon written request to Lender, to
terminate the Lock Box Agreement and all of Borrower's obligations and
Lender's rights thereunder other than those that expressly survive
termination.
9. There are added to the Loan Agreement new Sections 14 and 15, which
shall read as follows:
Section 14. ARBITRATION. Lender and Borrower agree that upon
the written demand of either party, whether made before or after the
institution of any legal proceedings, but prior to the rendering of
any judgment in that proceeding, all disputes, claims and
controversies between them, whether individual, joint, or class in
nature, arising from this Agreement, the Note, any other Loan Document
or otherwise, including without limitation contract disputes and tort
claims, shall be resolved by binding arbitration pursuant to the
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<PAGE>
Commercial Rules of the American Arbitration Association ("AAA"). Any
arbitration proceeding held pursuant to this arbitration provision
shall be conducted in Houston, Texas, or at any other place selected
by mutual agreement of the parties. No act to take or dispose of any
of the Mortgaged Property shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement.
This arbitration provision shall not limit the right of either party
during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or
otherwise, for the purposes of realizing upon, preserving, protecting,
foreclosing upon or proceeding under forcible entry and detainer for
possession of, any real or personal property, and any such action
shall not be deemed an election of remedies. Such remedies include,
without limitation, obtaining injunctive relief or a temporary
restraining order, invoking a power of sale under any deed of trust or
mortgage, obtaining a writ of attachment or imposition of a
receivership, or exercising any rights relating to personal property,
including exercising the right of set-off, or taking or disposing of
such property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims or controversies concerning the
lawfulness or reasonableness of an act, or exercise of any right or
remedy concerning any Mortgaged Property, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Mortgaged Property, shall also be arbitrated; provided, however that
no arbitrator shall have the right or the power to enjoin or restrain
any act of either party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines
which would otherwise be applicable in an action brought by a party
shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the
commencement of any action for these purposes. The Federal
Arbitration Act (Title 9 of the United States Code) shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
Section 15. JURY WAIVER. BORROWER AND LENDER HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER
BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG BORROWER AND
LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, THE
NOTE, ANY OTHER LOAN DOCUMENT, OR ANY RELATIONSHIP BETWEEN BORROWER
AND LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO
PROVIDE THE FINANCING DESCRIBED HEREIN AND TO MAKE THE AMENDMENTS
DESCRIBED IN THE THIRD AMENDMENT.
10. The closing of the transactions contemplated by this Third Amendment
is subject to the satisfaction of the following conditions:
(a) All legal matters incident to the transactions herein
contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs,
L.L.P., counsel to the Lender;
(b) The Lender shall have received fully executed copies of (i)
this Third Amendment, (ii) the Note, (iii) a Participation Agreement
relating to the sale of a
-5-
<PAGE>
participation in Tranche B to BOCP Energy Partners, L.P., and (iv) a
Notice of Final Agreement;
(c) The Lender shall have received an executed copy of
resolutions of the Board of Directors of Borrower, in form and
substance satisfactory to the Lender, authorizing the execution,
delivery and performance of this Third Amendment and all documents,
instruments and certificates referred to herein; and
(d) The Lender shall have received a certificate of the
Secretary of Borrower, setting forth the names of the officers of the
Borrower authorized to execute and deliver this Third Amendment and
all documents, instruments and certificates referred to herein,
together with the true signatures of such officers.
11. The Borrower hereby reaffirms each of the representations,
warranties, covenants and agreements of the Borrower set forth in the Loan
Agreement with the same force and effect as if each were separately stated
herein and made as of the date hereof. Except as amended hereby, the Loan
Agreement shall remain unchanged, and the terms, conditions and covenants of
the Loan Agreement shall continue and be binding upon the parties hereto.
There currently exist certain defaults under the Loan Agreement (the
"Existing Defaults"), and the Borrower has requested waivers with respect
thereto. The Lender is considering such request but has not yet granted it.
The Borrower and Guarantor acknowledge and agree that the Lender has not
waived or agreed to waive any of the Existing Defaults, that the Lender has
no obligation to do so and may refuse to do so in its discretion, and that
neither this Third Amendment, any of the transactions contemplated herein, or
any advance under the Credit Facility constitutes a waiver of any Existing
Defaults under the Loan Agreement, but Lender does hereby agree that, through
February 28, 1999, it will not accelerate the maturity of the Credit Facility
because of any Existing Default or foreclose any of its liens (or otherwise
exercise any of remedies against collateral) because of any Existing Default.
As an inducement to Lender's agreement in this Section 11, the Borrower
hereby represents and warrants to Lender that, to the best knowledge of the
Borrower, it has disclosed all Existing Defaults to Lender.
12. The Borrower hereby agrees that its liability under any and all
documents and instruments executed by the Borrower as security for the Credit
Facility (including, without limitation all mortgages, deeds of trust,
collateral assignments, assignments of production, security agreements and
financing statements executed by the Borrower for the benefit of the Lender)
shall not be reduced, altered, limited, lessened or in any way affected by
the execution and delivery of this Third Amendment or any of the instruments
or documents referred to herein, except as specifically set forth herein or
therein, that all of such documents and instruments are hereby renewed,
extended, ratified, confirmed and carried forward by the Borrower in all
respects, that all of such documents and instruments shall remain in full
force and effect and are and shall remain enforceable against the Borrower in
accordance with their terms and that all of such documents and instruments
shall cover all indebtedness of the Borrower to the Lender described in the
Loan Agreement as amended hereby.
13. As a material inducement to Lender's execution of this Third Amendment
and undertaking its obligations set forth herein, each of Borrower and Guarantor
hereby releases, acquits and forever discharges Lender and its affiliates,
successors, assigns, participants, directors, officers, agents, employees and
attorneys of and from any and all claims, actions, demands, causes of action,
defenses, costs and expenses of every kind and character whatsoever, whether
known or unknown, which Borrower, Guarantor or either of them may now or
hereafter have against Lender or such other persons, if any, regardless of
-6-
<PAGE>
whether any such claims, actions, demands, causes of action, defenses, costs
or expenses, arise out of contract, tort, misrepresentation, strict
liability, violation of laws or regulations or otherwise, and which arise, in
whole or in part, as a result of actions taken or omitted to be taken by
Lender, any of such other persons, or any other person prior to the execution
of this Third Amendment.
14. In a letter agreement of even date herewith among Borrower, Benz,
Calibre Energy, L.L.C., BOCP Energy Partners, L.P. and EnCap Energy Capital
Fund III, L.P., certain references are made to potential additional fundings
and other amendments to and under the Loan Agreement and the Credit Facility.
By its execution hereof, Borrower acknowledges that Lender is not a party to
such letter agreement, is not bound by any of the terms thereof, is not
obligated to take any action described therein or to take any other action
with respect to the Loan Agreement or the Credit Facility, and that any
additional funding or other amendment to or under the Loan Agreement or the
Credit Facility is subject to the approval of Lender, which approval Lender
is under no obligation to give.
15. Each of the terms defined in the Loan Agreement is used in this
Third Amendment with the same meaning, except as otherwise indicated in this
Third Amendment. Each of the terms defined in this Third Amendment is used
in the Loan Agreement with the same meaning, except as otherwise indicated in
the Loan Agreement.
16. THIS THIRD AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER,
SUBJECT TO, AND SHALL BE CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
17. THIS LOAN AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
TEXSTAR PETROLEUM, INC.
By: TODD GRABOIS
-----------------------------
Name: Todd Grabois
----------------------
Title: Vice President
---------------------
BANK ONE, TEXAS, N.A.
By: MICHELLE WALPERT
-----------------------------
Name: Michelle Walpert
----------------------
Title: V-P
---------------------
-7-
<PAGE>
The undersigned Guarantor joins in the execution of this Third Amendment
to evidence (1) that it hereby agrees and consents to all of the matters
contained in this Third Amendment and further agrees that (i) its liability
under that certain Guaranty Agreement dated July 17, 1997, executed by
Guarantor for the benefit of the Lender (the "Guaranty") shall not be
reduced, altered, limited, lessened or in any way affected by the execution
and delivery of this Third Amendment or any of the instruments or documents
referred to herein by the parties hereto, except as specifically set forth
herein or therein, (ii) the Guaranty is hereby renewed, extended, ratified,
confirmed and carried forward in all respects, (iii) the Guaranty is and
shall remain in full force and effect and is and shall remain enforceable
against Guarantor in accordance with its terms and (iv) the Guaranty shall
cover all indebtedness of the Borrower to the Lender described in the Loan
Agreement as amended hereby and (2) its agreement to be bound by the terms of
Section 13 of this Third Amendment.
BENZ ENERGY LTD.
By: TODD GRABOIS
------------------------------
Name: Todd Grabois
-----------------------
Title: Secretary
----------------------
-8-
<PAGE>
EXHIBIT "A"
PROMISSORY NOTE
$10,000,000.00 November ____, 1998
FOR VALUE RECEIVED, after date, without grace, in the manner, on the
dates and in the amounts so herein stipulated, the undersigned, TEXSTAR
PETROLEUM, INC., a Texas corporation ("Borrower"), PROMISES TO PAY TO THE
ORDER OF BANK ONE, TEXAS, N.A., a national banking association ("Lender"),
in Houston, Harris County, Texas, the sum of TEN MILLION AND NO/100 DOLLARS
($10,000,000.00) or, if less, the aggregate unpaid principal amount of
advances made by Lender to Borrower pursuant to this Promissory Note (this
"Note"), in lawful money of the United States of America, which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, and to pay interest on the advanced and unpaid principal amount from
date until maturity at the rate or rates ("Stated Rate") set forth in the
Loan Agreement (hereinafter defined), not to exceed the maximum non-usurious
interest rate permitted by applicable law from time to time in effect as such
law may be interpreted, amended, revised, supplemented or enacted ("Maximum
Rate"), provided that if at any time the Stated Rate exceeds the Maximum Rate
then interest hereon shall accrue at the Maximum Rate. In the event the
Stated Rate subsequently decreases to a level less than the Maximum Rate or
if the Maximum Rate applicable to this Note should subsequently be increased
to a level greater than the Stated Rate, then, in either case, interest
hereon shall thereafter accrue at a rate equal to the applicable Maximum Rate
until the aggregate amount of interest accrued through the term of this Note
equals the aggregate amount of interest which would have accrued at the
Stated Rate without regard to any usury limit, at which time interest hereon
shall again accrue at the Stated Rate,.
This Note is payable as follows:
1. Subject to the provisions of the Loan Agreement concerning
payment of interest with respect to Tranche B (as defined in the Loan
Agreement), accrued and unpaid interest shall be due and payable on the
first day of each month, commencing December 1, 1998.
2. Unless or to the extent not required pursuant to the provisions
of the Loan Agreement, a principal payment on Tranche A (as defined in
the Loan Agreement) in the amount of $1,500,000.00 shall be due and
payable on December 18, 1998.
3. All accrued and unpaid interest and unpaid principal shall be
due and payable on February 28, 1999.
- ----------
Initials
<PAGE>
All payments under this Note shall be applied in such order and manner as
Lender may from time to time determine in its sole discretion.
This Note is subject to mandatory prepayments, as set forth in the Loan
Agreement. In addition, Borrower may prepay this Note, in whole or in part,
at any time prior to maturity without penalty, and interest shall cease on
any amount prepaid.
Any check, draft, money order or other instrument given in payment of
all or any part hereof may be accepted by Lender and handled in collection in
a customary manner, but same shall not constitute payment hereof or diminish
any rights of Lender except to the extent that actual cash proceeds of such
instrument are unconditionally received by Lender.
It is agreed that time is of the essence of this agreement. In the event
of default in the payment of any installment of principal or interest when
due or in the event of any other default hereunder, Lender may accelerate and
declare this Note immediately due and payable without notice. Any failure to
exercise this option shall not constitute a waiver by Lender of the right to
exercise the same at any other time.
In the event of default in the making of any payment herein provided,
either of principal or interest, or in the event this Note is declared due,
interest hereunder shall accrue at the Maximum Rate.
Borrower hereby agrees to pay all expenses, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof,
incurred by Lender if this Note is placed in the hands of an attorney for
collection or if collected by suit or through any probate, bankruptcy or any
other legal proceedings.
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days the amounts are outstanding on the basis of a 365-day
or 366-day year, as is applicable.
It is expressly stipulated and agreed to be the intent of Borrower and
Lender to comply with applicable Texas law governing the maximum non-usurious
rate or amount of interest payable on or in connection with this Note (or
applicable United States federal law to the extent that it permits Lender to
contract for, charge, take, reserve or receive a greater amount of interest
than under Texas law). Accordingly, it is agreed that notwithstanding any
provision to the contrary in this Note, or in any of the documents securing
payment hereof or otherwise relating hereto, no such provision shall require
the payment or permit the collection of interest at a rate in excess of the
Maximum Rate. If any excess of interest in such respect is provided for, or
shall be judicially interpreted to be so provided for, in this Note or in any
of the documents securing payment hereof or otherwise relating hereto, or if
the acceleration of the maturity of this Note or any prepayment by Borrower
results in Borrower's having paid any interest in excess of that permitted by
applicable law, then in any such event, it is the express intent of Borrower
and Lender that (1) the provisions of this
- ----------
Initials -2-
<PAGE>
paragraph shall govern and control, (2) neither Borrower nor any other person
primarily liable on this Note, nor their respective heirs, legal
representatives, successors or assigns, shall be obligated to pay the amount
of such interest to the extent that it is in excess of the Maximum Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid amount hereof or refunded to Borrower, and (4)
the provisions of this Note and any documents securing payment of this Note
shall be automatically deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so that the effective rate of interest shall be reduced to the
Maximum Rate. For the purpose of determining the maximum amount of interest
permitted to be charged or collected hereunder, all sums paid or agreed to be
paid to Lender for the use, forbearance or detention of the proceeds of this
Note shall be amortized, prorated, allocated and spread throughout the full
term of this Note so that the rate or amount of interest on account of this
Note is uniform throughout the term hereof and does not exceed the applicable
usury ceiling.
Borrower agrees that the Maximum Rate to be charged or collected
pursuant to this Note shall be the applicable weekly ceiling as defined in
the Texas Finance Code, as supplemented and amended by art. 1D.003 of the
Texas Credit Title, provided that Lender may rely on other applicable laws,
including without limitation laws of the United States, for calculation of
the Maximum Rate if the application thereof results in a greater Maximum
Rate. Except as provided above, the provisions of this Note shall be governed
by the laws of the State of Texas.
Borrower and each other person who is a maker, surety, guarantor or
endorser of this Note hereby waives demand, grace, notice, presentment for
payment, notice of intention to accelerate the maturity hereof, notice of the
acceleration of the maturity hereof and protest, and agrees that this Note
and the liens securing its payment may be renewed, and the time of payment
extended, from time to time, without notice and without releasing any of the
foregoing. As additional security for all amounts owed by Borrower to Lender,
Borrower hereby grants to Lender a lien and security interest on (and the
express right of setoff against) any of Borrower's funds which may from time
to time be deposited with or in the possession of Lender.
The principal of this Note represents funds which Lender may advance to
Borrower, pursuant to and subject to the Loan Agreement, from time to time upon
request of Borrower. Any part of the principal advanced with respect to
Tranche A (as defined in the Loan Agreement) may be repaid by Borrower and
thereafter reborrowed, provided the outstanding principal amount of this Note
shall never exceed the face amount of this Note. Each advance shall
constitute a part of the principal hereof and shall bear interest from the
date of the advance. The provisions of Chapter 346 of the Texas Finance Code,
as the same may be amended, shall not apply to this Note or to any of the
Security Documents. No portion of Tranche B that is repaid may thereafter be
reborrowed.
This Note is given in renewal and extension of a Promissory Note dated
October 10, 1997, executed by Borrower, payable to the order of Lender, in
the original principal amount of
- ----------
Initials -3-
<PAGE>
$10,000,000.00, and the liens securing the payment of such note are not
released, but are hereby ratified and hereby carried forward to secure this
Note.
This Note is the Note referred to in, is subject to, and is entitled to
the benefits of and security afforded by the following documents (the
"Security Documents"):
(a) that certain letter loan agreement dated July 17, 1997
between Borrower and Lender, as amended by that certain First Amendment
to Letter Loan Agreement dated October 10, 1997 between Borrower and
Lender, by that certain Second Amendment to Letter Loan Agreement dated
October 10, 1997 between Borrower and Lender and by that certain Third
Amendment to Letter Loan Agreement of even date herewith between Borrower
and Lender (said letter loan agreement, as amended and as it may be
further amended, modified or supplemented from time to time, is referred
to herein as the "Loan Agreement");
(b) various mortgages and deeds of trust executed by Borrower and
others for the benefit of Lender and covering the Mortgaged Property (as
defined in the Loan Agreement); and
(c) that certain Guaranty Agreement dated July 17, 1997, executed
by Benz Energy Ltd. for the benefit of Lender.
This Note is subject to the provisions contained in the Security Documents
which, among other things, provide for the acceleration of the maturity
hereof upon the occurrence of certain events.
Borrower represents and warrants that this loan is for business,
commercial, investment of other similar purpose and not primarily for
personal, family, household or agricultural use.
TEXSTAR PETROLEUM, INC.
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
-4-
<PAGE>
FOURTH AMENDMENT TO LETTER LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LETTER LOAN AGREEMENT (this "Fourth Amendment")
is made and entered into as of the 16th day of December, 1998, by and between
TEXSTAR PETROLEUM, INC., a Texas corporation(the "Borrower"), and BANK ONE,
TEXAS, N.A., a national banking association (the "Lender").
WHEREAS, the Borrower and the Lender entered into that certain letter
loan agreement dated July 17, 1997, which letter loan agreement was amended
by that certain First Amendment to Letter Loan Agreement dated October 10,
1997 between Borrower and Lender, that certain Second Amendment to Loan
Agreement dated November 18, 1997 between Borrower and Lender and that
certain Third Amendment to Letter Loan Agreement dated November 4, 1998
between Borrower and Lender (as amended, the "Loan Agreement");
WHEREAS, the Borrower and the Lender desire to amend certain terms and
provisions of the Loan Agreement, as set forth herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. Section 1(a)(1) of the Loan Agreement is deleted in its entirety,
and the following is substituted in its place:
(1) MAXIMUM AVAILABILITY: The lesser of $7,000,000 and the
Borrowing Base (as defined in Section 5(c) hereof).
2. Section 1(b) of the Loan Agreement is deleted in its entirety, and
the following is substituted in its place:
(b) TRANCHE B:
(1) MAXIMUM AVAILABILITY: $4,500,000.
(2) ADVANCE PROCEDURES: At least three (3) Business Days
prior to the requested date of advance (other than the $1,000,000
advance made on the date hereof and the $1,500,000 advance to be
used to make the principal payment on Tranche A due on December 18,
1998), Borrower may make a written request to Lender for direct
advances pursuant to Tranche B, which request shall include a
detailed description of the proposed use of the proceeds of such
advance. If all participants with respect to Tranche B consent to
the making of such advance (to the extent required by the terms of
any applicable Participation Agreement), and all such participants
have fully
<PAGE>
paid for their participation, Lender will make the advance requested
by Borrower on the requested date.
(3) TERM: Through the Maturity Date.
(4) INTEREST RATE: Prime Rate plus eight percent (8%) per
annum (the "Tranche B Interest Rate"), not to exceed the Maximum
Rate.
3. Borrower and Lender acknowledge and agree that pursuant to a First
Amendment to Participation Agreement of even date herewith between Lender and
BOCP Energy Partners, L.P. ("Participant"), Participant is purchasing an
additional participation interest in Tranche B and in consideration thereof
is paying to Lender the sum of $1,000,000 on the date hereof and agreeing to
pay to Lender the sum of $1,500,000 on December 18, 1998. The $1,000,000
amount shall be disbursed to or at the direction of Borrower under Tranche B,
and the $1,500,000 amount shall be applied by Lender to the required
principal payment on Tranche A due December 18, 1998.
4. The closing of the transactions contemplated by this Fourth
Amendment is subject to the satisfaction of the following conditions:
(a) All legal matters incident to the transactions herein
contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs,
L.L.P., counsel to the Lender;
(b) The Lender shall have received fully executed copies of (i)
this Fourth Amendment, (ii) a First Amendment to Participation Agreement
relating to the sale of an additional participation in Tranche B to
Participant, and (iii) a Notice of Final Agreement;
(c) The Lender shall have received an executed copy of resolutions
of the Board of Directors of Borrower, in form and substance
satisfactory to the Lender, authorizing the execution, delivery and
performance of this Fourth Amendment and all documents, instruments and
certificates referred to herein; and
(d) The Lender shall have received a certificate of the Secretary
of Guarantor, certifying as to resolutions adopted by the Board of
Directors of Guarantor, in form and substance satisfactory to the Lender.
5. The Borrower hereby reaffirms each of the representations,
warranties, covenants and agreements of the Borrower set forth in the Loan
Agreement (including, without limitation the provisions dealing with
arbitration and jury waiver) with the same force and effect as if each were
separately stated herein and made as of the date hereof. Except as amended
hereby, the Loan Agreement shall remain unchanged, and the terms, conditions
and covenants of the Loan Agreement shall continue and be binding upon the
parties hereto. There currently exist certain defaults under the Loan
Agreement (the "Existing Defaults"), and the Borrower has requested waivers
with respect thereto. The Lender is considering such request but has not yet
granted it. The Borrower and
-2-
<PAGE>
Guarantor acknowledge and agree that the Lender has not waived or agreed to
waive any of the Existing Defaults, that the Lender has no obligation to do
so and may refuse to do so in its discretion, and that neither this Fourth
Amendment, any of the transactions contemplated herein, or any advance under
the Credit Facility constitutes a waiver of any Existing Defaults under the
Loan Agreement, but Lender does hereby agree that, through February 28, 1999,
it will not accelerate the maturity of the Credit Facility because of any
Existing Default or foreclose any of its liens (or otherwise exercise any of
remedies against collateral) because of any Existing Default. As an
inducement to Lender's agreement in this Section 4, the Borrower hereby
represents and warrants to Lender that, to the best knowledge of the
Borrower, it has disclosed all Existing Defaults to Lender.
6. The Borrower hereby agrees that its liability under any and all
documents and instruments executed by the Borrower as security for the Credit
Facility (including, without limitation all mortgages, deeds of trust,
collateral assignments, assignments of production, security agreements and
financing statements executed by the Borrower for the benefit of the Lender)
shall not be reduced, altered, limited, lessened or in any way affected by
the execution and delivery of this Fourth Amendment or any of the instruments
or documents referred to herein, except as specifically set forth herein or
therein, that all of such documents and instruments are hereby renewed,
extended, ratified, confirmed and carried forward by the Borrower in all
respects, that all of such documents and instruments shall remain in full
force and effect and are and shall remain enforceable against the Borrower in
accordance with their terms and that all of such documents and instruments
shall cover all indebtedness of the Borrower to the Lender described in the
Loan Agreement as amended hereby.
7. As a material inducement to Lender's execution of this Fourth
Amendment and undertaking its obligations set forth herein, each of Borrower
and Guarantor hereby releases, acquits and forever discharges Lender and its
affiliates, successors, assigns, participants, directors, officers, agents,
employees and attorneys of and from any and all claims, actions, demands,
causes of action, defenses, costs and expenses of every kind and character
whatsoever, whether known or unknown, which Borrower, Guarantor or either of
them may now or hereafter have against Lender or such other persons, if any,
regardless of whether any such claims, actions, demands, causes of action,
defenses, costs or expenses, arise out of contract, tort, misrepresentation,
strict liability, violation of laws or regulations or otherwise, and which
arise, in whole or in part, as a result of actions taken or omitted to be
taken by Lender, any of such other persons, or any other person prior to the
execution of this Fourth Amendment.
8. Each of the terms defined in the Loan Agreement is used in this
Fourth Amendment with the same meaning, except as otherwise indicated in this
Fourth Amendment. Each of the terms defined in this Fourth Amendment is used
in the Loan Agreement with the same meaning, except as otherwise indicated in
the Loan Agreement.
9. THIS FOURTH AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER,
SUBJECT TO, AND SHALL BE CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
-3-
<PAGE>
10. THIS LOAN AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
-------------------------------------
Name: Prentis B. Tomlinson, Jr.
-------------------------------
Title: Chairman and CEO
------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ Michelle Wolpert
-------------------------------------
Name: Michelle Wolpert
-------------------------------
Title: V-P
------------------------------
-4-
<PAGE>
The undersigned Guarantor joins in the execution of this Fourth
Amendment to evidence (1) that it hereby agrees and consents to all of the
matters contained in this Fourth Amendment and further agrees that (i) its
liability under that certain Guaranty Agreement dated July 17, 1997, executed
by Guarantor for the benefit of the Lender (the "Guaranty") shall not be
reduced, altered, limited, lessened or in any way affected by the execution
and delivery of this Fourth Amendment or any of the instruments or documents
referred to herein by the parties hereto, except as specifically set forth
herein or therein, (ii) the Guaranty is hereby renewed, extended, ratified,
confirmed and carried forward in all respects, (iii) the Guaranty is and
shall remain in full force and effect and is and shall remain enforceable
against Guarantor in accordance with its terms and (iv) the Guaranty shall
cover all indebtedness of the Borrower to the Lender described in the Loan
Agreement as amended hereby and (2) its agreement to be bound by the terms of
Section 6 of this Fourth Amendment.
BENZ ENERGY LTD.
By: /s/ Prentis B. Tomlinson, Jr.
-------------------------------------
Name: Prentis B. Tomlinson, Jr.
-------------------------------
Title: Chairman and CEO
------------------------------
-5-
<PAGE>
BANK ONE, TEXAS, N.A.
910 Travis
Houston, Texas 77002
PARTICIPATION AGREEMENT
November 4, 1998
BOCP Energy Partners, L.P.
150 E. Gay Street, 24th Floor
Colombus, Ohio 43215
Dear Sirs:
Bank One, Texas, N.A. ("Bank One") has entered into that certain
Letter Loan Agreement dated July 17, 1997 (as from time to time amended,
supplemented or restated, including by the herein defined Current Amendment,
the "Loan Agreement") with Texstar Petroleum, Inc., a Texas corporation
("Borrower"), pursuant to which Borrower executed that certain Promissory
Note of even date with the Current Amendment payable to the order of Bank One
in the original principal amount of $10,000,000 (the "Note"). As of the date
hereof, the aggregate unpaid amount of all outstanding principal advances
under the Loan Agreement is $3,201,224.60 (the "Outstanding Advances"). Bank
One has submitted to BOCP Energy Partners, L.P. ("Participant") copies of the
Loan Agreement and the Note (both the original documents and all amendments
and supplements thereto, including that certain Third Amendment to Letter
Loan Agreement of even date herewith, which is herein called the "Current
Amendment"). Reference is made to such instruments for descriptions of the
rights and obligations of Borrower and Bank One thereunder, for definitions
of terms used therein and herein and for all other terms and conditions of
the Loan Agreement and all loans and advances thereunder (collectively, the
"Loan"). The Current Amendment, among other things, creates a Tranche A
("Tranche A") and a Tranche B ("Tranche B") under the Loan Agreement.
References in this Participation Agreement to Participant's "pro rata" share
in the Loan or "pro rata share" of a designated sum or amount shall refer to
that percentage of the Loan or of such sum or amount which is the same as the
percentage determined by dividing (i) the amount of the unpaid principal
balance of Tranche B, at the time in question, by (ii) the entire unpaid
principal balance of the Loan at such time.
This Participation Agreement will evidence and confirm the arrangement
between Bank One and Participant whereby Bank One will allot and sell, and
Participant will take and purchase, a 100% participation in Tranche B under
the Loan Agreement and the related payment rights under the Note. Such
participation (herein called the "Participation") is allotted and sold to,
and is taken and purchased by, Participant for its own account and risk, on
the following terms:
Section 1. ADVANCES. Bank One has heretofore made, or immediately
after execution of this Participation Agreement will make, an advance under
Tranche B to Borrower in the principal
<PAGE>
BOCP Energy Partners, L.P.
November 4, 1998
Page 2
amount of $2,000,000, the making of which advance is hereby consented to and
approved by Participant in all respects. In consideration of such advance
under Tranche B, Participant will, on the date hereof, cause immediately
available funds in the amount of such principal amount to be transferred to
an account at Bank One designated by Bank One.
Section 2. "LAST-OUT" PARTICIPATION. Whenever Bank One collects or
receives money on account of the obligations owing under the Note or the Loan
Agreement, whether purportedly with respect to Tranche A, Tranche B or
otherwise, Bank One shall distribute all money so collected or received, and
Bank One and Participant shall apply all such money so distributed, as
follows:
(a) first, for the payment to Bank One for all costs, expenses and
disbursements incurred by Bank One which are owing pursuant to the Loan
Agreement or any other document or instrument executed in connection
therewith or as security therefor;
(b) then for the payment of any interest due and owing under the Note
with respect to Tranche A;
(c) then for the payment or prepayment of principal and any other
interest or other amounts owing under the Note with respect to Tranche A;
and
(d) then for the payment of any interest due and owing under the Note
with respect to Tranche B;
(e) last (upon the payment in full of all principal, interest and
other amounts owing under the Note with respect to Tranche A) for the
payment of principal and any other interest or other amounts owing under
the Note with respect to Tranche B.
To the extent that Bank One has received good funds therefor from Borrower,
Bank One will promptly credit to Participant's account with Bank One, or will
promptly credit to Participant's account with any bank previously designated
by Participant in writing delivered to Bank One, any such interest, principal
or other amounts to which Participant is entitled hereunder.
Section 3. SPECIAL INTEREST PROVISIONS FOR TRANCHE B. Bank One and
Participant acknowledge and agree that (a) interest accrues on the portion of
the principal balance of the Note represented by Tranche B at a rate that is
greater than the rate applicable to Tranche A, and (b) Borrower, with the
consent of Participant, has the option to defer payment of such interest
until the maturity of the Note.
<PAGE>
BOCP Energy Partners, L.P.
November 4, 1998
Page 3
Section 4. BANK ONE'S LIMITED RESPONSIBILITY TO PARTICIPANT. Bank
One makes no representation or warranty and shall have no responsibility with
respect to the validity or enforceability of any of the Loan Documents, any
engineering data relating to properties of Borrower or its affiliates, their
financial condition or performance of their obligations under the Loan
Documents, or the collectibility of the Note. In the making and handling of
the Loan and any security therefor Bank One will exercise the same care that
it exercises in the making and handling of loans and security for its own
account, but no further responsibility is assumed by Bank One in connection
therewith.
Section 5. PARTICIPANT'S INDEPENDENT CREDIT DECISIONS. Participant
acknowledges that it has made its own credit decision, examination,
engineering evaluation and review with respect to the Loan, the Loan
Documents and the validity, effectiveness, enforceability, genuineness and
value of the Loan Documents, and that Participant has not relied on Bank One
with respect to any thereof. Participant represents to Bank One that
Participant shall make its own credit decisions, examinations, engineering
evaluations and reviews with respect to all future decisions involving the
Loan and the Loan Documents and agrees that Bank One shall have no
responsibility with respect thereto.
Section 6. REPORTS. Upon request by Participant, Bank One will
send to Participant copies of any reports or information furnished to Bank
One pursuant to the Loan Documents.
Section 7. LIABILITIES AND EXPENSES. Participant shall pay to Bank
One on demand Participant's pro rata share, at the time of incurrence by Bank
One, of all liabilities (other than obligations to make advances and
liabilities under participation agreements) and costs, expenses and
disbursements incurred by Bank One in connection with the Loan or under any
of the Loan Documents or in connection with any action which may be taken by
Bank One to collect the Note or any other sums owing under any of the Loan
Documents, to the extent such liabilities, costs, expenses or disbursements,
or reimbursements therefor, are not paid to Bank One by Borrower or on
Borrower's behalf. If Participant shall make a pro rata payment to Bank One
pursuant to this section for which Bank One is later reimbursed, in whole or
in part, by or on behalf of Borrower, Bank One shall return to Participant
Participant's proportionate share of such reimbursement.
Section 8. ASSIGNMENTS AND SUBPARTICIPATIONS. The Participation
may not be transferred by Participant in whole or in part without the prior
written consent of Bank One, and then only if the transferee accepts the
conditions and assumes the obligations of Participant with respect to the
Participation as contained in this Participation Agreement. Unless the
entirety of the Participation is so transferred with Bank One's prior written
consent, Bank One shall have no obligation or responsibility to any purported
transferee and may treat Participant as the absolute owner of the
Participation for the purpose of receiving payment and for all other purposes
and
<PAGE>
BOCP Energy Partners, L.P.
November 4, 1998
Page 4
Bank One shall not be affected by any notice to the contrary. Participant
may sell subparticipations in the Participation, but Bank One shall in all
cases have no obligation or responsibility to any subparticipant and may
treat Participant as the absolute owner of the Participation for the purpose
of receiving payment and for all other purposes and Bank One shall not be
affected by any notice to the contrary. All payments made to Participant
shall be valid and effectual to satisfy and discharge Bank One's liability to
the extent of the sum or sums so paid.
Section 9. RIGHTS OF BANK ONE. Nothing contained in this
Participation Agreement shall prohibit or limit the making of any further
advance by Bank One to or for the benefit of Borrower, whether under Tranche
A or otherwise. It is further understood and agreed that nothing contained
herein shall prohibit or limit the rights of Bank One under the Loan
Agreement and the other Loan Documents to do any or all of the following,
none of which shall require the consent of Participant: (i) declare an event
of default under the Loan Agreement; (ii) accelerate the maturity of the
Note; (iii) take any action with respect to the obligations owed to it under
any guaranty agreement or any other Loan Document, including without
limitation any Loan Document executed as security for the Note or any other
indebtedness evidenced by any Loan Document; (iv) change the date on which
any payment under the Note or any other Loan Document is due; (v) waive any
default under any Loan Document; or (vi) bring suit against or take any other
action Borrower or any guarantor for enforcement of the rights of Bank One
under the Loan Documents ; provided, however, that Bank One will not, without
Participant's prior written consent: (a) release any material amount of
collateral at any time securing the Note, or (b) agree to any reduction in
the amounts payable under the Note, whether for principal or interest or
otherwise.
Section 10. SUBORDINATION. Participant agrees that its rights to
receive payments hereunder are subordinate to the rights of Bank One under
Section 2 above to retain all payments by Borrower of indebtedness owing
under the Loan Documents, as the same may be amended or modified from time to
time, until all such indebtedness (other than Tranche B and interest or other
amounts accruing in respect of Tranche B) has been paid in full. This
subordination applies, among other things, to any distribution of the assets
or readjustment of the indebtedness of Borrower, whether by reason of
liquidation, composition, bankruptcy, arrangement, receivership, assignment
for the benefit of creditors or any action or proceeding involving a
readjustment of any of the indebtedness of Borrower, or the application of
the assets of Borrower to the payment or liquidation thereof.
Section 11. BANK ONE NOT A FIDUCIARY. Nothing contained in this
Participation Agreement shall be deemed to make Bank One a fiduciary of
Participant, a partner or venturer of Participant, or to have any
relationship with Participant other than that of a seller and a purchaser of
a participation in a loan.
<PAGE>
BOCP Energy Partners, L.P.
November 4, 1998
Page 5
Section 12. ARBITRATION AND JURY WAIVER.
(a) Bank One and Participant agree that upon the written demand of
either party, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding,
all disputes, claims and controversies between them, whether individual,
joint, or class in nature, arising from this Participation Agreement, any
Loan Document or otherwise, including without limitation contract disputes
and tort claims, shall be resolved by binding arbitration pursuant to the
Commercial Rules of the American Arbitration Association ("AAA"). Any
arbitration proceeding held pursuant to this arbitration provision shall be
conducted in Houston, Texas, or at any other place selected by mutual
agreement of the parties. This arbitration provision shall not limit the
right of either party during any dispute, claim or controversy to seek, use,
and employ ancillary, or preliminary rights and/or remedies, judicial or
otherwise, and any such action shall not be deemed an election of remedies.
Judgment upon any award rendered by any arbitrator may be entered in any
court having jurisdiction. The statute of limitations, estoppel, waiver,
laches and similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement of
any action for these purposes. The Federal Arbitration Act (Title 9 of the
United States Code) shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
(b) PARTICIPANT AND BANK ONE HEREBY VOLUNTARILY, KNOWINGLY
IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE)
BETWEEN OR AMONG PARTICIPANT AND BANK ONE ARISING OUT OF OR IN ANY WAY
RELATED TO THIS PARTICIPATION AGREEMENT, ANY LOAN DOCUMENT, OR ANY
RELATIONSHIP BETWEEN PARTICIPANT AND BANK ONE.
Section 13. DEFAULT BY PARTICIPANT. In the event Participant fails
to timely pay to Bank One any amount required to be made available by
Participant hereunder, or upon the breach by Participant of any of its other
obligations hereunder, Participant shall be liable to Bank One for all such
amounts advanced hereunder by Bank One which Participant does not pay to Bank
One, together with interest thereon at the "Prime Rate" referred to in the
Loan Agreement from the date so advanced by Bank One until repaid, and all
amounts payable with respect to the Note and other Loan Documents (whether
with respect to or allocable to Tranche A, Tranche B or otherwise) shall be
paid to and retained by Bank One until all such obligations of Participant to
Bank One have been satisfied and no default by Participant exists hereunder.
Once all obligations of Participant to Bank One shall have been satisfied, so
that no default by Participant exists hereunder, Participant shall be
entitled to receive all amounts payable hereunder with respect to its
interest described herein, subject to its continued compliance with the terms
hereof.
<PAGE>
BOCP Energy Partners, L.P.
November 4, 1998
Page 6
Participant is requested to indicate its acceptance of the
Participation, upon the terms hereinabove set forth, by executing and
returning to Bank One one counterpart of this Participation Agreement.
Yours truly,
BANK ONE, TEXAS, N.A.
By:
--------------------------------------
Name:
Title:
The undersigned Participant hereby accepts, takes and purchases, as of
the date first set out above, the Participation described in the foregoing
Participation Agreement and accepts and agrees to the terms and conditions
contained therein.
BOCP ENERGY PARTNERS, L.P.
By:
--------------------------------------
Name:
Title:
Borrower hereby acknowledges receipt of a copy of the foregoing
Participation Agreement and agrees to the terms thereof.
TEXSTAR PETROLEUM, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
TEXSTAR PETROLEUM, INC.
BENZ ENERGY LTD.
CALIBRE ENERGY, L.L.C.
November 4, 1998
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
1100 Louisiana Street, Suite 3150
Houston, Texas 77002
Gentlemen:
In this letter the following terms have the following definitions:
"Bank One" means Bank One, Texas, National Association.
"Bank One Credit Facility" means the loan facility extended by Bank
One to Borrower under the Bank One Loan Agreement.
"Bank One Loan Agreement" means that certain Loan Agreement dated
as of July 17, 1997, between Borrower and Bank One, as from time to time
amended or supplemented (including without limitation, as amended
concurrently herewith).
"Benz" means Benz Energy Ltd., a corporation existing under the
laws of the Yukon Territory, Canada.
"Benz Entities" means Borrower, the Guarantors/Shareholders, and
all of their respective past or present shareholders, members, partners,
officers, directors, employees, attorneys, agents, representatives,
subsidiaries, parents, investors, participants, successors, assigns, and
affiliates or associated entities of whatever kind.
"BOCP" means BOCP Energy Partners, L.P.
"Borrower" means Texstar Petroleum, Inc., a Texas corporation.
"Calibre" means Calibre Energy, L.L.C., a Texas limited liability
company.
"Collateral" means all collateral or security given by Borrower or
any Guarantor/Shareholder under any of the Loan Documents to secure the
payment or performance of any indebtedness or obligations owing by
Borrower or any Guarantor/Shareholder under any of the Loan Documents.
"EnCap III LP" means EnCap Energy Capital Fund III, L.P.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 2
"EnCap Credit Agreement" means that certain Credit Agreement made
as of October 9, 1997, as from time to time amended or supplemented, by
and among Borrower, as borrower, Benz and Calibre, as guarantors, and
EnCap III LP, as lender.
"Guarantors/Shareholders" means Benz, Calibre, Benz Properties
Ltd., Prentis B. Tomlinson, Jr., individually, Texstar Holdings, L..L.C.
(f/ka Texstar Petroleum, L.L.C.), Prentis B. Tomlinson, Jr., Trustee of
and on behalf of The Slattery Trust, Prentis B. Tomlinson, Jr., Trustee
of and on behalf of The Ruston Trust, Prentis B. Tomlinson, Jr., Trustee
of and on behalf of The Houston Trust and Heather J. Tomlinson, Trustee
of and on behalf of The Starbucks Trust.
"Investor Entities" means BOCP, EnCap III LP, Bank One, and all of
their respective past or present members, partners, shareholders,
officers, directors, employees, attorneys, agents, representatives,
subsidiaries, parents, investors, participants, successors, assigns, and
affiliates or associated entities of whatever kind.
"Loan Documents" means all "Loan Documents" as defined in the EnCap
Credit Agreements, all "Loan Documents" as defined in the Bank One Loan
Agreement, and all other documents or instruments at any time given or
entered into by Borrower or any Guarantor/Shareholder in connection with
any of the foregoing.
"Oakvale Success" means the occurrence of all of the following: (a)
one or both of the Oakvale Wells is drilled to the base of the H-6 sand
in the Hosston formation, (b) either or both of the Oakvale Wells so
drilled is completed as a producer in one or more new zones not
currently being produced from Borrower's Byrd No. 1 Well, and (c) Ryder
Scott Company assigns at least 9.5 billion cubic feet of new proved
producing reserves of natural gas to Borrower's net revenue interests in
either (or both, collectively) of such completed Oakvale Wells.
"Oakvale Wells" means (a) Borrower's well named the "Howell
Petroleum 32-4 No. 1" that, as of October 26, 1998, is being drilled on
Borrower's Howell Petroleum Co. lease in Jefferson Davis County,
Mississippi, and (b) Borrower's well named the "Fortenberry 32-13 No. 1"
that, as of October 26, 1998, is being drilled on Borrower's Fortenberry
lease in Jefferson Davis County, Mississippi.
"Released Claims" means any and all claims, demands, and causes of
action of whatever kind or character which any Benz Entity has, or may
have in the future, based on any actions, failures to act, or events
that have occurred prior to the effective date hereof, which in any way
relate to or are based upon any of the following: (1) the EnCap Credit
Agreement or any other Loan Document, (2) the making of any loans or
advances
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 3
thereunder or the failure or refusal to make any loans or advances
thereunder, (3) any actual, claimed, threatened, or alleged exercise by
any Investor Entity of any of its rights or remedies under or in
connection with the EnCap Credit Agreement, any of the other Loan
Documents, or any Collateral, (4) any other transactions of any kind
among any of the Benz Entities and any of the Investor Entities, or (5)
any actual or alleged negotiations, discussions, representations,
warranties, promises, or other undertakings by any Investor Entity in
connection with any of the foregoing; provided that the "Released
Claims" shall not include any rights of Benz under Articles VII, XI, XII
and XVIII of that certain Purchase and Sale Agreement dated January 23,
1998, by and between Lasco Energy Partners, L.P., as seller, and Benz,
as buyer.
"Standstill Period" means the period from the date hereof through
and including February 28, 1999.
"Warrants" means all of those Stock Purchase Warrants issued by
Benz to EnCap III LP, to BOCP, to EnCap Energy Capital Fund-B, L.P., and
to Energy Capital Investment Company PLC on or before the date hereof.
Borrower and Benz desire to increase the amount available for borrowing
under the Bank One Credit Facility by $2,000,000 and, to that end, have
requested BOCP to purchase a $2,000,000 participation in the Bank One Credit
Facility. Borrower and Benz have also requested that in the event Borrower
fails to pay any portion of the $1,500,000 prepayment due under the Bank One
Credit Facility on December 18, 1998, BOCP purchase on such date an
additional participation in the Bank One Credit Facility in an amount equal
to that portion of such prepayment not made on such date, such participation
not to exceed $1,500,000. Borrower, Calibre and Benz have also requested
EnCap III LP to extend the maturity of the EnCap Credit Agreement until the
end of the Standstill Period. In order to induce BOCP and EnCap III LP to do
so, and in consideration of such purchase by BOCP and of the covenants and
agreements set out below, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower, the
Guarantors/Shareholders, BOCP and EnCap III LP hereby agree as follows for
the benefit of each other and for the benefit of each of the Investor
Entities:
1. BOCP hereby agrees to purchase a $2,000,000 participation interest in
the Bank One Credit Facility on the terms set out in the participation
agreement attached hereto as Annex C, provided that (a) Borrower and
Bank One concurrently enter into a Third Amendment to Letter Loan
Agreement in the form attached as Annex D hereto and (b) Borrower
satisfies the conditions set out in paragraph 10 of such Third
Amendment. BOCP hereby further agrees that in the event Borrower fails
to pay any portion of the $1,500,000 prepayment due under the Bank One
Credit Facility on December 18, 1998,
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 4
BOCP shall on such date purchase an additional participation in the Bank
One Credit Facility in an amount equal to that portion of such
prepayment not made on or prior to such date, such participation not to
exceed $1,500,000, on the same terms set out in the participation
agreement attached hereto as Annex C, PROVIDED that (i) such
participation shall not increase the outstanding indebtedness under the
Bank One Credit Facility and (ii) no default exists under the EnCap
Credit Agreement as of such date, other than (a) the Disclosed Defaults
(as defined below), (b) a Default or Event of Default under Section
8.1(g) of the EnCap Credit Agreement, so long as neither Bank One nor
any other Person has taken any action or otherwise commenced the
enforcement of any obligation or the exercise of any remedy with respect
to any obligation as a result of such underlying failure constituting
such Default or Event of Default under such Section 8.1(g), (c) the
creation or assumption of any statutory Liens for taxes, statutory
mechanics' and materialmen's Liens in violation of Section 7.3(c)
securing Indebtedness not in excess of $100,000 individually or $250,000
in the aggregate, other than Indebtedness owing to 3-D Directional
Drilling Inc., Neighbors Drilling USA, Inc. or Scientific Drilling
International, Inc., in which case such Liens shall secure Indebtedness
not in excess of $400,000 individually or in the aggregate, (d) the
failure of an Oakvale Success to occur on or prior to such date.
2. EnCap III LP, Borrower, Benz and Calibre hereby amend Section 1.1 of the
EnCap Credit Agreement to replace the definition of "Maturity Date" in
the EnCap Credit Agreement with the following new definition:
"MATURITY DATE" MEANS FEBRUARY 28, 1999.
The Guarantors/Shareholders hereby consent to such amendment.
3. Borrower has notified EnCap III LP of certain specified defaults that
presently exist under the EnCap Credit Agreement (the "Disclosed
Defaults") and has requested waivers with respect thereto. EnCap III LP
has not waived or agreed to waive any of the Disclosed Defaults (nor
does it have any obligation to do so), but EnCap III LP does hereby
agree that, during the Standstill Period, it will not accelerate the
maturity of the loans outstanding under the EnCap Credit Agreement
because of any Disclosed Default or foreclose any of its liens (or
otherwise exercise any of its remedies against collateral) because of
any Disclosed Default.
4. Borrower and the Guarantors/Shareholders -- on behalf of themselves and, to
the extent they are permitted by law or are otherwise expressly authorized
to do so, on behalf of all other Benz Entities -- hereby ratify and
confirm each of the Loan Documents in all respects, waive any defenses,
set-offs or counterclaims with respect to the Loan
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 5
Documents or any of the indebtedness thereunder, and ratify and confirm
all liens and security interests with respect to the Collateral
heretofore given by any of them to or for the benefit of any Investor
Entity. Borrower and the Guarantors/Shareholders hereby agree not to
challenge the validity, priority or enforceability of the Loan Documents
or of any liens or security interests at any time given to any Investor
Entity with respect to any Collateral.
5. The Bank One Loan Agreement provides that Borrower may, with BOCP's
consent, defer interest on "Tranche B" thereunder until the maturity of
the Bank One Credit Facility. BOCP hereby agrees to give its consent to
such deferral (in the form attached hereto as Annex A) whenever
requested by Borrower, provided that Benz first executes and delivers to
EnCap III LP an amendment to the Warrants in the form attached hereto as
Annex B, together with a copy (certified by Benz's Secretary) of
resolutions of Benz's Board of Directors expressly authorizing such
amendment.
6. BORROWER AND THE GUARANTORS/SHAREHOLDERS -- ON BEHALF OF THEMSELVES AND,
TO THE EXTENT THEY ARE PERMITTED BY LAW OR ARE OTHERWISE EXPRESSLY
AUTHORIZED TO DO SO, ON BEHALF OF ALL OTHER BENZ ENTITIES -- HEREBY
GENERALLY RELEASE AND FOREVER DISCHARGE THE INVESTOR ENTITIES FROM ANY
AND ALL RELEASED CLAIMS. THIS RELEASE IS TO BE CONSTRUED AS THE
BROADEST TYPE OF GENERAL RELEASE AND COVERS AND RELEASES ANY AND ALL
RELEASED CLAIMS, WHETHER KNOWN OR UNKNOWN AND HOWEVER OR WHENEVER
ARISING, WHETHER BY CONTRACT OR AGREEMENT, AT LAW OR UNDER ANY STATUTE
(INCLUDING WITHOUT LIMITATION ANY LAW OR STATUTE PERTAINING TO
NEGLIGENCE, GROSS NEGLIGENCE, STRICT LIABILITY, FRAUD, DECEPTIVE TRADE
PRACTICES, NEGLIGENT MISREPRESENTATION, SECURITIES VIOLATIONS, BREACH OF
FIDUCIARY DUTY, BREACH OF CONTRACT, TRADE REGULATION, REGULATION OF
BUSINESS OR COMPETITION, CONSPIRACY OR RACKETEERING), OR OTHERWISE
ARISING, AND EXPRESSLY INCLUDING ANY CLAIMS FOR PUNITIVE OR EXEMPLARY
DAMAGES, ATTORNEYS' FEES, OR PENALTIES. TO THE EXTENT THAT ANY RELEASED
CLAIMS WITH RESPECT TO ANY INVESTOR ENTITY HAVE NOT BEEN RELEASED BY
THIS LETTER AGREEMENT,
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 6
BORROWER AND THE GUARANTORS/SHAREHOLDERS HEREBY ASSIGN SUCH RELEASED
CLAIMS TO SUCH INVESTOR ENTITY.
7. Borrower, the Guarantors/Shareholders, BOCP and EnCap III LP agree that
upon the written demand of any party, whether made before or after the
institution of any legal proceedings, but prior to the rendering of any
judgment in that proceeding, all disputes, claims and controversies
between any of them, whether individual, joint, or class in nature,
arising from any Loan Document or otherwise, including without
limitation contract disputes and tort claims, shall be resolved by
binding arbitration pursuant to the Commercial Rules of the American
Arbitration Association ("AAA"). Any arbitration proceeding held
pursuant to this arbitration provision shall be conducted in Houston,
Texas, or at any other place selected by mutual agreement of the
parties. This arbitration provision shall not limit the right of any
party during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or otherwise,
and any such action shall not be deemed an election of remedies. Such
remedies include, without limitation, obtaining injunctive relief or a
temporary restraining order, invoking a power of sale under any deed or
trust or mortgage, obtaining a writ of attachment or imposition of a
receivership, or exercising any rights relating to personal property,
including exercising the right of set-off, or taking or disposing of
such property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims or controversies concerning the
lawfulness or reasonableness of an act, or exercise of any right or
remedy concerning any mortgaged property, including any claim to
rescind, reform, or otherwise modify any agreement relating to any
mortgaged property, shall also be arbitrated, provided, however, that no
arbitrator shall have the right or the power to enjoin or restrain any
act of any party. Judgment upon any award rendered by any arbitrator
may be entered in any court having jurisdiction. The statute of
limitations, estoppel, waiver, laches and similar doctrines which would
otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of any action
for these purposes. The Federal Arbitration Act (Title 9 of the United
States Code) shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
8. EACH OF BORROWER, THE GUARANTORS/SHAREHOLDERS, ENCAP III LP AND BOCP
HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES AND
RELEASES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER ANY "SPECIAL DAMAGES", AS DEFINED BELOW, FROM
ANY OTHER PARTY HERETO IN RESPECT OF ANY
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 7
LITIGATION (INCLUDING ARBITRATION PROCEEDINGS) BASED ON, OR DIRECTLY OR
INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH, ANY
ACTIONS, FAILURES TO ACT, OR EVENTS AT ANY TIME OCCURRING (WHETHER
BEFORE, AT OR AFTER THE EFFECTIVE DATE HEREOF) WHICH IN ANY WAY RELATE
TO OR ARE BASED UPON ANY OF THE FOLLOWING: (1) THE ENCAP CREDIT
AGREEMENT OR ANY OTHER LOAN DOCUMENT, (2) THE MAKING OF ANY LOANS OR
ADVANCES THEREUNDER OR THE FAILURE OR REFUSAL TO MAKE ANY LOANS OR
ADVANCES THEREUNDER, (3) ANY ACTUAL, CLAIMED, THREATENED, OR ALLEGED
EXERCISE BY ANY INVESTOR ENTITY OF ANY OF ITS RIGHTS OR REMEDIES UNDER
OR IN CONNECTION WITH THE ENCAP CREDIT AGREEMENT, ANY OF THE OTHER LOAN
DOCUMENTS, OR ANY COLLATERAL, (4) ANY OTHER TRANSACTIONS OF ANY KIND
AMONG ANY OF THE BENZ ENTITIES AND ANY OF THE INVESTOR ENTITIES, OR (5)
ANY ACTUAL OR ALLEGED NEGOTIATIONS, DISCUSSIONS, REPRESENTATIONS,
WARRANTIES, PROMISES, OR OTHER UNDERTAKINGS BY ANY PARTY HERETO IN
CONNECTION WITH ANY OF THE FOREGOING. AS USED IN THIS LETTER "SPECIAL
DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE
DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR
FUNDS WHICH ANY PARTY HERETO HAS IN ANY LOAN DOCUMENT OR OTHER DOCUMENT,
SECURITY OR INSTRUMENT EXPRESSLY PROMISED TO PAY OR DELIVER.
9. EACH OF BORROWER, THE GUARANTORS/SHAREHOLDERS, ENCAP III LP AND BOCP
HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES, TO
THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR DIRECTLY OR
INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE
LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED
THEREWITH, BEFORE OR
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 8
AFTER MATURITY, AND CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE WAIVERS IN THIS PARAGRAPH AND
THE FOREGOING PARAGRAPH, AND ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO
ENTER INTO THIS LETTER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY BY, AMONG OTHER THINGS, THE ARBITRATION PROVISIONS, MUTUAL
WAIVERS, AND CERTIFICATIONS CONTAINED IN THIS PARAGRAPH AND THE TWO
PRECEDING PARAGRAPHS.
10. Borrower and the Guarantors/Shareholders hereby represent and warrant to
BOCP and EnCap III LP that this letter agreement has been duly
authorized in all respects, does not conflict with any obligation or
duty owed by any of them, and is enforceable in accordance with its
terms.
11. Borrower has requested BOCP to increase its participation interest in
the Bank One Credit Facility from $2,000,000 to as much as $6,000,000,
allowing Bank One to increase its advances thereunder by up to
$4,000,000. From an economic perspective -- assuming that Borrower and
BOCP can, using commercially reasonable criteria, agree upon the
expenditures to be made with such new funds, that an Oakvale Success
occurs, and that Borrower is successful in reducing its general and
administrative expenses and its expenditures for seismic and leasing
activities -- BOCP is willing to make reasonable efforts to do so,
provided that the consent and cooperation of Bank One can be obtained,
that appropriate documentation can be completed to evidence such
additional participation and advances, that the relevant persons
(including Borrower and BOCP) can agree upon how to deal with the "NPI
Conveyances" referred to in the EnCap Credit Agreement, and that
appropriate arrangements are made with respect to Benz's corporate
governance following the end of the Standstill Period, all to the
satisfaction of Borrower and BOCP. Borrower and BOCP agree to work
together after the execution of this letter to try to quickly resolve
the foregoing issues and complete such documentation to the satisfaction
of each, but all of the parties hereto understand and agree that neither
Borrower nor BOCP shall have any liability as a result of any failure to
resolve such issues or to complete such documentation.
12. As an alternative to the participation described in the preceding
paragraph, Borrower has requested EnCap III LP to advance additional
funds of up to $4,000,000 to Borrower
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 9
during the Standstill Period. From an economic perspective -- assuming
that Borrower and EnCap III LP can, using commercial reasonable
criteria, agree upon the expenditures to be made with such new funds,
that an Oakvale Success occurs, and that Borrower is successful in
reducing its general and administrative expenses and its expenditures
for seismic and leasing activities - EnCap III LP is willing to make
reasonable efforts to do so, provided that certain issues can first be
resolved. These issues are obtaining the consent and cooperation of
Bank One and the holders of certain debentures and notes issued by Benz,
confirmation to EnCap III LP's satisfaction that such advances will be
secured with the same priority as the indebtedness presently outstanding
under the EnCap Credit Agreement, the completion of appropriate
documentation to evidence such advances, with terms and conditions
substantially the same as the EnCap Credit Agreement and otherwise
reasonably satisfactory to both EnCap III LP and Borrower, agreement by
all relevant persons (including Borrower and EnCap III LP) upon how to
deal with the "NPI Conveyances" referred to in the EnCap Credit
Agreement, and the making of appropriate arrangements with respect to
Benz's corporate governance following the end of the Standstill Period,
all to the satisfaction of Borrower and EnCap III LP. Borrower and
EnCap III LP agree to work together after the execution of this letter
to try to quickly resolve the foregoing issues and complete such
documentation to the satisfaction of each, but all of the parties hereto
understand and agree that neither Borrower nor EnCap III LP shall have
any liability as a result of any failure to resolve such issues or to
complete such documentation.
13. Benz has informed EnCap III LP and BOCP that Benz is interested in
obtaining long term funding for its drilling prospects and operations
through a merger or similar combination with another oil and gas company
and that Benz has begun informal discussions of such a merger with at
least one other company. Benz agrees to keep EnCap III LP and BOCP
informed about any such merger discussions and about the terms thereof,
including without limitation any post-closing price adjustments that
Benz may choose to negotiate, and EnCap III LP and BOCP agree not to
discuss such a merger of Benz with any third parties unless Benz has
been notified that discussions with such third party may occur. All
parties hereto understand and agree that the ultimate decision about
whether or not to proceed with any such merger or combination, and about
the terms thereof, will be made by Benz's board of directors and
shareholders.
14. Borrower hereby agrees to provide to EnCap III LP and to Bank One,
within five business days after the end of every two-week period,
schedules showing all of its accounts payable (in any categories) at the
end of such period and all payments made on its accounts payable during
such period. The first such report shall be due on November 20, 1998
with respect to the two-week ending November 13, 1998. Borrower also
agrees to provide to EnCap III LP and to Bank One, within fifteen days
after the end of every calendar month, a schedule showing all of its
accounts receivable (in any categories) at
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 10
the end of such month. The first such report shall be due on December 15,
1998 with respect to the month of November 1998.
15. This letter agreement shall be governed by and construed under the laws
of the State of Texas and of the United States of America. This letter
agreement may be executed in multiple counterparts and by the different
parties hereto in separate counterparts, all of which shall constitute
one and the same agreement. This letter agreement shall take effect
upon its execution by all parties hereto.
Please execute a counterpart of this letter in the space provided below to
evidence your agreement to the foregoing.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
-----------------------------
Prentis B. Tomlinson, Jr., Chief Executive Officer
BENZ ENERGY LTD.
By: /s/ Prentis B. Tomlinson, Jr.
-----------------------------
Prentis B. Tomlinson, Jr., Chairman
CALIBRE ENERGY, L.L.C.
By: /s/ L. E. Walker
-----------------------------
L. E. Walker, Manager and President
BENZ PROPERTIES LTD.
By: /s/ Prentis B. Tomlinson, Jr.
-----------------------------
Prentis B. Tomlinson, Jr., President
/s/ Prentis B. Tomlinson, Jr.
-----------------------------
PRENTIS B. TOMLINSON, JR.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
November 4, 1998
Page 11
TEXSTAR HOLDINGS, L.L.C.
By: /s/ Prentis B. Tomlinson, Jr.
------------------------------
Prentis B. Tomlinson, Jr., President
/s/ Prentis B. Tomlinson, Jr.
----------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE SLATTERY TRUST
/s/ Prentis B. Tomlinson, Jr.
----------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE RUSTON TRUST
/s/ Prentis B. Tomlinson, Jr.
----------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE HOUSTON TRUST
/s/ Heather J. Tomlinson
----------------------------------
HEATHER J. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE STARBUCKS TRUST
AGREED TO as of the date first
written above:
BOCP ENERGY PARTNERS, L.P.
By: EnCap Investments L.C., Manager
By: /s/ Robert L. Zorich
---------------------------------
Robert L. Zorich, Managing Director
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.C., its general partner
By: /s/ Robert L. Zorich
---------------------------------
Robert L. Zorich, Managing Director
<PAGE>
BANK ONE, TEXAS, N.A.
910 Travis
Houston, Texas 77002
FIRST AMENDMENT TO PARTICIPATION AGREEMENT
December 16, 1998
BOCP Energy Partners, L.P.
150 E. Gay Street, 24th Floor
Colombus, Ohio 43215
Dear Sirs:
Bank One, Texas, N.A. ("Bank One") has entered into that certain Letter
Loan Agreement dated July 17, 1997 (as from time to time amended,
supplemented or restated, including by the herein defined Current Amendment,
the "Loan Agreement") with Texstar Petroleum, Inc., a Texas corporation
("Borrower"), pursuant to which Borrower executed that certain Promissory
Note dated November 4, 1998 payable to the order of Bank One in the original
principal amount of $10,000,000 (the "Note"). Bank One has submitted to BOCP
Energy Partners, L.P. ("Participant") copies of the Loan Agreement and the
Note (both the original documents and all amendments and supplements thereto,
including that certain Fourth Amendment to Letter Loan Agreement of even date
herewith, which is herein called the "Current Amendment"). Reference is made
to such instruments for descriptions of the rights and obligations of
Borrower and Bank One thereunder, for definitions of terms used therein and
herein and for all other terms and conditions of the Loan Agreement and all
loans and advances thereunder (collectively, the "Loan"), including Tranche A
and Tranche B under the Loan Agreement.
Pursuant to a Participation Agreement dated November 4, 1998 (the
"Original Participation Agreement") Bank One sold, and Participant purchased,
a 100% participation in Tranche B under the Loan Agreement and the related
payment rights under the Note. Bank One and Participant now desires to amend
the Original Participation Agreement as follows:
Section 1. CONSENTS. Participant hereby consents to the Current
Amendment and to the increase of Tranche B, as provided therein, from
$2,000,000 to a maximum of $4,500,000.
Section 2. ADVANCES. Bank One has heretofore made, or within one
day after execution of this First Amendment will make, a second advance under
Tranche B to Borrower in the principal amount of $1,000,000, the making of
which advance is hereby consented to and approved by Participant in all
respects. In consideration of such advance under Tranche B, Participant will,
on the date of such advance, cause immediately available funds in the amount
of such principal amount to be transferred to an account at Bank One
designated by Bank One.
<PAGE>
BOCP Energy Partners, L.P.
December 16, 1998
Page 2
Section 3. PRINCIPAL PAYMENT ON TRANCHE A. Unless Tranche A is paid
in full before such time, prior to 11:00 a.m., Houston time, on December 18,
1998, Participant will purchase an additional $1,500,000 interest in Tranche
B by causing immediately available funds in the amount of $1,500,000 to be
transferred to an account at Bank One designated by Bank One, which
$1,500,000 shall be applied to the $1,500,000 principal payment due on
Tranche A on December 18, 1998.
Section 4. NO FURTHER MODIFICATION. As modified hereby to reflect
the increase in Tranche B, the Original Participation Agreement is hereby
ratified and confirmed in all respects.
Yours truly,
BANK ONE, TEXAS, N.A.
By: /s/ Michelle Wolpert
----------------------------------------
Name: Michelle Wolpert
Title: V-P
AGREED TO AND ACCEPTED:
BOCP ENERGY PARTNERS, L.P.
By: EnCap Investments L.C., Manager
By: /s/ Robert L. Zorich
-----------------------------------
Robert L. Zorich, Managing Director
Borrower hereby acknowledges receipt of a copy of the foregoing First
Amendment to Participation Agreement and agrees to the terms thereof.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson Jr.
------------------------------------------
Name: Prentis B. Tomlinson, Jr.
Title: Chairman and CEO
<PAGE>
ASSIGNMENT OF OIL, GAS AND MINERAL LEASES
AND BILL OF SALE
STATE OF LOUISIANA SECTION
SECTION KNOW ALL MEN BY THESE PRESENTS:
PARISH OF CLAIBORNE
THAT TEXSTAR PETROLEUM, INC., hereinafter referred to as "Assignor,"
whose address is 1000 Louisiana, Suite 1500, Houston, Texas 77002, for and in
consideration of One Hundred Dollars ($100.00) and other good and valuable
consideration of which are hereby acknowledged, does hereby grant, bargain,
sell, convey, assign, transfer, set over and deliver unto FAULCONER RESOURCES
1999 LIMITED PARTNERSHIP, a Texas limited partnership, hereinafter referred
to as "Assignee," whose address is P.O. Box 7995, Tyler, Texas 75711, all of
its right, title and interest in and to the following properties and rights:
(a) The oil, gas and mineral leasehold and fee estates (including all
working interests, farmout rights, royalty, overriding royalty or other
non-working or carried interests and operating rights or other mineral rights
of every nature), described in Exhibit "A" attached hereto and made a part
hereof, together with all wells located on the described leases and all of
Assignor's rights incident thereto (the "Subject Properties");
(b) All of Assignor's right, title and interest (including without
limitation, leasehold) in and to all wells, equipment, supplies, machinery,
gathering pipelines, gas facilities, gathering systems, gathering storage,
distribution and disposal facilities, tanks and all other real or tangible
personal property and fixtures which are located on and appurtenant to the
lands covered by the leases described on Exhibit "A" attached hereto.
(c) All of Assignor's rights, title and interest in and to the oil, gas
and minerals produced on or after the Effective Date, all orders, contracts,
title opinions and documents, abstracts of title, leases, deeds, unitization
agreements, pooling agreements, conservation orders, operating agreements,
division of interest statements, participation agreements and all other
agreements and instruments associated or connected with the leasehold
conveyed hereby;
(d) All of Assignor's right, title and interest in and to all
easements, rights-of-way, licenses, authorizations, permits and similar
rights and interests, all warranties, covenants, indemnities and
representations from third parties, except as expressly provided herein; and
(e) All original or copies of all lease files, land files, well files,
oil and gas sales contract files, gas processing files, division order files,
abstracts, title files and materials, and all other books, files, maps, logs
and records (the "Records"), and all rights thereto, subject to the rights of
third parties, to the extent assignable and seismic, geologic, engineering
and geophysical records and data; and all other rights, privileges, benefits
and powers conferred upon the owner and holder of interest in the Subject
Properties.
<PAGE>
This Assignment of Oil, Gas and Mineral Leases and Bill of Sale is
subject to the following terms, covenants and conditions:
1. This Assignment of Oil, Gas and Mineral Leases and Bill of Sale shall
become effective as of the 1st day of March, 1999, as of 7:00 a.m., local
time, regardless of the date of execution (the "Effective Date.")
2. The Subject Properties are subject to the lease royalties, overriding
royalties, production payments, net profits obligations, carried working
interests, and other payments out of or with respect to production which are
of record and with which the Leases are encumbered at the Effective Date
hereof. Assignee hereby assumes and agrees to perform all of the terms and
express and implied covenants and conditions of the leases and any intervening
assignments affecting same at the Effective Date.
3. With respect to the Subject Properties, Assignee hereby assumes and
agrees to timely perform and discharge all duties and obligations in
connection with the Subject Properties of the owner of the Leases and Wells
on and after the Effective Date hereof, including, but not limited to, the
obligation to properly plug and abandon the Wells, at Assignee's sole costs,
risk, and expense, in accordance with the applicable rules and regulations of
any authority having jurisdiction there over and to clean and restore the
surface of the land around the Wells in accordance with the terms of the
Leases. Assignor shall include no liability from Assignee's failure to perform
and discharge such duties and obligations in a timely manner.
4. With respect to the Subject Properties, Assignee shall be solely
responsible for any and all sales taxes which may be assessed by any taxing
authority as a result of this Assignment. Assignee shall hold Assignor
harmless from all such taxes and any interest and penalties thereon. All
other taxes, including, but not limited to, applicable ad valorem taxes,
excise taxes, severance and production taxes, and any other local, state, or
federal taxes or assessments attributable to the Leases and Wells, including
any deductions, credits, and refunds pertaining thereto, shall be apportioned
between Assignor and Assignee as of the Effective Date, and Assignor and
Assignee shall each indemnify and hold the other free and harmless from and
against any such taxes as apportioned, including interest and penalties
thereon.
5. Assignor, any parent company, subsidiary or affiliate, (including, but
not limited to, Benz Energy Ltd.), shall be responsible for all costs,
expenses, losses, claims, damages, demands, suits, causes of action and
liabilities pertaining to the Leases and Wells and the operation thereof
prior to the Effective Date. ASSIGNOR SHALL DEFEND, INDEMNIFY, AND HOLD
ASSIGNEE, INCLUDING BUT NOT LIMITED TO VERNON E. FAULCONER, INDIVIDUALLY,
VERNON E. FAULCONER, INC., FAULCONER CORPORATION, FAULCONER ENERGY JOINT
VENTURE-1990, FAULCONER ENERGY GENERAL PARTNER, L.L.C., and FAULCONER ENERGY
CORPORATION), ITS SUCCESSORS AND ASSIGNS, HARMLESS AGAINST SAME, INCLUDING
ANY COSTS AND EXPENSES FOR ATTORNEYS FEES.
Assignor, any parent company, subsidiary or affiliate, (including, but
not limited to, Benz Energy Ltd.), further hereby agrees to indemnify and
hold Faulconer Resources 1999 Limited Partnership, Vernon E. Faulconer,
individually, Vernon E. Faulconer, Inc., Faulconer Corporation, Faulconer
Energy Joint Venture-1990, Faulconer Energy General Partner, L.L.C., and
Faulconer Energy Corporation, its partners, affiliates, successors and
assigns from and against any royalty claims, expenses and costs attributable
and associated with any nonpayment of royalties and any recoupment of
erroneous payments made by Assignor prior to the Effective Date of this
Agreement.
Further, Assignor, any parent company, subsidiary or affiliate,
(including, but not limited to, Benz Energy Ltd.), shall defend Assignee and
the above-referenced parties harmless from and against any claims resulting
from the litigation and claims (including, but not limited to the claims and
mortgages) listed on Exhibit "B" attached hereto and made a part hereof.
2
<PAGE>
6. All costs and expenses attributable to operations on the Subject
Properties prior to the Effective Date shall be borne by Assignor and all
costs and expenses attributable to such operations on or after the Effective
Date shall be borne by Assignee. All proceeds from production on the Subject
Properties attributable to sales made prior to the Effective Date shall
belong to Assignor and all proceeds attributable to such sales made on or
after the Effective Date shall belong to the Assignee. An accounting for all
production, proceeds, costs, and expenses belonging to or being borne by
Assignor or Assignee shall be had and all remittances and payments thereof
shall be made within sixty (60) days following the date of this Assignment.
Following such accounting, any funds received by, or costs or expenses billed
to, a party that belong to or should be borne by another party, shall be
promptly paid to or remitted by such other party.
Assignor hereby warrants and agrees to defend its title to the Leases as
to the acts done by, through or under Assignor, but no further. Assignee is
hereby substituted for and subrogated to all actions of warranty which
Assignor has or may have against any predecessors in title.
7. All equipment and other personal property appurtenant to the Subject
Properties is transferred subject to normal wear and tear and without
warranties of any kind whatsoever, whether expressed or implied, and are sold
"AS IS AND WITH ALL FAULTS AND DEFECTS" and "WITH NO WARRANTY AS TO
MERCHANTABILITY, FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE". THIS
ASSIGNMENT IS MADE (a) WITHOUT ANY WARRANTY OR REPRESENTATION OF TITLE,
EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, EXCEPT AS EXPRESSLY PROVIDED
HEREIN, (b) WITHOUT ANY EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR
REPRESENTATION AS TO THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A
PARTICULAR PURPOSE, CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OR
MERCHANTABILITY OF ANY OF THE ASSETS OR THEIR FITNESS FOR ANY PURPOSE; AND
(c) WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR
REPRESENTATION WHATSOEVER. Notwithstanding the foregoing, should Assignee or
any of the above-referenced parties be required by any agency of the State of
Louisiana to remediate any pit on the Subject Properties not currently in
compliance with state regulations, the cost will be borne by Assignor or any
parent company, subsidiary or affiliate.
8. This Agreement is made by Assignor and accepted by Assignee subject to
all applicable laws, ordinances, rules and regulations, and Assignee agrees
to timely comply with same.
So long as not prohibited by applicable law to do so, Assignor and
Assignee and their respective successors an assignees, will do, execute and
acknowledge, and deliver all further acts, conveyances, transfer orders,
division orders, notices releases, and acquittances and such other
instruments as may be necessary or appropriate to assure more fully to each
party hereto, their respective successors and assigns, all of the respective
properties, rights, title, interest, estates, remedies, powers and privileges
conveyed or intended to be conveyed by this Assignment.
It is the intent of Assignor to convey and this Agreement hereby conveys
to Assignee subject to the reservations and conditions herein contained, all
of Assignor's right, title, and interest on the Effective Date hereof in and
to the lease and lands, regardless of the omission of any wells or leases,
errors in description, and incorrect or misspelled names or any transcribed or
incorrect recording references.
The provisions hereof shall be covenants running with the land and shall
insure to benefit of and be binding upon Assignor and Assignee, their
respective personal representatives, successors and assigns.
<PAGE>
EXECUTED this 26 day of April, 1999, but to be effective as of March 1,
1999. -- ------
WITNESS: ASSIGNOR:
/s/ Thomas William TEXSTAR PETROLEUM, INC.
/s/ Dee Dee Cottrell
BY: /s/ Todd Grabois
--------------------------------
TODD GRABOIS
Vice President
WITNESS ASSIGNEE:
/s/ Dee Dee Cottrell FAULCONER RESOURCES 1999 LIMITED PARTNERSHIP
/s/ Becky Glover
BY: FAULCONER ENERGY GENERAL PARTNER,
L.L.C., a Louisiana limited liability
company, its general partner
BY: FAULCONER ENERGY CORPORATION,
ATTEST: its sole member
BY: /s/ Jean Crawley BY: /s/ Philip H. Jensen
----------------------- -------------------------------
JEAN CRAWLEY PHILIP H. JENSEN
Secretary Vice President
<PAGE>
THE STATE OF TEXAS SECTION
---------
COUNTY OF SMITH SECTION
--------
BEFORE ME, the undersigned, a Notary Public in and for the county and
state aforesaid, personally appeared, TODD GRABOIS to me personally known,
who being by me duly sworn, did say that he is the Vice President of TEXSTAR
PETROLEUM, INC. and that said instrument was signed on behalf of said
corporation by authority of its Board of Directors and the said TODD GRABOIS
acknowledged said instrument to be the free act and deed of said corporation
for the uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 26th day of April, 1999.
------ ----- -
My Commission Expires:
7-21-01 /s/ Maureen Raney
- --------------------- -------------------------------
Notary Public
MAUREEN RANEY
-------------------------------
Printed Name
- --------------------------------
MAUREEN RANEY
[SEAL] Notary Public
STATE OF TEXAS
My Comm. Exp. 7-21-2001
- --------------------------------
THE STATE OF TEXAS
COUNTY OF SMITH
BEFORE ME, the undersigned, a Notary Public in and for the county and
state aforesaid, personally appeared, PHILIP H. JENSEN to me personally
known, who being by me duly sworn, did say that he is the Vice President of
FAULCONER ENERGY CORPORATION, sole member of Faulconer Energy General
Partner, L.L.C., general partner of FAULCONER RESOURCES 1999 LIMITED
PARTNERSHIP and that said instrument was signed on behalf of said corporation
by authority of its Board of Directors and the said PHILIP H. JENSEN
acknowledged said instrument to be the free act and deed of said corporation
for the uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 23rd day of April, 1999.
------ ------ -
My Commission Expires:
7-21-01 /s/ Maureen Raney
- --------------------- ------------------------------
Notary Public
MAUREEN RANEY
------------------------------
Printed Name
- --------------------------------
MAUREEN RANEY
[SEA] Notary Public
STATE OF TEXAS
My Comm. Exp. 7-21-2001
- --------------------------------
<PAGE>
December 31, 1998
Texstar Petroleum, Inc.
1000 Louisiana, Suite 3950
Houston, Texas 77002
Ladies and Gentlemen:
This letter loan agreement (this "Agreement") confirms the mutual
agreements between Texstar Petroleum, Inc., a Texas corporation ("Borrower") ,
and the persons listed in the attached Schedule I (such persons being
collectively referred to herein as "Lenders" and individually as a "Lender"), in
connection with a credit facility more fully described herein.
Section 1. CREDIT FACILITY. Subject to the terms of this Agreement,
each Lender agrees to lend and Borrower agrees to borrow certain amounts
pursuant to the following terms and conditions (the "Credit Facility"):
(a) NOTE: Borrower's obligation to repay the Credit Facility shall
be evidenced by its execution of a promissory note of even date herewith,
payable to the order of each Lender (herein called such Lender's "Note"),
substantially in the form attached as Exhibit 1(a) hereto.
(b) CREDIT FACILITY AMOUNT: $2,200,000 (the "Credit Facility
Amount").
(c) LOANS: Subject to the terms and conditions hereof, each Lender
agrees to make a single advance to Borrower (herein called such Lender's
"Loan") upon Borrower's request on or before December 31, 1998, provided
that each Lender's advance shall not exceed the amount reflected on
Schedule I for such Lender and the aggregate principal amount of Loans does
not exceed the Credit Facility Amount. The amount of principal owing on
any Lender's Note at any given time shall be the amount of such Lender's
Note minus all payments of principal theretofore received by such Lender on
such Note. Interest on each Note shall accrue and be due and payable as
provided in this Agreement and in each Note. No portion of any Loan which
has been repaid may be reborrowed. Each Note shall be due and payable as
provided in this Agreement and in each Note and shall be due and payable in
full on the Maturity Date.
(d) MATURITY DATE: April 30, 1999 (the "Maturity Date").
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 2
(e) PURPOSE: To finance the acquisition of (1) the "Assigned
Premises," as such term is defined in the draft furnished to the Lenders
of that certain Recordation Notice and Memorandum of Term Assignment of Oil
and Gas Lease(s), by and between Mobil Producing Texas & New Mexico Inc.
("Mobil") and Borrower (the "Notice and Memorandum") and (2) the "Contract
Rights," as such term is defined in the draft furnished to the Lenders of
that certain Assignment of Contract Rights (as herein called) by and
between Mobil and Borrower, and to pay the arrangement fees described in
Section 1(f) and the legal fees of Thompson & Knight, P.C. and Bracewell &
Patterson, L.L.P. referenced in Section 9.
(f) ARRANGEMENT FEE AND OTHER AGREEMENTS:
(1) Borrower shall pay to RP&C International, Inc. ("RP&C") and
to EnCap Investments L.C. ("EnCap") arrangement fees in the amounts
of $125,400 and $6,600, respectively, on the date hereof (and RP&C
will use $120,000 of the amount of the fee so paid to it to make
the Loan by it to Borrower hereunder).
(2) No later than 10 business days after the closing provided in
Section 9, Borrower shall use its reasonable best efforts to cause
Benz Energy Ltd., a corporation existing under the laws of the Yukon
Territory and the sole shareholder of Borrower ("Benz Energy"), to
issue to RP&C and to EnCap warrants to purchase Benz Shares (as
defined below) in an aggregate amount equal to $220,000 divided by the
Market Price (and such warrants shall be apportioned 95% to RP&C and
5% to EnCap, respectively). For purposes hereof:
"Benz Shares" shall mean the common shares of Benz Energy, no
par value, and any securities of Benz Energy for or into which such
common shares are exchanged, reclassified or converted.
"Market Price" shall mean the lesser of (x) the average of the
last reported sales price for the Benz Shares for the 20 consecutive
Trading Days immediately preceding the date hereof or (y) the
average of the last reported sales price for the Benz Shares for the
20 consecutive Trading Days immediately preceding the one year
anniversary of the date hereof. The last reported sales price for
each day shall be the last reported sales price for the Benz Shares on
such date on the exchange on which the Benz Shares are primarily
traded.
"Trading Days" shall mean, with respect to the exchange on which
the Benz Shares are primarily traded, the days on which such
securities exchange is open for business.
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 3
The exercise price of the warrants shall be the Market Price and the
exercise period of the warrants shall be for a three-year period
commencing the date of the Notes. In lieu of issuing warrants as
provided above, Borrower shall have the option of using its reasonable
best efforts to cause Benz Energy to make (or, if requested by RP&C
and EnCap, Borrower shall use its reasonable best efforts to cause
Benz Energy to make) alternative arrangements satisfactory to RP&C and
EnCap to provide them in substance with substantially the same
economic rights or interests they would have otherwise received had
they been issued the warrants as provided above (which alternative
arrangements shall include "phantom warrants"). The form of the
warrants or such alternative arrangements shall be in form and content
reasonably satisfactory to RP&C and to EnCap.
(3) No later than 10 business days after the closing provided in
Section 9, Texstar agrees to use its reasonable best efforts to cause
Benz to amend those certain phantom warrants originally issued to
RP&C on March 25, 1998, in connection with the issuance by Parent of
up to $25,000,000 of convertible debentures on or about that date, to
provide for an exercise price equal to the Market Price. If for bona
fide legal or other regulatory purposes, Benz is precluded from so
amending such warrants (or if requested by RP&C), Texstar shall use
its reasonable best efforts to cause Benz to make arrangements
satisfactory to RP&C to provide RP&C in substance with substantially
the same economic rights or interests it would have otherwise received
had the warrants been amended as provided above (and such alternative
arrangements shall be in form and content reasonably satisfactory to
RP&C).
Section 2. INTEREST RATE AND REPAYMENT TERM.
(a) INTEREST RATE.
(1) Subject to the provisions of paragraphs (2) and (3) of this
Section 2(a), Borrower shall pay interest on the outstanding principal
amount of each Note at the rate of 10% per annum. Accrued and unpaid
interest on each Note shall be calculated on the basis of a 365-day year or
366-day year, as the case may be, and the actual number of days elapsed.
(2) In the event that, and for so long as, any principal or interest
owing under a Note is not paid when due, then and in any such event, all of
the outstanding principal amount of each Note shall bear interest from such
due date at the rate of 16% per annum.
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 4
(3) Notwithstanding anything contained herein or in any Note to the
contrary, in no event shall the interest payable with respect to each Note
exceed the Maximum Interest (as defined in each Note).
(b) REPAYMENT TERMS. Accrued and unpaid interest on the outstanding
principal amount of each Note shall be due and payable on February 1, 1999,
and on the first day of each month thereafter. The balance of unpaid
principal and accrued and unpaid interest on each Note shall be due and
payable on the Maturity Date.
Section 3. OVERRIDING ROYALTY INTEREST AND NET PROFITS INTEREST.
(a) OVERRIDING ROYALTY INTEREST. Subject to the terms and
conditions hereof, Borrower agrees to convey to each Lender such Lender's
Percentage Share (as defined below) of an overriding royalty interest
equal to 50% of the Mobil Interest in and to the OOU Leases and the AMI
Leases. The conveyance of each overriding royalty interest provided in
the immediately preceding sentence shall be substantially in the form of
the Conveyance of Overriding Royalty Interest attached hereto as Exhibit
3(a) in all material respects (the "Override Conveyance"), and the terms
"Mobil Interest," "OOU Leases" and "AMI Leases" shall have the respective
meanings assigned to them in the Override Conveyance. As used herein
with respect to a Lender, the term "Percentage Share" shall mean a
percentage derived by dividing the then outstanding principal amount
of such Lender's Note (or Notes, if such Lender hereafter acquires a
Note or Notes, or a portion thereof, of any other Lenders) by the Credit
Facility Amount.
(b) NET PROFITS INTEREST.
(1) If Borrower pays in full all of the Notes on or before the
expiration of the two-month period commencing the date of the Notes,
Borrower and each Lender agree to promptly execute and deliver that
certain Reconveyance of Overriding Royalty Interest and Conveyance of
Net Profits Interest substantially in the form of the instrument
attached hereto as Exhibit 3(b) in all material respects (the "NPI
Conveyance")(it being agreed, however, that each Lender shall be
entitled to receive such Lender's Percentage Share of 6.40% of the net
profits, if any, realized from the production of oil, gas and other
minerals from the Subject Interests, calculated in the manner provided
in the NPI Conveyance). The term "Subject Interests" shall have the
meaning assigned to it in the NPI Conveyance.
(2) If Borrower pays in full all of the Notes after the
expiration of the two-month period commencing the date of the Notes
but on or before the expiration of the four-month period commencing
the date of the Notes, Borrower and each
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 5
Lender agree to promptly execute and deliver the NPI Conveyance
(it being agreed, however, that each Lender shall be entitled
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 Interests, calculated in the
manner provided in the NPI Conveyance).
Section 4. REPRESENTATION AND WARRANTIES. Borrower represents and
warrants to each Lender that, as of the date hereof:
(a) ORGANIZATION. Borrower is a corporation, duly organized,
validly existing and in good standing under the laws of the State of Texas
and is qualified to transact business in all other jurisdictions where
such qualification is necessary. Borrower is authorized to execute this
Agreement, each Note, and all the other Loan Documents (hereinafter
defined), and those documents or instruments, when executed and delivered
will be valid and binding obligations of Borrower, enforceable in
accordance with their terms (except as such enforcement may be limited by
bankruptcy, insolvency or similar laws of general application relating to
the enforcement of creditors' rights) and do not violate the provisions of
the Articles of Incorporation or Bylaws of Borrower, or any contract,
agreement, law or regulation to which Borrower is subject.
(b) FINANCIAL STATEMENTS. All financial statements of Borrower
delivered by Borrower to any Lender are complete and correct and have
been prepared in accordance with generally accepted accounting principles,
consistently applied, and no material adverse change in the condition of
Borrower, financial or otherwise, has occurred since the date of the most
recent financial statements of Borrower delivered to Lenders.
(c) INVESTMENTS, LIABILITIES AND LITIGATION. Borrower has not made
any investments, warranties or advances or incurred any liabilities except
(i) for investments in, guarantees of, or advances to other entities in the
ordinary course of business and liabilities incurred in the ordinary course
of business and (ii) as disclosed in the most recent financial statements
of Borrower in Lenders' possession. Except as set forth in Exhibit 4(c),
Borrower has no litigation and there is no legal or administrative
proceeding, investigation or other action pending or, to the best knowledge
of Borrower, threatened against or affecting Borrower which, in any case,
involves the possibility of any judgment or liability not fully covered by
insurance.
(d) TITLE. Borrower has good title to its material assets and
properties (including, without limitation, the Assigned Premises and the
Contract Rights) free and clear of adverse claims, except as disclosed in
the most recent financial statements of Borrower delivered to Lenders.
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 6
(e) TAX RETURNS. Borrower has filed all federal and state tax
returns required to be filed as of the date of this Agreement and has paid
all taxes or assessments related to said returns.
(f) NO DEFAULT. Borrower is not, and after giving effect to the
Loans made to Borrower under the Credit Facility will not be, in default in
any respect under this Agreement, any other Loan Document, or any other
contract, agreement, or instrument to which Borrower is a party or by which
Borrower may be bound (except for defaults under that certain Credit
Agreement dated October 9, 1997, as heretofore amended, among Borrower, as
borrower, Benz Energy and Calibre Energy, L.L.C., as guarantors, and EnCap
Energy Capital Fund III, L.P., as lender, as heretofore disclosed to
EnCap), and Borrower is in compliance in all material respects with all
applicable laws and regulations.
(g) ERISA; MARGIN SECURITIES. No fact exists, including but not
limited to any reportable event or prohibited transaction (as defined in
the Employee Retirement Income Security Act of 1974, as amended "ERISA")
which might constitute grounds for termination of any plan of Borrower or
appointment of a trustee to administer such plan. Borrower does not own
any "margin security" or "margin stock" as defined in Regulations G, U, or
X of the Board of Governors of the Federal Reserve System.
(h) PATENTS, ETC. Borrower has all patents, licenses, trademarks,
franchises and the like necessary to conduct its business and is not aware
of any conflict with the rights of others with respect thereto.
(i) NO UNTRUE STATEMENTS. Neither this Agreement nor any other
information furnished by Borrower to any Lender contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements not misleading.
(j) NUEVO LETTER OF INTENT. Borrower has not received any notice
from Nuevo Energy Company ("Nuevo") terminating that certain letter of
intent dated December 15, 1998, by and between Borrower, Benz Energy and
Nuevo, nor have Nuevo, Borrower or Benz Energy amended or modified the
terms of such letter of intent.
Section 5. REPORTING REQUIREMENTS. Borrower will deliver the following
reports to Lender:
(a) QUARTERLY FINANCIAL STATEMENTS OF BORROWER: Within sixty (60)
days after the last day of each calendar quarter, the balance sheet of
Borrower as of the last day of such quarter and the statements of income,
stockholders, equity and cash flow of Borrower for such quarter, certified
by the chief financial officer of Borrower.
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 7
(b) QUARTERLY REPORTS: Simultaneously with the financial statements
delivered pursuant to Section 5(a) above, a certificate of the chief
financial officer of Borrower stating whether Borrower has kept and
performed all covenants set forth in this Agreement and the other Loan
Documents and, if Borrower has not, specifying the subject covenant and
corrective action, if any, which may be taken by Borrower.
(c) FINANCIAL STATEMENTS OF BENZ ENERGY: Within sixty (60) days
after the last day of each calendar quarter, the balance sheet of Benz
Energy (hereinafter defined) as of the last day of such quarter and the
statements of income, stockholders, equity and cash flow of Benz Energy for
such quarter, certified by the chief financial officer of Benz Energy, and
within one hundred (120) days after the last day of each calendar year, the
balance sheet of Benz Energy as of the last day of such year and the
statements of income, stockholders' equity and cash flow of Benz Energy for
such year, certified without qualification by independent certified public
accountants acceptable to Lenders.
(d) NOTICE OF DEFAULT: Within three (3) days after the occurrence
of a default, or an event which with the giving of notice, the passage of
time, or both, would constitute a default under (1) this Agreement or (2)
any other material agreement to which Borrower or Benz Energy is a party,
notice of such default (or event) together with Borrower's or Benz
Energy's plans to correct such default.
(g) NOTICE OF LIABILITIES: Within five (5) days of notice thereof,
written notice of any liability outside the ordinary course of business
(whether actual or contingent) in which the liability or claimed liability
of Borrower or Benz Energy is greater than $100,000.00.
(h) OTHER INFORMATION: Such other information as any Lender may
reasonably request from time to time.
Section 6. COVENANTS.
(a) COMPLIANCE AND PERFORMANCE. Borrower will comply in all
material respects with all statutes and governmental regulations and will
pay all taxes, assessments, governmental charges, claims for labor and
the like. Borrower will maintain its existence as a Texas corporation and
will remain qualified to do business in all jurisdictions in which it is
required to be qualified and will maintain its properties in good and
workable condition at all times (ordinary wear and tear excepted).
Borrower will perform all obligations under this Agreement, and under
all indentures, agreements, and contracts by which Borrower is bound.
Borrower will maintain with financially sound and reputable insurers
acceptable to Lenders, insurance with respect to its properties and
business against such liabilities, casualties, risks and contingencies
as is customary for its business naming Lenders as loss
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 8
payee with respect to any insurance covering collateral
securing the loans hereunder, and will, upon Lenders' request, provide
satisfactory evidence of such insurance. While any Loan is outstanding and
upon Lenders' request, Borrower will provide Lenders and/or Lenders'
representatives access to Borrower's books, records and properties at such
times during ordinary business hours as Lender may request.
(b) PAYMENT OF EXPENSES. Whether or not the transactions
contemplated by this Agreement are consummated, Borrower will promptly (and
in any event, within 30 days after any invoice or other statement or
notice) pay: (i) all transfer, stamp, mortgage, documentary or other
similar taxes, assessments or charges levied by any governmental or revenue
authority in respect of this Agreement or any of the other Loan Documents
or any other document referred to herein or therein,(ii) all reasonable
third party costs and expenses incurred by or on behalf of any Lender
(including attorneys' fees, consultants' fees and engineering fees, travel
costs and miscellaneous expenses) in connection with (1) the negotiation,
preparation, execution and delivery of the Loan Documents, and any and all
consents, waivers or other documents or instruments relating thereto,(2)
the filing, recording, refiling and re-recording of any Loan Documents and
any other documents or instruments or further assurances required to be
filed or recorded or refiled or re-recorded by the terms of any Loan
Document,(3) the borrowings hereunder and other action reasonably required
in the course of administration hereof,(4) monitoring or confirming (or
preparation or negotiation of any document related to) Borrower's
compliance with any covenants or conditions contained in this Agreement or
in any Loan Document, and (iii) all reasonable costs and expenses incurred
by or on behalf of any Lender (including attorneys' fees, consultants' fees
and accounting fees) in connection with the defense or enforcement of any
of the Loan Documents (including this section) or the defense of any
Lender's exercise of its rights thereunder. In addition to the foregoing,
until all amounts owed by Borrower under this Agreement have been paid in
full, Borrower will also pay or reimburse each Lender for all reasonable
out-of-pocket costs and expenses of each Lender or its agents or employees
in connection with the continuing administration of the Loans and the
related due diligence of each Lender, including travel and miscellaneous
expenses and fees and expenses of any Lender's outside counsel, reserve
engineers and consultants engaged in connection with the Loan Documents.
(c) SECURITY. The Notes and the other indebtedness hereunder shall
be secured by (1) a first and prior lien on certain oil and gas properties
of Borrower described more particularly in that certain Deed of Trust,
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement from Borrower , as mortgagor, to Robert L. Zorich, Trustee, and
Perry Limited, et al, as lenders (which Deed of Trust is to be delivered at
closing as provided in Section 9) and (2) a junior lien on certain oil and
gas properties of Borrower described more particularly in that certain
Junior Deed of Trust, Mortgage, Assignment,
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 9
Security Agreement, Fixture Filing and Financing Statement from Borrower,
as mortgagor, to Robert L. Zorich, Trustee, and Perry Limited, et al, as
lenders (which Junior Deed of Trust is to be delivered at closing as
provided in Section 9) or any other properties from time to time
specified by a Majority in Interest of the Lenders (collectively, the
"Mortgaged Property").
(d) MOBIL DOCUMENTS. The Notice and Memorandum and the Assignment
of Contract Rights executed and delivered by Borrower will be
substantially in the form of the final draft of such documents furnished
to Lenders and their respective counsel.
(e) LEGAL OPINIONS OF COUNSEL TO BENZ ENERGY. Borrower will use its
reasonable best efforts to cause to be delivered to Lenders within 10
business days after the closing provided in Section 9 a favorable opinion
or opinions of counsel to Benz Energy, which counsel and opinion(s) shall
be reasonably acceptable to RP&C and to EnCap.
(f) SEISMIC AGREEMENT. Unless Borrower has first received the prior
written consent of a Majority in Interest of the Lenders, Borrower will not
(1) agree to any alteration, amendment or modification of that certain
Agreement dated _______, 1997, by and between Amoco Production Company,
Mobil Exploration & Producing U.S. Inc., as agent for Mobil Producing Texas
& New Mexico, Inc., Texaco ______ and Cheyenne Petroleum Company, as
amended (the "3D Agreement"), if such alteration, amendment or
modification adversely affects Borrower or Lenders, or (2) waive any of its
material rights thereunder.
Section 7. INDEMNITY. Borrower agrees to indemnify each Lender, upon
demand, from and against any and all liabilities, obligations, claims,
losses, damages, penalties, fines, actions, judgments, suits, settlements,
costs, expenses or disbursements (including reasonable fees of attorneys,
accountants, experts and advisors) of any kind or nature whatsoever (in this
section collectively called "liabilities and costs") which to any extent (in
whole or in part) may be imposed on, incurred by, or asserted against such
Lender growing out of, resulting from or in any other way associated with any
of the Mortgaged Property (as herein defined), the Loan Documents and the
transactions and events (including the enforcement or defense thereof) at any
time associated therewith or contemplated therein (whether arising in
contract or in tort or otherwise and including any violation or noncompliance
with any environmental laws by any Lender or any other person or any
liabilities or duties of any or any Lender or any other person with respect
to hazardous materials found in or released into the environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY
CLAIM OR
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 10
THEORY OF STRICT LIABILITY OR CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT
ACT OR OMISSION OF ANY KIND BY ANY LENDER,
provided only that no Lender shall be entitled under this section to receive
indemnification for that portion, if any, of any liabilities and costs which
is proximately caused by its own individual gross negligence or willful
misconduct, as determined in a final judgment. If any person (including
Borrower or any of its affiliates) ever alleges such gross negligence or
willful misconduct by any Lender, the indemnification provided for in this
section shall nonetheless be paid upon demand, subject to later adjustment or
reimbursement, until such time as a court of competent jurisdiction enters a
final judgment as to the extent and effect of the alleged gross negligence or
willful misconduct. As used in this section the term "Lender" shall refer
not only to each person designated as such herein but also to each director,
officer, trustee, agent, attorney, employee, representative and affiliate of
such persons.
Section 8. DEFAULT AND REMEDIES. It shall constitute an event of
default hereunder if (a) Borrower fails to make when due any payment on any
Note or on any other indebtedness hereunder, (b) Borrower fails to comply
with any provision of Section 5 or 6 hereof and, except for Section 6(e),
such violation remains uncured for a period of thirty (30) days, (c) Borrower
fails to perform any of its other agreements contained herein and such
violation remains uncured for a period of forty-five (45) days, (d) Borrower
defaults under the terms or provisions of any other Loan Document or any
other agreement, instrument or document executed in connection with or as
security for the Credit Facility, (e) any representation or warranty of
Borrower or Benz Energy proves to have been untrue in any material respect
when made, (f) any petition in bankruptcy is filed by Borrower or Benz
Energy, or any order granting relief under any bankruptcy or receivership law
is filed with respect to Borrower or Benz Energy, (g) Borrower or Benz
Energy permits a final, non-appealable monetary judgment against it in excess
of $100,000 to remain undischarged for a period in excess of thirty (30)
days, (h) Borrower or Benz Energy dissolves, (i) a Material Adverse Change
(as defined below) occurs with respect to either Borrower or Benz Energy, (j)
Benz Energy ceases to own 100% of the issued and outstanding capital stock of
Borrower, (k) Borrower or Benz Energy defaults under the terms of that
certain General Agreement for Acquisition of Geophysical Data (Onshore) dated
October 5, 1998, by and between Western Geophysical and Benz Energy, as
amended, modified or supplemented, or (l) after the expiration of the
four-month period commencing the date of the Notes, an "Event of Default"
occurs (as defined in that certain Credit Agreement dated October 9, 1997, as
from time to time amended, supplemented or restated, among Borrower, as
borrower, Benz and Calibre Energy, L.L.C., as guarantors, and EnCap Energy
Capital Fund III, L.P., as lender). Upon the occurrence of an event of
default specified in clause (f) above, immediately, and upon the occurrence
of any other event of default hereunder at the option of a Majority in
Interest of the Lenders (as defined below), without notice to Borrower or any
other
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 11
person, all indebtedness of Borrower to Lenders shall be immediately due and
payable and Lenders may take any other actions as may be permitted by this
Agreement, any other Loan Document or any other document or instrument
evidencing or securing the Credit Facility. Borrower expressly waives
presentment, demand, protest, notice of protest, or other notice of dishonor
of any kind including, without limitation, notice of intent to accelerate the
maturity of the Notes and other indebtedness hereunder and notice of
acceleration of the maturity of the Notes and other indebtedness hereunder.
As used above, (1) the term "Material Adverse Change" shall mean (i) a
material adverse change in the business, assets, financial condition or
results of operations of Borrower or Benz Energy (as applicable) or (ii) a
material adverse effect on Borrower's or Benz Energy's (as applicable)
ability to perform its obligations under this Agreement or any other Loan
Document, and (2) the term "Majority in Interest of the Lenders" shall mean
those Lenders whose aggregate Percentage Shares equal or exceed 51%.
Section 9. CLOSING. The initial funding of the Credit Facility
shall be subject to the payment upon execution hereof of all legal fees and
expenses incurred by Thompson & Knight, P.C., counsel to EnCap, and Bracewell
& Patterson, L.L.P., counsel to RP&C, in connection with the preparation,
negotiation and execution of this Agreement and the other Loan Documents, as
well as the receipt by each Lender of the following documents, instruments
and certificates (collectively, the "Loan Documents"), each of which shall be
satisfactory in form and substance to Lenders and their counsel:
(a) a copy of this Agreement executed by Borrower;
(b) each Note executed by Borrower;
(c) the Mortgages, Collateral Assignments, Security Agreements and
Financing Statements covering the Mortgaged Property;
(d) all financing statements or amendments thereto requested by
Lenders, executed by Borrower;
(e) a copy of the Put/Call Agreement executed by Benz Energy
substantially in the form of the instrument attached hereto as Exhibit 9(e)
in all material respects;
(f) certificate of the Secretary of Borrower, certifying as to the
Articles of Incorporation and Bylaws of Borrower, resolutions of the board
of directors of Borrower, and the signatures of authorized officers of
Borrower;
(g) resolutions of the board of directors of Borrower;
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 12
(h) a Certificate of Existence issued by the Secretary of State of
Texas with respect to Borrower;
(i) Certification of Account Status issued by the Comptroller of
Public Accounts of the State of Texas with respect to Borrower;
(j) a Lien Subordination Agreement and Consent substantially in the
form attached hereto as Exhibit 9(j) in all material respects executed by
the parties thereto;
(k) an opinion of counsel to Borrower reasonably acceptable to
Lenders' counsel;
(l) certificate of the Secretary of Benz Energy, certifying as to the
Articles of Incorporation and Bylaws of Benz Energy, resolutions of the
board of directors of Benz Energy, and the signatures of authorized
officers of Benz Energy;
(m) resolutions of the board of directors of Benz Energy;
(n) such other documents and instruments as may be reasonably
requested by any Lender or its counsel.
Section 10. DISCLOSURE. Any additions or exceptions applicable to
the terms of this Agreement, the covenants, representations and warranties of
Borrower herein or with respect to the acquisition of the Assigned Premises
shall only be those disclosed in writing to Lenders prior to or concurrently
with the execution hereof.
Section 11. MISCELLANEOUS.
(a) NOTICES. All notices or other communications hereunder
(including, without limitation, any notice of default) shall be in writing,
and shall be deemed sufficiently given or furnished if delivered by
personal delivery , by telecopy or telex, by delivery service with proof of
delivery, or by registered or certified mail to the address set forth on
the signature page of this Agreement. Any party hereto may, by proper
written notice hereunder to the other party, change the address to which
notices shall thereafter be sent.
(b) SUCCESSORS AND ASSIGNS. All covenants and agreements herein
contained by or on behalf of Borrower shall bind its successors and assigns
and shall inure to the benefit of Lender and its successors and assigns.
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 13
(c) RENEWALS AND EXTENSIONS. All provisions of this Agreement shall
apply with equal force and effect to each and all renewals and extensions,
in whole or in part, of the Notes or the Credit Facility.
(d) USURY SAVINGS CLAUSE. Nothing contained in this Agreement or in
any of the other Loan Documents shall be construed to obligate Borrower,
under any circumstances whatsoever, to pay interest in excess of the
maximum non-usurious interest rate applicable to Borrower. In the event
that any sums received from Borrower are at any time under applicable law
deemed to be in excess of the maximum non-usurious amount Lender could
collect under applicable usury law, the effective rate of interest on the
loans hereunder shall be reduced to and be the maximum non-usurious
interest rate permitted under applicable law and Borrower and all sureties,
endorsers and guarantors shall accept as their sole remedy under such
circumstances either the return of any sums of interest which may have been
collected and which produced a rate of interest in excess of the applicable
maximum non-usurious interest rate or the application of those sums as a
credit against the unpaid principal amount of the loan, whichever remedy
may be elected by Lender.
(e) HEADINGS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect, limit,
amplify or modify the terms and provisions hereof.
(f) NO WAIVER; REMEDIES CUMULATIVE. No course of dealing on the part
of any Lender or its members, managers, shareholders, directors, or
employees, or any failure or delay by Lenders with respect to exercising
any right, power or privilege of Lenders under this Agreement or any other
Loan Document shall operate as a waiver thereof. The rights and remedies
of Lenders under this Agreement and the other Loan Documents shall be
cumulative and the exercise or partial exercise of any such right or remedy
shall not preclude the exercise of any other right or remedy.
(g) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL
BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF ENGLAND AND WALES, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
(h) INVALID PROVISIONS. In the event any one or more of the
provisions contained in this Agreement or any of the other Loan Documents
shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement or the other Loan Documents.
Furthermore, in lieu of such invalid, illegal or unenforceable provision,
there shall
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 14
automatically be added a provision as similar in terms to such invalid,
illegal or unenforceable provision as may be possible and as may be valid,
legal and enforceable.
(i) LENDER ASSIGNMENTS. Any Lender may at any time at its own
expense sell, assign, transfer, negotiate, grant participations in, or
otherwise dispose of to any person or entity all of its interest, rights
and obligations under this Agreement and the other Loan Documents.
Section 12. ENTIRE AGREEMENT. THIS WRITTEN LOAN AGREEMENT, TOGETHER
WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 15
If this evidences your understanding of the agreements herein, please
execute in the space provided.
Sincerely,
PERRY LIMITED
By: RP&C INTERNATIONAL LIMITED,
Attorney-in-Fact
By: /s/ David P. Quint
------------------------------------
Name: David P. Quint
Title: Chief Executive Officer
Address for Notice:
c/o RP&C International Limited
56 Green Street
London W1Y 3RH
England
Attention: David P. Quint
Fax No.: 44 171 491 9081
-------------------
SREEDESWAR, INC.
By: RP&C INTERNATIONAL LIMITED,
Attorney-in-Fact
By: /s/ David P. Quint
------------------------------------
Name: David P. Quint
Title: Chief Executive Officer
Address for Notice:
c/o RP&C International Limited
56 Green Street
London W1Y 3RH
England
Attention: David P. Quint
Fax No.: 44 171 491 9081
-------------------
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 16
DALWORTH CAPITAL
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
------------------------------------
Name: David P. Quint
Title: Chief Executive Officer
Address for Notice:
c/o RP&C International Limited
56 Green Street
London W1Y 3RH
England
Attention: David P. Quint
Fax No.: 44 171 491 9081
-------------------
James Ladner
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
------------------------------------
Name: David P. Quint
Title: Chief Executive Officer
Address for Notice:
c/o RP&C International Limited
56 Green Street
London W1Y 3RH
England
Attention: David P. Quint
Fax No.: 44 171 491 9081
-------------------
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 17
RP&C INTERNATIONAL LIMITED
By: /s/ David P. Quint
------------------------------------
Name: David P. Quint
Title: Chief Executive Officer
Address for Notice:
56 Green Street
London W1Y 3RH
England
Attention: David P. Quint
Fax No.: 44 171 491 9081
-------------------
ENERGY CAPITAL INVESTMENT COMPANY
PLC
By: /s/ Robert L. Zorich
-------------------------------------
Name: Robert L. Zorich
Title: Authorized Representative
Address for Notice:
1100 Louisiana, Suite 3150
Houston, Texas 77002
Attention: Robert L. Zorich
Fax No.: 713-659-6130
<PAGE>
Texstar Petroleum, Inc.
December 31, 1998
Page 18
ACCEPTED AND AGREED TO:
TEXSTAR PETROLEUM, INC.
By: /s/ Todd Grabois
------------------------------
Name: Todd Grabois
Title: Vice President
Address for Notice:
1000 Louisiana
Suite 3950
Houston, Texas 77002
Attention: Prentis B. Tomlinson, Jr.
Fax No.: 713-739-8402
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
LENDER LOAN AMOUNT
- -------------------------------------------------- ---------------
<S> <C>
Perry Limited, a Guernsey Corporation $ 1,000,000.00
Sreedeswar, Inc., a Panamanian Corporation $ 880,000.00
Dalworth Capital, a Channel Islands Corporation $ 50,000.00
James Ladner $ 50,000.00
RP&C International Limited $ 120,000.00
Energy Capital Investment Company PLC $ 100,000.00
</TABLE>
<PAGE>
PUT/CALL AGREEMENT
THIS PUT/CALL AGREEMENT (this "AGREEMENT") is made and entered into this
31st day of December, 1998, by and among Benz Energy Ltd., a corporation
existing under the laws of the Yukon Territory ("PARENT"), and the persons
listed on SCHEDULE I attached hereto ("LENDERS").
RECITALS:
A. Parent is the owner of 100% of the issued and outstanding shares of
capital stock in Texstar Petroleum, Inc., a Texas corporation ("SUB").
B. Sub, as borrower, and certain of the Lenders, have entered into that
certain letter loan agreement dated as of even date herewith (the "CREDIT
AGREEMENT), whereby the Lenders have agreed to make loans to Sub in an
aggregate principal amount equal to $2,200,000 on the terms and conditions
set forth therein.
C. In connection with the loans contemplated by, and subject to the
terms and conditions of, the Credit Agreement, Sub will convey and assign to
each Lender a net profits overriding royalty interests in certain properties
of Sub pursuant to a "NPI Conveyance" (as such term is defined in the Credit
Agreement). Each net profits overriding royalty interest so conveyed and
assigned by Sub to a Lender under the Credit Agreement shall be herein called
a "NPI").
D. The parties hereto deem it in their mutual best interests to set
forth the terms and conditions whereby (i) each Lender shall have the right
to "put" a NPI to Parent in exchange for common shares of Parent plus a
warrant to purchase common shares of Parent and (ii) Parent has the right to
"call" the NPIs in exchange for cash (or, if requested by a Lender, common
shares of Parent) plus warrants to purchase common shares of Parent.
AGREEMENT:
NOW, THEREFORE, for and in consideration of the foregoing Recitals and
the mutual agreements contained herein, the sufficiency of which is hereby
acknowledged and confirmed, the parties hereto, intending to be legally bound
hereby, agree as follows:
SECTION 1. DEFINED TERMS AND REFERENCES.
(a) The following terms shall have the respective meanings assigned to
them below or in the sections, subsections, subdivisions or other parts of
this Agreement referred to below:
"ADJUSTED PV-10 VALUE" shall mean, with respect to a NPI, the
pre-income tax value of projected net revenues (U.S. Dollars) from the
Subject Properties attributable to such NPI as set forth in the Subject
Reserve Report, based upon the following:
-1-
<PAGE>
(i) a discount rate of 10% per annum;
(ii) projected NYMEX two-year forward strip prices for Henry Hub
gas and West Texas intermediate crude oil, respectively, as published in
the WALL STREET JOURNAL, adjusted for historical pricing differentials
between such NYMEX prices and actual realizations;
(iii) projected capital costs with respect to which the NPI is to
be charged;
(iv) projected lease operating expenses and production taxes
derived from or consistent with those actually incurred by Sub; and
(v) utilization of Proved Reserves only.
Upon the expiration of the two-year NYMEX pricing period referenced in
PARAGRAPH (ii) above, both commodity prices and lease operating expenses
and production taxes shall be escalated at 3% per annum.
"AGREEMENT" shall mean this Agreement, as hereafter amended or
modified in accordance with the terms hereof.
"CALL NOTICE" shall have the meaning assigned to it in SECTION 3.
"CREDIT AGREEMENT" shall have the meaning assigned to it in
PARAGRAPH B of the Recitals hereto.
"EXCHANGE PRICE" shall mean the lessor of (i) the average of the
last reported sales price for the Parent Shares for the 20 consecutive
Trading Days immediately preceding the date hereof or (ii) the average
of the last reported sales price for the Parent Shares for the 20
consecutive Trading Days immediately preceding the earlier of (x) the
date the put right or the warrants issued hereunder are exercised or (y)
the one year anniversary of the date hereof. The last reported sales
price for each day shall be the last reported sales price for the Parent
Shares on such date on the exchange on which the Parent Shares are
primarily traded.
"MAJORITY IN INTEREST OF THE LENDERS" shall have the meaning
assigned to it in the Credit Agreement.
"NET PROFITS SHARE" shall mean, when used with respect to a Lender,
such Lender's respective undivided percentage interest assigned to the
Lenders under the Override Conveyance (as defined in the Credit
Agreement).
"NPI" shall have the meaning assigned to it in PARAGRAPH C of the
Recitals hereto.
-2-
<PAGE>
"PARENT" shall have the meaning assigned to it in the introductory
paragraph of this Agreement.
"PARENT SHARES" shall mean the common shares of Parent, no par
value, and any securities of Parent for or into which such common shares
are exchanged, reclassified or converted.
"PERCENTAGE SHARE" shall have the meaning assigned to it in the
Credit Agreement.
"PROVED RESERVES" shall have the meaning assigned to such term in
the Definitions for Oil and Gas Reserves promulgated by the Society of
Petroleum Engineers (or any generally recognized successors) as in
effect from time to time.
"PUT EFFECTIVE DATE" shall mean the first day of the month during
which Parent receives a Put Notice.
"PUT NOTICE" shall have the meaning assigned to it in SECTION 2.
"SUB" shall have the meaning assigned to it in PARAGRAPH A of the
Recitals hereto.
"SUBJECT PROPERTIES" shall mean, with respect to a NPI, the subject
oil, gas and mineral properties which such NPI burdens.
"SUBJECT RESERVE REPORT" shall mean an engineering report prepared
by Ryder Scott Company or such other independent petroleum engineer
mutually agreed upon in good faith by Parent and a Majority in Interest
of the Lenders with an effective date as of the Put Effective Date.
"TRADING DAYS" shall mean, with respect to the exchange on which
the Parent Shares are primarily traded, the days on which such
securities exchange is open for business.
"VSE APPROVAL" shall mean the approval of the Vancouver Stock
Exchange to the transactions contemplated under this Agreement.
"WARRANTS" shall mean the warrants issued by Parent under the terms
of either SECTION 2 or SECTION 3.
"WARRANT SHARES" shall mean the Parent Shares issued upon exercise
of the Warrants.
(b) All references in this Agreement to articles, sections, subsections
and other subdivisions refer to corresponding articles, sections, subsections
and other subdivisions of this Agreement unless expressly provided otherwise.
-3-
<PAGE>
(c) Titles appearing at the beginning of any of such subdivisions are
for convenience only and shall not constitute part of such subdivisions and
shall be disregarded in construing the language contained in such
subdivisions.
(d) The words "this Agreement", "this instrument", "herein", "hereof",
"hereby", "hereunder" and words of similar import refer to this Agreement as
a whole and not to any particular subdivision unless expressly so limited.
(e) Words in the singular form shall be construed to include the plural
and VICE VERSA, unless the context otherwise requires.
(f) Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender.
(g) Examples shall not be construed to limit, expressly or by
implication, the matter they illustrate.
(h) Unless the context otherwise requires or unless otherwise provided
herein, the terms defined in this Agreement which refer to a particular
agreement, instrument or document also refer to and include all renewals,
extensions, modifications, amendments or restatements of such agreement,
instrument or document, provided that nothing contained in this subsection
shall be construed to authorize such renewal, extension, modification,
amendment or restatement.
(i) The word "or" is not exclusive and the word "includes" and its
derivatives shall mean "includes, but is not limited to" and corresponding
derivative expressions.
(j) No consideration shall be given to the fact or presumption that one
party had a greater or lesser hand in drafting this Agreement.
(k) All references herein to "$" or "dollars" shall refer to U.S.
Dollars.
SECTION 2. PUT RIGHT.
(a) Subject to the terms and provisions hereof, each Lender shall have
the right to convey and assign its NPI to Parent, and Parent shall have the
obligation to purchase such NPI from such Lender, in exchange for Parent
Shares and a warrant to purchase Parent Shares determined as provided in
SUBSECTIONS (b) and (c) below.
(b) The number of Parent Shares to be issued by Parent to a Lender
electing to exercise its rights under this SECTION 2 (in this SUBSECTION, an
"ELECTING LENDER") shall be equal to the greater of A or B, where:
"A" = C divided by D, with "C" equal to the Electing Lender's Net
Profits Share multiplied by $1,100,000, and with "D" equal to the Exchange
Price; and
-4-
<PAGE>
"B" = E divided by F, with "E" equal to the Adjusted PV-10 Value of the
Electing Lender's NPI as of the Put Effective Date, and with "F" equal to
the Exchange Price.
(c) Parent shall issue to an Electing Lender a warrant substantially in
the form of EXHIBIT 2(c) hereto in all material respects, subject to the
following;
(i) The number of Parent Shares to be acquired upon the exercise
of the warrant shall equal the number of Parent Shares issued by Parent
to such Electing Lender under SUBSECTION (b) above.
(ii) The exercise price of the warrant shall equal the Exchange
Price.
(iii) The exercise period of the warrant shall be for a three-year
period commencing the date the warrant is issued.
(d) To exercise its put right under this SECTION 2, a Lender must give
notice of its election to Parent (the "PUT NOTICE") on or before the
expiration of the two-year period commencing the date hereof.
(e) In connection with a put under this SECTION 2, Parent agrees that
it will cause a Subject Reserve Report to be prepared or updated as promptly
as possible after receipt by it of a Put Notice, but in no event later than
30 days after receipt by it of a Put Notice. Thereafter, Parent agrees that
it will cause a determination of the Adjusted PV-10 Value as promptly as
possible, but in no event later than 60 days after receipt by it of a Put
Notice.
SECTION 3. PARENT CALL
(a) Subject to the terms and provisions hereof and provided that the
Loans (as defined in the Credit Agreement) have been paid in full, Parent
shall have the right to purchase from each Lender its NPI, and each Lender
shall have the obligation to convey and assign its NPI to Parent, in exchange
for cash and a warrant to purchase Parent Shares determined as provided in
SUBSECTION (b) and (c) below.
(b) The amount of cash to be paid by Parent to a Lender in the event
Parent exercises its call right under this SECTION 3 shall be equal to
$1,100,000 multiplied by such Lender's Net Profits Share.
(c) Parent shall issue to a Lender a warrant substantially in the form
of EXHIBIT 2(c) hereto in all material respects, subject to the following:
(i) The number of Parent Shares to be acquired upon the exercise
of the warrant shall be equal to $1,100,000 divided by the Exchange
Price.
(ii) The exercise price of the warrant shall equal the Exchange
Price.
-5-
<PAGE>
(iii) The exercise period of the warrant shall be for a three-year
period commencing the date the warrant is issued.
(d) To exercise its call right under this SECTION 3, Parent must give
notice of its election to Lenders (the "CALL NOTICE") on or before the
expiration of the one-year period commencing the date hereof. Without
limiting the foregoing, it is specifically agreed that Parent must exercise
its call right under this SECTION 3 with respect to all of the NPIs.
(e) Notwithstanding the foregoing or anything else herein to the
contrary, any given Lender may elect (as to itself) to receive Parent Shares
in lieu of the cash consideration provided in SECTION 3(b). The number of
Parent Shares to be issued to a Lender that elects the option provided in the
preceding sentence shall be equal to (i) the cash consideration that such
Lender would otherwise receive under SECTION 3(b) divided by (ii) the
Exchange Price.
SECTION 4. CLOSING OF A PUT/CALL TRANSACTION. If a Lender exercises a
put right under SECTION 2 or Parent exercise its call right under SECTION 3,
the parties involved shall consummate the transaction contemplated by such
put or call (in this SECTION 4, a "SUBJECT TRANSACTION"), as applicable, as
follows:
(a) The closing of a Subject Transaction shall take place at the
offices of Parent, at its address for notices under SECTION 7, at 10:00 a.m.
(local time) on (i) in the instance of a Subject Transaction arising under
SECTION 2, the fifth business day after the date on which the Adjusted PV-10
Value of the NPI(s) to be purchased and sold has been determined, (ii) in the
instance of a Subject Transaction arising under SECTION 3, the tenth business
day after receipt of the Call Notice, or (in either event) at such other time
and place as shall be mutually agreed upon by the parties to the Subject
Transaction.
(b) At the closing of a Subject Transaction, (i) a Lender that is a
party thereto shall execute an assignment of that portion of the NPI to be
transferred and assigned to Parent or a designee of Parent (which assignment
shall be reasonably customary in form and content and reasonably acceptable
to Parent); (ii) Parent shall deliver stock certificate(s) representing the
Parent Shares to be transferred and assigned to such Lender and a warrant as
provided in SECTION 2(c) (in the instance of a Subject Transaction arising
under SECTION 2); (iii) Parent shall wire transfer immediately available
funds to an account or accounts designated by a Lender and shall deliver a
warrant as provided in SECTION 3(c) (in the instance of a Subject Transaction
arising under SECTION 3); and (iv) Parent shall deliver a certificate or
instrument in form and content reasonably satisfactory to a Lender and
executed by Parent to the effect the representations and warranties of Parent
contained in SECTION 5 are true and correct on as of the date of the closing.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby
represents and warrants to the Lenders as follows:
(a) Parent is an entity duly organized or formed and in good standing
under the laws of the jurisdiction of its formation. Parent has all requisite
power and authority to own, lease, and
-6-
<PAGE>
operate its properties and to carry on its business as now being conducted.
No actions or proceedings to dissolve or terminate Parent are pending.
(b) Except for VSE Approval, Parent has full power and authority to
execute, deliver, and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance by
Parent of this Agreement, and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary action on the
part of Parent. This Agreement has been duly executed and delivered by Parent
and constitutes, and each other agreement, instrument, or document executed
or to be executed by Parent in connection with the transactions contemplated
hereby has been, or when executed will be, duly executed and delivered by
Parent and constitutes, or when executed and delivered will constitute, a
valid and legally binding obligation of Parent, enforceable against it in
accordance with their respective terms, except that such enforceability may
be limited by (i) applicable bankruptcy, insolvency, reorganization,
moratorium, and similar laws affecting creditors' rights generally and (ii)
equitable principles which may limit the availability of certain equitable
remedies (such as specific performance) in certain instances.
(c) The execution, delivery, and performance by Parent of this
Agreement and the consummation by it of the transactions contemplated hereby
do not and will not (i) conflict with or result in a violation of any
provision of the charter or other governing instruments of Parent, (ii)
conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a
default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation, or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement, or other instrument or obligation to which Parent is a
party or by which Parent or any of its properties may be bound, (iii) result
in the creation or imposition of any lien or other encumbrance upon the
properties of Parent, or (iv) violate any applicable law, rule or regulation
binding upon Parent.
(d) Except for VSE Approval, no consent, approval, order, or
authorization of, or declaration, filing, or registration with, any court or
governmental agency or of any third party is required to be obtained or made
by Parent in connection with the execution, delivery, or performance by
Parent of this Agreement or the consummation by it of the transactions
contemplated hereby.
(e) No suit, action or other proceeding is pending before any court or
governmental agency to which Parent is a party and which might materially
hinder or impede the ability of Parent to perform its obligations hereunder.
(f) The Parent Shares and the Warrants and the Warrant Shares which may
be issued hereunder and thereunder have been duly authorized. Upon issuance
of any Parent Shares hereunder (including the Warrant Shares), such Parent
Shares will be validly issued, fully paid and nonassessable and will be free
and clear of all liens, charges, pledges, encumbrances, equities and claims
whatsoever.
-7-
<PAGE>
(g) Parent is current in its obligations to file all periodic reports
and proxy statements with all applicable securities commission required to be
filed under applicable Canadian securities laws, as amended, and applicable
rules and regulations promulgated thereunder. Parent's press releases,
material change reports, financial statements, proxy materials and other
continuous disclosure documents required to be filed under applicable
Canadian securities laws do not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
SECTION 6. NO COMMISSIONS OWED. Parent agrees to indemnify and hold
harmless each Lender (and its affiliates, and its and their respective
officers, directors, employees, attorneys, contractors and agents) from and
against any and all claims, actions, causes of action, liabilities, damages,
losses, costs or expenses (including, without limitation, courts costs and
attorneys' fees) of any kind or character arising out of or resulting from
any agreement, arrangement or understanding alleged to have been made by, or
on behalf of, Parent with any broker or finder in connection with this
Agreement or the transactions contemplated hereby. Each Lender severally (and
not jointly or jointly and severally) agrees to indemnify and hold harmless
Parent (and its officers, directors, employees, attorneys, contractors and
agents) from and against any and all claims, actions, causes of action,
liabilities, damages, losses, costs or expenses (including, without
limitation, court costs and attorneys' fees) of any kind or character arising
out of or resulting from any agreement, arrangement or understanding alleged
to have been made by, or on behalf of, it with any broker or finder in
connection with this Agreement or the transactions contemplated hereby.
SECTION 7. NOTICES. All notices and other communications required
under this Agreement shall (unless otherwise specifically provided herein) be
in writing and be delivered personally, be recognized commercial courier or
delivery service which provides a receipt, by telecopier (with receipt
acknowledged), or by registered or certified mail (postage prepaid), at the
following addresses:
IF TO PARENT:
1000 Louisiana
Suite 3950
Houston, Texas 77002
Attention: Prentis B. Tomlinson, Jr.
Telecopier No.: (713)739-8402
IF TO A LENDER:
at the address provided for such Lender in the Credit Agreement
(provided, that any notice to EnCap Energy Capital Fund III, L.P.,
EnCap Energy Acquisition III-B, Inc. and BOCP Energy Partners, Ltd.
shall be sent to the same address as Energy Capital Investment
Company PLC)
-8-
<PAGE>
and shall be considered delivered on the date of receipt. Any Lender may
change its address for notice purposes by giving notice to Parent in the
manner provided in this Section, at least ten (10) days prior to the
effective date of such change of address. Parent may change its address for
notice purposes by giving notice to Lenders in the manner provided in this
Section, at least ten (10) days prior to the effective date of such change of
address.
SECTION 8. SURVIVAL OF PROVISIONS. All representations, warranties
and covenants made by each party hereto in this Agreement or any other
document contemplated hereby shall be considered to have been relied upon by
the other parties hereto and shall survive the execution and delivery of this
Agreement or such other document, regardless of any investigation made by or
on behalf of any such party.
SECTION 9. COSTS OF ENFORCEMENT. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and expenses in
addition to any other relief to which such party may be entitled.
SECTION 10. ENTIRE AGREEMENT. This Agreement and the other documents
contemplated hereunder contain the entire understanding of the parties hereto
with respect to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations, and discussions among the parties
with respect to such subject matter.
SECTION 11. AMENDMENTS. This Agreement may be amended, modified,
supplemented, restated or discharged only by an instrument in writing signed
by Parent and those Lenders whose aggregate Percentage Shares equal or exceed
95%.
SECTION 12. NO WAIVER. The failure of any party hereto to insist upon
strict performance of a covenant hereunder or of any obligation hereunder,
irrespective of the length of time for which such failure continues, shall
not be a waiver of such party's right to demand strict compliance in the
future. No consent or waiver, express or implied, to or of any breach or
default in the performance of any obligation hereunder shall constitute a
consent or waiver to or of any other breach or default in the performance of
the same or any other obligation hereunder.
SECTION 13. CHOICE OF LAW. Without regard to principles of conflicts
of law, this Agreement shall be construed and enforced in accordance with and
governed by the laws of England and Wales.
SECTION 14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on
and inure to the benefit of the parties hereto and their respective
successors and assigns, provided that Parent may not assign its rights and
duties hereunder without the prior written consent of those Lenders whose
aggregate Percentage Shares equal or exceed 95%.
SECTION 15. SPECIFIC PERFORMANCE. The parties hereto recognize that
any breach of the terms of this Agreement may give rise to irreparable harm
for which money damages would not
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<PAGE>
be an adequate remedy, and accordingly agree that, in addition to other
remedies, any nonbreaching party shall be entitled to enforce the terms of
this Agreement by a decree of specific performance without the necessity of
proving the inadequacy as a remedy of money damages.
SECTION 16. ARBITRATION. Any dispute arising out of or relating to
this Agreement or incident to the transactions contemplated hereby or the
breach, inaccuracy, termination or validity hereof or otherwise arising out
of or relating to the transactions contemplated hereby, shall be determined
by binding arbitration in accordance with the then current Commercial
Arbitration Rules of the (United States) American Arbitration Association. If
a single neutral arbitrator cannot be agreed upon within 30 calendar days
after a dispute has arisen which is to be decided by arbitration, the
arbitration shall be conducted by a panel of three neutral arbitrators.
Otherwise, the arbitration shall be conducted by a single neutral arbitrator.
The parties shall endeavor to select neutral arbitrators by mutual agreement.
If such agreement cannot be reached within 30 calendar days after a dispute
has arisen which is to be decided by arbitration, each party shall select its
own neutral arbitrator within 15 days of the expiration of such 30-day period
and the two neutral arbitrators so selected shall select a third neutral
arbitrator within 10 days of the expiration of such 15-day period. The 3
persons thus selected shall be the arbitrators for such arbitration. If three
arbitrators are selected, the arbitrators shall elect a chairperson to
preside at all meetings and hearings. If a dispute is to be resolved by a
sole arbitrator in accordance with the terms hereof, or if the dispute is to
be resolved by a panel of three arbitrators as provided hereinabove, then
such sole arbitrator or the chairperson of such panel, as the case may be,
shall be a member of a state bar engaged in the practice of law in the United
States or a retired member of a state or the federal judiciary in the United
States. The award of the arbitrator(s) shall require a majority of the
arbitrators in the case of a panel of arbitrators, shall be in writing and
reasoned, shall be based on the evidence admitted and the substantive law of
England and Wales and shall contain an award for each issue and counterclaim.
The award shall be made within 30 days following the close of the final
hearing and the filing of any post hearing briefs authorized by the
arbitrator(s). The award of the arbitrator(s) shall be final and binding on
the parties hereto and the subject matter. Judgment upon the award rendered
by the arbitrator(s) may be entered by any court having jurisdiction. The
place of arbitration shall be in Houston, Texas. Each party shall be entitled
to inspect and obtain a copy of relevant documents in the possession or
control of the other party and to take depositions of the other parties'
employees, agents, representatives and witnesses (including expert
witnesses). All such discovery shall be in accordance with procedures
approved by the arbitrator(s). Unless otherwise provided in the award, each
party shall bear its own costs of discovery. All discovery shall be
expedited, consistent with the nature and complexity of the claim or dispute
and consistent with fairness and justice. The arbitrator(s) shall have the
power to compel any party to comply with discovery requests of the other
parties and to issue binding orders relating to any discovery dispute which
shall be enforceable in the same manner as awards. The arbitrator(s) also
shall have the power to impose sanctions for abuse or frustration of the
arbitration process, including without limitation, the refusal to comply with
orders of the arbitrator(s) relating to discovery and compliance with
subpoenas. Each of the parties hereto hereby irrevocably submits to the
jurisdiction of the courts of the State of Texas for entry of any arbitration
decision or to obtain any preliminary relief which may be necessary and
hereby consents to the enforcement by such courts of any award rendered in
such arbitration.
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<PAGE>
SECTION 17. VSE APPROVAL. Parent agrees to use its best efforts to
obtain VSE Approval as promptly as possible after the execution and delivery
of this Agreement, but in any event within 45 days after the execution and
delivery of this Agreement.
SECTION 18. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, with each such counterpart constituting an original and all of
such counterparts constituting but one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
BENZ ENERGY LTD.
By: /s/ Todd Grabois
-------------------------------
Name: Todd Grabois
Title: Vice President
PERRY LIMITED
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By:
-------------------------------
Name: David P. Quint
Title: Chief Executive Officer
SREEDESWAR, INC.
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By:
-------------------------------
Name: David P. Quint
Title: Chief Executive Officer
DALWORTH CAPITAL
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By:
-------------------------------
Name: David P. Quint
Title: Chief Executive Officer
James Ladner
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By:
-------------------------------
Name: David P. Quint
Title: Chief Executive Officer
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<PAGE>
RP&C INTERNATIONAL LIMITED
By:
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.C., General Partner
By: /s/ Robert L. Zorich
----------------------------
Name: Robert L. Zorich
Title: Managing Director
ENCAP ENERGY ACQUISITION III-B, INC.
By: /s/ Robert L. Zorich
----------------------------
Name: Robert L. Zorich
Title: President
BOCP ENERGY PARTNERS, L.P.
By: EnCap Investments L.C., Manager
By: /s/ Robert L. Zorich
----------------------------
Name: Robert L. Zorich
Title: Managing Director
ENERGY CAPITAL INVESTMENT COMPANY PLC
By: /s/ Robert L. Zorich
----------------------------
Name: Robert L. Zorich
Title: Authorized Representative
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
BENZ ENERGY, LTD.
By:
----------------------------
Name: Todd Grabois
Title: Vice President
PERRY LIMITED
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
SREEDESWAR, INC.
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
DALWORTH CAPITAL
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
James Ladner
By: RP&C INTERNATIONAL LIMITED, Attorney-in-Fact
By: /s/ David P. Quint
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
<PAGE>
RP&C INTERNATIONAL LIMITED
By: /s/ David P. Quint
----------------------------
Name: David P. Quint
Title: Chief Executive Officer
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EuCap Investments L.C., General Partner
By:
----------------------------
Name: Robert L. Zorich
Title: Managing Director
ENCAP ENERGY ACQUISITION III-B, INC.
By:
----------------------------
Name: Robert L. Zorich
Title: President
BOCP ENERGY PARTNERS, L.P.
By: EnCap Investments L.C., Manager
By:
----------------------------
Name: Robert L. Zorich
Title: Managing Director
ENERGY CAPITAL INVESTMENT COMPANY PLC
By:
----------------------------
Name: Robert L. Zorich
Title: Authorized Representative
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
LENDER LOAN AMOUNT
- ----------------------------------------------- --------------
<S> <C>
Perry Limited, a Guernsey Corporation $ 1,000,000.00
Sreedeswar, Inc., a Panamanian Corporation $ 880,000.00
Dalworth Capital, a Channel Islands Corporation $ 50,000.00
James Ladner $ 50,000.00
RP&C International Limited $ 120,000.00
Energy Capital Investment Company PLC $ 100,000.00
</TABLE>
<PAGE>
[LETTERHEAD]
December 18, 1998
Mr. Joe U. Flores
Mobil Exploration & Production U.S. Inc.
1200 Timberlock Place
The Woodlands, Texas 77380
RE: Assignment of Contract Rights and Term Assignment
of Oil and Gas Lease, Old Ocean Area, Brazoria and
Matagorda Counties, Texas
Ladies and Gentlemen:
The purpose of this letter is to set forth our agreement regarding
the extension of that certain letter agreement (the "Agreement") dated
November 10, 1998 between Benz Energy, Ltd. ("Benz") and Mobil Producing
Texas & New Mexico Inc. ("Mobil") regarding the referenced transaction (the
"Transaction").
1. The Agreement provides the closing of the Transaction will occur on
or before December 15, 1998. At the request of Benz Mobil hereby agrees to
extend the closing of the Transaction to on or before December 31, 1998 (the
"Closing Date").
2. The Agreement also requires the parties to negotiate in good faith
to formalize a purchase and sale agreement. The parties hereby agree that
they are under no obligation to negotiate, for or formalize such an
agreement.
3. In the event Benz is unable to close this Transaction on or before
the Closing Date, as liquidating damages, Mobil will receive an assignment
from Benz of 22.23105% of 8/8ths interest in all of the geophysical option
agreements and oil, gas and mineral leases and any extensions, renewals or
modifications thereto, (the "Interest") acquired by, or for the benefit of,
Benz or any of its affiliated companies free of cost through the Closing
Date. The Interest assigned will be limited to lands within the AMI but
outside the Old Ocean Unit as identified in that unrecorded agreement, by
and between Mobil Producing Texas & New Mexico Inc., Amoco Producing Company
and Cheyenne Petroleum Company dated effective October 15, 1997.
<PAGE>
Mobil Exploration & Production U.S. Inc.
December 18, 1998
Page 2
If this letter set forth your understanding, please sign and insert
the date in the appropriate spaces below.
Very truly yours,
BENZ ENERGY, LTD.
/s/ R. Hiram Lucius
R. Hiram Lucius, CPL
Coordinator Contract Negotiations
ACCEPTED AND AGREED TO
this 18th day of December, 1998:
MOBIL PRODUCING TEXAS & NEW MEXICO INC.
By: Mobil Exploration & Producing U.S. Inc.,
as Agent
/s/ Joe U. Flores
-----------------------------------------
BY: Joe U. Flores
-------------------------------------
NAME:
-----------------------------------
TITLE: Landman
----------------------------------
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, (hereinafter referred to as "AGREEMENT"), made and
entered into this 19th day of May, 1998, by and among TEXSTAR PETROLEUM, INC., a
Texas corporation, 1000 Louisiana, 15th Floor, Houston, Texas, 77002,
(hereinafter referred to as "Texstar"), and SOUTHERN GAS CO. OF DELAWARE, INC.,
a Delaware Corporation, 160 Morgan Street, Versailles, Kentucky, 40383
(hereinafter referred to as "Southern").
RECITALS
WHEREAS, Southern owns certain working and revenue interest in oil and gas
properties, leases, wells and pipelines located in Mississippi (the "Assets");
and
WHEREAS, Texstar desires to purchase from Southern the Assets and Southern
desire to sell to Texstar the Assets; and
WHEREAS, the parties are desirous of evidencing their agreements in respect
of such purchase and sale of the Assets, which is to be made on all the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements herein contained, the
parties agree as follows:
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<PAGE>
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINITIONS. Except as otherwise expressly defined herein,
all capitalized terms in this Agreement shall have the meanings assigned to
them as follows:
GLOSSARY OF TERMS
"SOUTHERN" shall have the meaning assigned to such term in the Preamble
"ASSETS" shall in addition to the meaning assigned to such term in Section
2.1 and the Preamble, mean all tangible and intangible personal and real
property, including but not limited to all equipment, inventory, mineral
leasehold interest, wells and pipelines appurtenant to the wells which are the
subject of this Agreement, in Wayne, Jones, Lawrence and Jefferson Davis
Counties, Mississippi.
"CLOSING" shall mean the closing of the transactions contemplated by this
Agreement.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CODE" shall mean the Internal Revenue Code of 1986.
"IRS" shall mean the Internal Revenue Service.
"KNOWLEDGE" shall mean actual knowledge or knowledge that such party should
have obtained, acting diligently, by making due inquiry of such parties'
directors, officers, employees, agents and/or others reasonably expected to be
familiar with the particular subject matter.
"LEASES" shall mean any oral or written contract for the use or occupancy
of real or personal property, or mineral rights thereunder.
"PERSON" shall mean any individual, firm, corporation, partnership or other
business entity.
"TEXSTAR" shall have the meaning assigned to such term in the Preamble.
2
<PAGE>
ARTICLE II
PURCHASE AND SALE
2.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions
of this Agreement and in reliance on the representations, warranties,
covenants and agreements contained herein, Southern shall sell, assign,
transfer and deliver to Texstar and Texstar agrees to purchase and acquire
from Southern, at the Closing on the Closing Date (as defined in Section
3.3), the following assets and properties of Southern (the "ASSETS"):
a. All of Southern's interest in and to those oil and/or gas wells (the
"Wells") as set forth and identified in Exhibit "A", attached hereto
and made a part hereof.
b. All of Southern's interest in and to those oil and gas leases (the
"Leases") as set forth and identified in Exhibit "B", attached hereto
and made a part hereof.
c. All surface and underground equipment and other personalty and
fixtures in or on the Leases, to the extent Southern owns, possesses
and has the right to transfer same (the "Facilities").
2.2 PURCHASE PRICE. In reliance upon the representations and warranties
and subject to the terms and conditions hereinafter set forth, Southern hereby
sells, transfers, assigns and delivers to Texstar and Texstar hereby purchases
and acquires from Southern all of the Assets for an aggregate deemed
consideration of One Million Two Hundred and Fifty Thousand Dollars
($1,250,000.00) Dollars and the conveyance of a 5.5% working interest in the
White Castle Dome
3
<PAGE>
Prospect (collectively the "Purchase Price"), which shall be paid by Texstar to
Southern at the time of Closing.
2.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
as set forth in Exhibit "C", attached hereto and made a part hereof.
2.4 EFFECTIVE DATE. The conveyance of the Assets as contemplated in this
Agreement shall be deemed for all respects, except that all Representations and
Warranties of Southern shall be applicable at the time of the Closing, to be
effective on May 1, 1998.
2.5 WHITE CASTLE DOME RIGHT OF FIRST REFUSAL. The parties acknowledge
that Texstar is required to give notice of its intention to sale its interest in
the White Castle Dome Prospect and that interest is subject to a "RIGHT OF FIRST
REFUSAL" by Shell Western E&P, Inc. Texstar stipulates that the parties have
established a value on its interest in White Castle Dome Prospect at $780,000
(the "Right of First Refusal Payment"), and in the event Shell Western E&P, Inc.
elects to exercise their right of first refusal and acquire Texstar's interest
for the Right of First Refusal Payment, Texstar, upon receipt, shall immediately
remit said monies to Southern. Furthermore, should Texstar be unable to
transfer its interest to Southern by August 1, 1998, it shall remit the sum of
$780,000 to Southern. Texstar agrees to use its best efforts to transfer its
interest in the White Castle Dome Prospect to Southern.
4
<PAGE>
ARTICLE III
CLOSING
3.1 CLOSING. The Closing of the purchase and sale of the Assets (the
"CLOSING"), shall be held on May 19, 1998 (the "CLOSING DATE"), or on such other
date as shall be mutually agreed upon by Texstar and Southern. The Closing
shall be held at the offices of Texstar in Houston, Texas, or at such other
location as the parties hereto may mutually agree upon.
3.2 DELIVERIES BY SOUTHERN TO TEXSTAR. Southern shall deliver to Texstar
at Closing:
(a) Bill of sale, assignment and/or other instruments of transfer
referred to in this Agreement, in the forms attached hereto as
Exhibits "D-1", "D-2" and "D-3" to effect the transfer of the
Assets to Texstar.
(b) A copy of the resolutions, certified by the Secretary of
Southern, authorizing Southern to enter into the transactions
contemplated by this Agreement to which it is a party.
3.3 DELIVERIES BY TEXSTAR TO SOUTHERN. At the Closing, Texstar shall
deliver to Southern:
(a) A bank cashier's check or wire transfer for the Purchase Price as
provided in Section 2.2.
5
<PAGE>
(b) A copy of the resolutions, certified by the Secretary of Texstar,
authorizing Texstar to enter into the transactions contemplated
by this Agreement.
(c) Bill of sale, assignment and/or other instruments of transfer
referred to in this Agreement, in the form attached hereto as
Exhibit "E", to effect the transfer of Texstar interest in the
White Castle Dome Prospect to Southern.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SOUTHERN
WITH RESPECT TO THE ASSETS
In order to induce Texstar to enter into this Agreement and to consummate
the transactions contemplated hereby, to the extent that the representations and
warranties contained in this Article IV, relate to the Assets, or the falsity of
such representations or warranties could affect Texstar's rights in or use of
the Assets, Southern represents and warrants to Texstar as follows:
4.1 FORMATION OF SOUTHERN. That Southern is a corporation which was duly
formed, validly existing and in good standing under the laws of the State of
Delaware, with the power and authority to own, lease and operate its properties
and to carry on their business as now being conducted.
6
<PAGE>
4.2 AUTHORITY OF SOUTHERN. Southern has the necessary power and
authority, and has taken all necessary and proper action to approve this
Agreement and to consummate the transactions contemplated hereby and thereby.
True and complete copies of the resolutions heretofore duly and validly adopted
by Southern evidencing such authorization (which resolutions have not been
modified or rescinded and will be in full force and effect at the Closing),
certified by an Officer of Southern. This Agreement will, upon the execution
and delivery hereof and thereof, constitute a valid and binding obligation of
Southern enforceable against Southern in accordance with its respective terms.
4.3 TITLE TO PROPERTIES; ENCUMBRANCES. Southern makes no representation
or warranty as to title and Texstar accepts the assignment of the Assets with
full knowledge that it is acquiring Southern's interest without any such
warranty or representation.
4.4 LITIGATION. There are no claims, actions, suits, proceedings, or, to
the best of Southern's Knowledge and belief, investigations (collectively,
"Actions") pending or threatened by or against, or involving the Assets, and
there are no actions which question or challenge the validity of this Agreement
or any action taken or to be taken by Southern pursuant to this Agreement or in
connection with the transactions contemplated hereby or thereby, and Southern
does not know of any valid basis for any such Action.
7
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF TEXSTAR
Texstar hereby represents and warrants to Southern as follows:
5.1 ORGANIZATION OF TEXSTAR. Texstar is a corporation duly organized,
validly existing and in good standing under the laws of the State of Texas,
it is qualified to do business as a foreign corporation in every jurisdiction
in which it transacts business and has the corporate power and authority to
own, lease and operate its properties and to carry on its business as now
being conducted.
5.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Texstar has the corporate
power and authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby and thereby. The execution and delivery
of this Agreement by Texstar, and the consummation by Texstar of the
transactions contemplated hereby and thereby, have been duly authorized (or
will be ratified) by Texstar's Board of Directors and no other corporate
proceedings on the part of Texstar or any other Person are (will be)
necessary to authorize Texstar's entering into this Agreement to which it is
a party or the consummation of the transactions contemplated hereby and
thereby. True and complete copies of the resolutions duly and validly adopted
by such Board of Directors evidencing such authorizations (or ratification)
(which resolutions shall not have been modified or rescinded and will be in
full force and effect on the Closing Date), certified by the Secretary of
Texstar, will be delivered to Southern by Texstar on or before the Closing.
8
<PAGE>
5.3 PURCHASE PRICE. Texstar has the funds in which to fully comply
with the terms and conditions of Article II.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF SOUTHERN
The obligation of Southern to consummate the transactions contemplated
by this Agreement is subject to the satisfaction, on or before the Closing
Date, of each of the following conditions, unless waived in writing by
Southern:
6.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Texstar contained in, or made pursuant to, this Agreement shall
be true, complete and accurate in all material respects as of the date when
made, and at and as of the Closing Date as though such representations and
warranties were made at and as of the Closing, except for changes expressly
permitted or contemplated by the terms hereof or thereof.
6.2 PERFORMANCE. Texstar shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by them on or prior to the Closing Date.
6.3 NO GOVERNMENT PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative
9
<PAGE>
proceeding shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated by this Agreement.
6.4 CONSENTS. All permits, authorizations, consents, approvals and
waivers necessary for the consummation of the transactions contemplated by
this Agreement shall have been obtained and copies thereof delivered by
Southern. The consummation of this transaction is subject to Southern
receiving consent from its primary lenders of the divestiture of the Assets.
6.5 PAYMENT OF CONSIDERATION. Texstar shall have paid the purchase
price as provided for in Article II of this Agreement.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF TEXSTAR
The obligation of Texstar to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or before the Closing Date,
of each of the following conditions, unless waived in writing by Texstar.
7.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Southern contained in this Agreement shall be true and accurate
in all material respects as of the date when made, and at and as of the
Closing Date, as though such representations and warranties
10
<PAGE>
were made at and as of the Closing Date, except for changes expressly
permitted or contemplated by the terms hereof or thereof.
7.2 PERFORMANCE. Southern shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by Southern on or prior to the Closing Date.
7.3 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated by this Agreement.
ARTICLE VIII
TERMINATION
8.1 METHODS OF TERMINATION. The transactions contemplated by this
Agreement may be terminated;
(a) By mutual consent of Texstar and Southern; or
(b) By either party on the Closing Date if any of the conditions
provided for in this Agreement shall not have been met or
waived in writing prior to such date.
11
<PAGE>
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 AMENDMENT AND MODIFICATION. This Agreement may be amended,
modified or supplemented only by written agreement between Texstar and
Southern.
9.2 WAIVER OF COMPLIANCE. Any failure of Texstar to comply with any
obligation, covenant, agreement, or condition herein may be waived by
Southern, and any failure of Southern to comply with any obligation,
covenant, agreement or condition herein may be waived by Texstar; PROVIDED,
HOWEVER, that any such waiver may be made only by a written instrument signed
by the party or parties granting such waiver, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
9.3 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns;
PROVIDED, HOWEVER, Texstar may assign this Agreement in whole or in part, or
assign any of its respective rights, interests or obligations hereunder
without the written consent of Southern.
9.4 FURTHER ASSURANCES. From time to time, at the request of Texstar,
and without further consideration, Southern at their expense, will execute
and deliver to Texstar such other
12
<PAGE>
documents, and take such other action as Texstar may reasonably request in
order to consummate more effectively the transactions contemplated hereby and
to vest in Texstar title to the Assets.
9.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas (without regard to its
conflicts of law doctrines).
9.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument and shall become a
binding agreement when one or more of the counterparts have been signed by
each of the parties hereto and delivered to each of the other parties.
9.7 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered by hand,
courier, mailed by registered or certified mail (return receipt requested),
or telecopied to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
IF TO SOUTHERN:
Southern Gas Co. of Delaware, Inc.
160 Morgan Street
Versailles, Kentucky 40383
Attention: David Stetson
Telephone: 606-873-5455
Fax: 606-873-4689
13
<PAGE>
IF TO TEXSTAR:
Texstar Petroleum, Inc.
1000 Louisiana, Suite 1500
Houston, Texas 77002
Telephone: 713-739-0351
Fax: 713-739-8402
Attention: Hiram Lucius
9.8 ENTIRE AGREEMENT. This Agreement, including the Exhibits attached
hereto, and the schedules, other documents and instruments referred to in
this Agreement (which are hereby incorporated by reference and deemed to
constitute a part of "this Agreement"), enbodies the entire agreement and
understanding of the parties hereto in respect of the subject matter
contained herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
9.9 HEADINGS. The section or paragraph headings contained in this
Agreement are for convenience reference only, and shall not in any way effect
the meaning or interpretation of this Agreement. This Agreement may be
executed simultaneously.
9.10 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable or being enforced by any rules, law or public
policy, all other conditions and provisions of this Agreement shall,
nevertheless, remain in full force and effect so long as economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid,
14
<PAGE>
illegal, or incapable of being enforced, the parties hereto shall negotiate
in good faith to modify this Agreement so as to affect the original intent of
the parties as closely as possible, in an acceptable manner to the end of the
transactions contemplated hereby are fulfilled to the extent possible.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
TEXSTAR PETROLEUM, INC.
BY: /s/ Ernest J. LaFlure
------------------------------
Ernest J. LaFlure
ITS:
------------------------------
President
SOUTHERN GAS CO. OF DELAWARE, INC.
BY: /s/ David Stetson
------------------------------
David Stetson
ITS:
------------------------------
General Counsel
15
<PAGE>
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
STARBUCKS TRUST
AS SELLER
AND
BENZ ENERGY, LTD.
AS BUYER
AND
TEXSTAR PETROLEUM, INC.
<PAGE>
TABLE OF CONTENTS
1. SALE AND PURCHASE OF THE ASSETS1
1.1 Acquired Assets1
1.2 Records2
2. PURCHASE PRICE2
2.1 Purchase Price2
2.2 Payment2
2.3 Advances2
2.4 Security for Advances3
2.5 Resale Restrictions3
2.6 Allocation3
2.8 Adjustments4
2.10 Share Pledge4
3. EFFECTIVE TIME AND CLOSING DATE4
3.1 Closing4
3.2 Effective Time4
3.3 Ownership Prior to Effective Time4
3.4 Ownership After Effective Time5
4. INDEMNIFICATION/ASSUMED OBLIGATIONS5
4.1 Assumed Obligations5
4.2 Seller's Indemnification5
4.3 Buyer's Indemnification6
4.4 Sole Remedy6
5. CLOSING6
5.1 Delivery by Sellers6
5.2 Delivery to Buyer6
5.3 Further Co-operation6
6. TITLE COVENANTS6
6.1 Covenants Relating to Title6
6.2 Seller's Title7
6.4 Defect Letters8
6.5 Effect of Title Failure8
6.6 Price Adjustments due to Title Failure9
7. REPRESENTATIONS AND WARRANTIES OF SELLER9
7.1 Seller's Representations and Warranties9
7.2 Disclaimer of Representations10
<PAGE>
8. REPRESENTATIONS AND WARRANTIES OF BUYER10
8.1 Buyer's Representations and Warranties10
9. CERTAIN AGREEMENTS OF SELLER11
9.1 Maintenance of Assets11
9.2 Consents12
9.3 Co-operation12
10. CERTAIN AGREEMENTS OF BUYER12
10.1 Co-operation12
10.2 Disclosure12
11. SURVIVAL12
12. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER12
12.1 No Litigation13
12.2 Representations, Warranties and Covenants13
12.3 Consents13
13. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER13
13.1 No Litigation13
13.2 Representations and Warranties13
14. TERMINATION13
14.1 Causes of Termination13
14.2 Effect of Termination13
15. MISCELLANEOUS14
15.1 Notice14
15.2 Fees, Expenses and Taxes14
15.3 Assignment14
15.4 Entire Agreement15
15.5 Severability15
15.6 Choice of Law15
15.7 Texas Deceptive Trade Practices Act Waiver15
15.8 Exhibits15
15.9 Captions15
EXHIBITS
EXHIBIT A -- Leases
EXHIBIT B -- Properties
EXHIBIT C -- Allocated Values
EXHIBIT D -- Conveyance
EXHIBIT E -- Promissory Notes
<PAGE>
EXHIBIT F -- Guarantee Agreement
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") is entered into this
30th of June, 1998 by and between STARBUCKS TRUST, a Texas trust ("Seller") and
BENZ ENERGY, LTD., a Yukon corporation, ("Buyer") and Texstar Petroleum, Inc.
("Texstar"). Buyer and Seller are collectively referred to herein as the
"Parties" and sometimes individually referred to as a "Party."
WITNESSETH:
In consideration of the mutual agreements contained in this Agreement, Buyer,
Seller and Texstar agree as follows.
1. SALE AND PURCHASE OF THE ASSETS.
1.1 ACQUIRED ASSETS. Subject to the terms and conditions of this
Agreement, Seller agrees to sell, convey and deliver to Buyer or Texstar, as its
designee, and Buyer agrees to purchase and acquire from Seller all of Seller's
right, title and interest in and to the following (collectively, the "Assets"):
(A) All of Seller's oil and gas and associated hydrocarbons
("Oil and Gas") and related rights, titles and interests, including, but not
limited to, leasehold interests, royalty interests, overriding royalty
interests, payments out of production, reversionary rights, and contractual
rights to production, including without limitation, (i) those interests
described in the leases, subleases, assignments and other instruments described
in Exhibit A (collectively "Leases"); (ii) those properties described in Exhibit
B (the "Properties") (iii) all easements, rights of way, platform leases, and
other rights, privileges, benefits and powers with respect to the use and
occupation of the surface of, and the subsurface depths under, the land covered
by the Leases and (iv) all rights in respect of any pooled or unitized acreage
located in whole or in part within each Lease including all production
associated with such Lease, regardless of whether such unit or pool production
comes from wells located within or outside the Leases;
(B) All licenses, servitudes, farmin agreements, farmout
agreements, bottom hole agreements, acreage contribution agreements, operating
agreements, unit agreements, processing agreements, marketing and product sales
agreements, options, leases of equipment or facilities, joint venture
agreements, pooling agreements, transportation agreements, and other contracts,
agreements and rights, which are owned by Seller, in whole or in part, and are
(i) appurtenant to the Leases, or (ii) used or held for use in connection with
the ownership or operation of the Leases, or the sale, distribution or disposal
of oil and gas or water, (collectively, the "Contracts");
(C) All of the real, personal and mixed property and facilities
located in, on or adjacent to the Leases or used in the operation thereof
(whether located on or off such Leases), which is owned by Seller, in whole or
in part, including, without limitation, well equipment;
<PAGE>
casing; tanks; crude oil, natural gas, condensate or products in storage severed
after the Effective Time; tubing; compressors; pumps; motors; fixtures;
machinery and other equipment; pipelines; field processing equipment; inventory
and all other improvements used or useful in the operation thereof (the "Related
Assets");
(D) All governmental permits, licenses and authorizations
including environmental permits, licenses and authorizations, as well as any
applications for the same, related to the Leases or the use thereof;
(E) To the extent specifically attributable or allocable to the
Leases and only to the extent that the same are assignable or transferable by
Seller, all of the files, records and data relating to the items described in
subsections (A), (B), (C), and (D) above, including, without limitation, title
records (title curative documents); surveys, maps and drawings; contracts;
correspondence; Federal Energy Regulation Commission files; geological,
geophysical and seismic records, data and information; production records,
electric logs, core data, pressure data, decline curves, graphical production
curves and all related matters and construction documents (except to the extent
the delivery or copying of such records may be restricted by contract with a
third party, in which event Seller shall co-operate with Buyer in efforts to
provide on site access to such records until a release from such restriction may
be obtained) (the "Records"), provided that Seller will not be obligated to pay
any costs or fees to provide such access or release; and
(F) Any and all other assets of Seller appurtenant or related to
or used in connection with the Leases.
1.2 RECORDS. Seller shall have the right to make and retain copies of
the Records as Seller may desire prior to the delivery of the Records to Buyer.
Buyer, for a period of three years after the Closing, defined below, shall make
available to Seller access to such copies of the Records as Buyer may have in
its possession (or to which it may have access) upon written request of Seller,
during normal business hours; provided, however, that Buyer shall not be liable
to Seller for the loss of any Records by reason of clerical error or inadvertent
loss or destruction of Records.
2. PURCHASE PRICE.
2.1 PURCHASE PRICE. The purchase price for the Assets is Two Million
Eight Hundred Eighty-Two Thousand Five Hundred Forty-Seven Dollars ($2,882,547)
in United States currency, subject to adjustment, which shall be comprised of
US$2,332,537 in readily available funds and 600,000 common shares in the capital
stock of Buyer (the "Shares") at a price of CDN$1.35 per share (the "Purchase
Price").
2.2 PAYMENT. The Purchase Price, shall be paid by Buyer to the Seller
on the Closing Date:
2.3 ADVANCES. Notwithstanding section 2.2 hereof, in the event that the
Closing Date:
<PAGE>
(A) has not occurred by July 25, 1998, Texstar shall advance to
Seller by way of loan US$570,000 (the "First Advance") on
July 26, 1998; and
(B) has not occurred before August 25, 1998, Texstar shall
advance to Seller by way of loan an additional US$1,000,000
(the "Second Advance") on August 26, 1998.
(the First Advance and Second Advance are hereinafter referred to
as "Advances")
2.4 SECURITY FOR ADVANCES. Notwithstanding any other provision of this
Agreement, any Advance made by Texstar to Seller shall be evidenced by a
promissory note (a "Promissory Note") of Seller in favour of Texstar in the
amount of the Advance which shall be in the form attached as Exhibit E, and the
Promissory Note(s) and all amounts owing thereunder shall be secured by a pledge
of 1,500,000 common shares of Buyer owned by Seller in favour of Texstar on
terms satisfactory to Texstar (the "Share Pledge"). The Promissory Notes and
Share Pledge shall be executed and delivered by Seller to Texstar on the date of
each Advance, as applicable, and all amounts owing under the Promissory Note(s)
shall be repaid to Texstar by Seller on or before the earlier of the Closing
Date and December 31, 1998.
2.5 RESALE RESTRICTIONS. Seller hereby acknowledges and accepts that
the Shares to be issued hereunder may be subject to resale restrictions imposed
under applicable securities laws and rules of regulatory bodies having
jurisdiction and Seller agrees to comply with such requirements and resale
restrictions.
2.6 ALLOCATION. The Purchase Price shall be allocated to the Assets in
accordance with the values set forth in Exhibit C. Each of Buyer and Seller
covenant and agree that the values allocated to various portions of the Assets
which are set forth in Exhibit C, shall be binding on the parties.
2.7 GUARANTEE OF VALUE OF ASSETS. Seller hereby guarantees that the
Assets on January 1, 2000 or such earlier date as the Seller may request (the
"Valuation Date"), will have a value of not less than US$3,032,537 (cumulative)
(the "Guaranteed Amount") based on a valuation report ("Valuation") prepared by
an nationally recognized independent qualified engineer mutually agreed upon by
the Seller and Buyer using a discount rate of 10%, such Valuation shall be
calculated based on the following:
(A) cash proceeds received by the Buyer from the sale of any portion of
the Assets following Closing plus interest thereon calculated at an
interest rate of 10% per annum; plus
(B) the net present value (using a discount rate of 10%) attributable
to the proven developed producing reserves using oil and gas prices
described in the Wall Street Journal futures strip dated July 6,
1998 relating to that portion of the Assets which have not been
sold by Buyer following Closing; plus
<PAGE>
(C) 70% of the proven non-producing reserves using oil and gas prices
described in the Wall Street Journal futures strip dated July 6,
1998 relating to that portion of the Assets which have not been
sold by Buyer following Closing; plus
(D) oil and gas revenues generated from the Assets after the Effective
Date; less
(E) actual expenses associated with exploring, developing and
production from the Assets.
The applicable Valuation may be delivered to the Buyer at any time prior to the
Valuation Date but shall be delivered no later than 90 days following the
Valuation Date.
2.8 ADJUSTMENTS. In the event that the value of the Assets (cumulative)
specified in the Valuation and calculated in accordance with section 2.7 hereof
is less than the Guaranteed Amount, Seller shall be obligated to pay to Buyer
within 5 days following the date that the Valuation is required to be delivered,
an amount equal to the difference between the value specified in such Valuation
and the Guaranteed Amount, and any payments under this section shall be an
considered as an adjustment to the Purchase Price under section 2.1 above. For
the purposes of calculating any other adjustments to the Purchase Price, the
Seller shall be credited with proceeds of production from the Assets prior to
the Effective Time and debited with costs, taxes and expenses of ownership
attributable to the Assets prior to the Effective Time and Buyer shall be
credited with proceeds of production from the Assets after the Effective Time
and debited with costs, taxes and expenses of ownership attributable to the
Assets after the Effective Time. In addition, appropriate reductions to the
Purchase Price will be made due to Title Failures as provided in section 6.6.
2.9 GUARANTEE. Pursuant to section 2.7 hereof, Seller shall execute and
deliver to Buyer, a guarantee of Seller in the form attached as Exhibit "F"
(the "Guarantee") on or prior to the Closing Date and any other documentation
required to be executed and delivered under the terms and conditions of the
Guarantee.
2.10 SHARE PLEDGE. On the earlier of the date of the First Advance, (if
applicable) and the Closing Date, Seller shall execute and deliver to Texstar,
the Share Pledge and any other documentation required to be executed and
delivered under the terms and conditions of the Share Pledge, as security for
the payment of any principal and interest owing to Texstar under the
Promissory Notes (if applicable).
3. EFFECTIVE TIME AND CLOSING DATE.
3.1 Closing. Subject to Conditions Precedent set forth at Articles 13
and 14 and "any termination pursuant to Article 15, the sale and purchase of the
Assets ("Closing") shall be held on or before July 25, 1998 ("Closing Date") or
such other date as Buyer and Seller may agree. The Closing will take place at
the offices of Seller at 1000 Louisiana, Suite 1500, Houston, Texas, 77002, or
at such other place as mutually agreed upon by Seller and Buyer.
<PAGE>
3.2 EFFECTIVE TIME. The sale shall be effective as of 7:00 A.M., local
time of the location of the Assets on June 30, 1998 ("Effective Time").
3.3 OWNERSHIP PRIOR TO EFFECTIVE TIME. If the Closing occurs,
Seller shall be entitled to all of the rights and incidents of ownership
generated from or attributable to the Assets prior to the Effective Time. Seller
shall bear and be responsible for the duties, liabilities, costs, expenses and
obligations of ownership attributable to the Assets prior to the Effective Time,
except as may be otherwise provided herein.
3.4 OWNERSHIP AFTER EFFECTIVE TIME. If the Closing occurs, Buyer shall
be entitled to all of the rights and incidents of ownership generated from or
attributable to the Assets after the Effective Time. Buyer shall assume, bear
and be responsible for the duties, liabilities, costs, expenses and obligations
of ownership attributable to the Assets from and after the Effective Time,
including but not limited to compliance with Environmental Laws.
4. INDEMNIFICATION/ASSUMED OBLIGATIONS.
4.1 ASSUMED OBLIGATIONS. Subject to Buyer being satisfied with an
environmental assessment, at Closing, Buyer shall assume (a) the obligation to
(i) plug and abandon or remove and dispose of all wells, structures, flow lines,
pipelines and other equipment now or hereafter located on the Assets; (ii) when
required by law or contract, cap and bury all flow lines and other pipelines now
or hereafter located on the Assets, and (iii) dispose of natural occurring
radioactive material and all other pollutants, wastes, containments, hazardous
or toxic materials or wastes caused by Buyer's actions now or hereafter located
on the Assets; (b) all other costs, obligations and liabilities that arise under
the Assets and, in each case, arises from or relates to events occurring or
conditions existing from events occurring on or after the Effective Time or
accrue after the Effective time. All such plugging, replugging, abandonment,
removal, disposal and restructure operations shall be in compliance with
applicable laws and regulations and shall be conducted in a good and workmanlike
manner.
"Environmental Laws" means all applicable local, state, and federal laws,
rules, regulations, and orders regulating or otherwise pertaining to (a) the
use, generation, migration, storage, removal, treatment, remedy, discharge,
release, transportation, disposal, or cleanup of pollutants, contamination,
hazardous wastes, hazardous substances, hazardous materials, toxic substances or
toxic pollutants, (b) surface waters, ground waters, ambient air and any other
environmental medium on any Lease or (c) the environment or health and
safety-related matters; including the following as from time to time amended and
all others whether similar or dissimilar: the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the
Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste
Amendments of 1984, the Hazardous Materials Transportation Act, as amended, the
Toxic Substance Control Act, as amended, the Clean Air Act, as amended, the
Clean Water Act, as amended, and all regulations promulgated pursuant thereto.
<PAGE>
4.2 SELLER'S INDEMNIFICATION. Seller agrees to defend, indemnify and
hold Buyer, its affiliates, directors, officers, employees, agents and the
respective representatives of each of them harmless from and against any and all
claims, demands, losses, damages, liabilities, judgments, causes of action,
reasonable costs or expenses (including, without limitation, any and all
reasonable costs, expenses, attorneys' fees, consequential damages and other
costs incurred in defense of any claim or lawsuit arising therefrom), of
whatsoever nature arising out of or relating to Seller's ownership, operation or
administration of the Assets accruing on or prior to the Effective Time or with
respect to or relating to a material breach of any representation, warranty or
covenant of the Seller contained in this Agreement.
4.3 BUYER'S INDEMNIFICATION. Buyer agrees to defend, indemnify and hold
Seller, its affiliates, directors, officers, employees, agents and the
respective representatives of each of them harmless from and against any and all
claims, demands, losses, damages, liabilities, judgments, causes of action,
reasonable costs or expenses (including, without limitation, any and all
reasonable costs, expenses, attorneys' fees, consequential damages and other
costs incurred in defense of any claim or lawsuit arising therefrom), of
whatsoever nature arising out of or relating to Buyer's ownership, operation or
administration of the Assets accruing after the Effective Time or with respect
to or relating to a material breach of any representation, warranty or covenant
of, the Buyer contained in this Agreement.
4.4 SOLE REMEDY. If the Closing occurs, the sole and exclusive remedy
of Buyer and Seller with respect to the purchase and sale of the Assets shall be
pursuant to the express provisions of this Agreement. Any and all (a) claims
relating to the representations, warranties, covenants and agreement contained
in this Agreement, (b) other claims pursuant to or in connection with this
Agreement or (c) other claims relating to the Assets and the purchase and
sale thereof shall be subject to the provision in this Article 4.
5. CLOSING.
5.1 DELIVERY BY SELLER. At or prior to Closing, Seller shall deliver
to Buyer, in form satisfactory to Seller and Buyer and the appropriate
government agencies, a conveyance effecting the sale, transfer, conveyance
and assignment of the Assets in the form set forth as Exhibit D, the
Guarantee and Share Pledge in the forms set forth as Exhibit E and F attached
hereto.
5.2 DELIVERY TO BUYER. At Closing, Buyer shall deliver to Seller, the
Purchase Price referred to in section 2. 1.
5.3 FURTHER CO-OPERATION. At the Closing and thereafter as may be
necessary, Seller and Buyer shall execute and deliver such other instruments and
documents and take such other actions as may be reasonably necessary to evidence
and effectuate the transactions contemplated by this Agreement including all
post-Closing adjustments.
6. TITLE COVENANTS.
<PAGE>
6.1 CONVENANTS RELATING TO TITLE. From and after the Effective Time
and prior to Closing, Seller covenants and agrees to:
(A) Obtain all consents, approvals, waivers (including
preferential rights) and agreements of all other parties and governmental
authorities (other than approvals of the assignment of the Leases which must be
obtained after the Closing) which are necessary to effect the transactions
provided for herein, including the assignment and transfer to Buyer of the
ownership of the Assets; and
(B) Make all filings which must be made and record all
instruments that may be recorded to accurately reflect Seller's current
interests in the Assets.
6.2 SELLER'S TITLE
(A) For the purpose of computing adjustments to the Purchase
Price for Title Failures under section 6.6, Seller covenants to Buyer that
Seller's title to the Assets as of the Effective Time is (and as of the Closing
Date will be) good and marketable title as defined in section 6.3; and
(B) In the documents to be executed and delivered by Seller to
Buyer transferring title to the Assets, Seller shall warrant and defend the
Assets unto Buyer or its designee against every person lawfully claiming the
Assets or any part thereof by, through or under Seller, but not otherwise.
However, all of Seller's interest in equipment and personal property are to be
sold AS IS AND WHERE IS AND WITHOUT WARRANTY OF MERCHANTABILITY, CONDITION OR
FITNESS FOR A PARTICULAR PURPOSE, EITHER EXPRESS OR IMPLIED as more specifically
set forth in Section 7.2.
6.3 GOOD AND MARKETABLE TITLE. As used herein the term "good and
marketable title" shall mean:
(A) As to each of the Leases, that record title of Seller which:
(i) entitles Seller to receive from a Lease not less than
the interests shown in Exhibit B as the "Net Revenue Interest" of
all Oil and Gas produced, saved and marketed from the Leases and of
all Oil and Gas produced, saved and marketed from any unit of
which the Lease is a part and allocated to such Lease, all without
reduction, suspension or termination of the interests in the Lease
throughout the duration of such Lease, except as stated in such
Exhibit; and
(ii) obligates Seller to bear a percentage of the costs and
expenses relating to the maintenance and development of, and
operations relating to, the Leases not greater than the "Working
Interest" shown in Exhibit B all without increase of the interests
in the Leases throughout the duration of such Lease, except as
stated in such Exhibit.
<PAGE>
(B) That title of Seller to the Assets which:
(i) at or prior to Closing, is free and clear (except for
Permitted Encumbrances as defined in subsection (ii) below) of
liens and encumbrances and (a) with respect to real property
interests to be transferred to Seller, real property interests are
of record in the relevant counties, parishes, and environmental
offices; and (b) with respect to any Asset subject to preferential
rights, such rights have been waived and consents obtained from all
third parties, and
(ii) as used herein the term "Permitted Encumbrances" means
those encumbrances and obligations which Buyer finds would be
acceptable to a reasonable, prudent owner and operator of the
Assets and shall not include material defects that interfere with
or significantly restrict Buyer's right to use, operate, own or
benefit from the Assets as owner, holder, lessee, licensee or
permittee, including without limitation (a) Lessors' royalties,
overriding royalties, production payments and reversionary
interests if the net cumulative effect of such burdens does not
operate to cause the Net Revenue Interest of any Asset to be less
than the Net Interest set forth in Exhibit A; (b) preferential
rights to purchase and required third party consents to
assignments and similar agreements with respect to which, prior to
Closing, (i) waivers or consents are obtained from the appropriate
parties, or (ii) required notices have been given to the holders
of such rights and the appropriate time period for asserting such
rights has expired without any exercise of such rights; (c) liens
for taxes or assessments not due or not delinquent on the Closing
Date; (d) all rights to consent by, required notices to, filings
with, or other actions by governmental agencies in connection with
the sale or conveyance of oil and gas leases or interests therein
or sale of production therefrom if the same are customarily
obtained subsequent to such sale or conveyance; and (e) easements,
rights-of-way, servitudes, permits, surface leases, and other
rights in respect of surface operations in favour of a third party
on or over any of the Subject Interests which do not operate to
interfere with current or proposed operations on the Assets;
PROVIDED, HOWEVER, any encumbrance listed in this definition shall
not be a Permitted Encumbrance if it (i) operates to (x) reduce the
Net Revenue Interest, or (y) increase the Working Interest of
Seller in the Assets, except where there is a corresponding
proportional increase in the Net Revenue Interest; (ii) causes
Seller to be in material breach of any representation or warranty
contained in this Agreement or the Assignment; (iii) relates to an
agreement, document, or instrument which provides for terms,
conditions, exceptions, reservations, limitations, or other matters
contained in such agreement, document or instrument which are not
customary to currently accepted oil and gas industry standards
which materially and adversely restricts or limits Buyer's ability
to produce oil and/or gas from the Assets.
6.4 DEFECT LETTERS
<PAGE>
(A) Buyer may from time to time, but no later than three (3)
business days prior to Closing notify Seller in writing (a "Notice") of any
liens, charges, contracts, agreements, obligations, encumbrances, defects and
irregularities of title which would cause title to all or part of the Assets not
to be good and marketable as defined in section 6.3 hereof, or which would
cause a breach of a representation or warranty of Seller ("Title Defect").
(B) A Title Defect as set forth in a Notice shall be a "Title
Failure", unless waived by Buyer. Any Title Defect waived by Buyer under this
section shall become a Permitted Encumbrance as defined in section 6.3(B)(ii).
6.5 EFFECT OF TITLE FAILURE. Any Title Failure not set forth in a
Notice prior to Closing shall be deemed to be waived by Buyer.
6.6 PRICE ADJUSTMENTS DUE TO TITLE FAILURE. The amount of any downward
adjustments due to Title Failure shall be determined as follows:
(A) The reduction of the Purchase Price shall be equal to the
Allocated Value reflected in Exhibit "C"; and
(B) As to reductions in Purchase Price caused by Seller
delivering less interest than the total net revenue interest
reflected in Exhibit "B" for any Asset, provided that the
ratio of net revenue interest to working interest has not
changed, the adjusted Purchase Price for the affected Asset
shall be determined by multiplying the Allocated Value times
a fraction which has the actual delivered net revenue
interest as its numerator and the net revenue interest for
the affected Asset reflected in Exhibit "B" as its
denominator.
7. REPRESENTATIONS AND WARRANTIES OF SELLER.
7.1 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and
warrants that as of the date hereof, and as of the Closing:
(A) Seller is a trust formed under the laws of the State of
Texas, validly existing and in good standing under the laws of the State listed
on the first page of this Agreement and is duly qualified to do business in the
states where the Assets are located;
(B) Seller owns the Assets and has the requisite power and
authority to enter of into this Agreement, to carry out the transactions
contemplated hereby, to transfer the Assets in the manner contemplated by this
Agreement, and to undertake all of the obligations of Seller set forth in this
Agreement;
(C) This Agreement and any documents or instruments delivered by
Seller at the Closing shall constitute legal, valid and binding obligations of
Seller, enforceable in accordance with their terms, except that such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and
<PAGE>
(ii) equitable principles which may limit the availability of certain equitable
remedies (such as specific performance in certain instances);
(D) To the best of Seller's knowledge, after due inquiry, Seller
is in material compliance with all permits, licenses, contracts and agreements
relating to the Assets. Seller is in material compliance with all laws, rules,
regulations and orders of federal, state or local entities which have
jurisdiction over Seller or the Assets to be sold hereunder, including but not
limited to all environmental regulations and laws, except for noncompliance with
such laws, rules and regulations which, individually or in the aggregate, do not
and will not affect materially and adversely any portion of any of the Assets;
(E) To the best of Seller's knowledge, there is no suit,
action, claim, investigation or inquiry pending or threatened arising out of
or with respect to the ownership, operation or environmental condition of the
Assets;
(F) To the best of Seller's knowledge, at Closing there are no
liens, mortgages or encumbrances which would materially impair the value of the
Assets or materially interfere with the operation of the Assets; and
(G) Seller has good and marketable title to the Leases.
7.2 DISCLAIMER OF REPRESENTATIONS. THE EXPRESS REPRESENTATIONS OF
SELLER CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF, AND
SELLER EXPRESSLY DISCLAIMS AND NEGATES AND BUYER HEREBY WAIVES, ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR
OTHERWISE, WITH RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES,
IF ANY, OF OIL, GAS OR OTHER HYDROCARBONS AND ASSOCIATED PRODUCTS IN OR UNDER
THE ASSETS, THE ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, OR
OTHER CONDITIONS OF THE ASSETS, OR THE OWNERSHIP OR OPERATION OF THE ASSETS
OR ANY PART THEREOF OR FOR CLAIMS BY BUYER FOR DAMAGES BECAUSE OF DEFECTS,
WHETHER KNOWN OR UNKNOWN. EXCEPT AS OTHERWISE PROVIDED HEREIN, BUYER AGREES
THAT SELLER IS CONVEYING THE SUBJECT INTERESTS WITHOUT REPRESENTATION OR
WARRANTY AND SELLER DOES NOT MAKE OR PROVIDE, AND BUYER HEREBY WAIVES, ANY
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR
OTHERWISE AND SPECIFICALLY IN THE CASE OF THE PERSONAL PROPERTY WITHOUT ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE QUALITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO SAMPLES, OR
CONDITIONS OF ANY OF THE ASSETS. SELLER DISCLAIMS AND NEGATES, AND BUYER
HEREBY WAIVES ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED,
BY STATUTE OR OTHERWISE OR FOR CLAIMS BY BUYER FOR DAMAGES BECAUSE OF
DEFECTS, WHETHER KNOWN OR UNKNOWN. THE ITEMS OF PERSONAL PROPERTY, EQUIPMENT,
IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED AS PART OF THE ASSETS ARE
SOLD, AND BUYER ACCEPTS SUCH ITEMS AS IS, WITH
<PAGE>
ALL FAULTS. THERE ARE NO WARRANTIES THAT EXTEND BEYOND THE FACE OF THIS
AGREEMENT. BUYER ACKNOWLEDGES THAT THIS WAIVER IS CONSPICUOUS.
8. REPRESENTATIONS AND WARRANTIES OF BUYER.
8.1 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and
warrants (which representations and warranties shall survive the Closing) that
at the date hereof and at Closing:
(A) Buyer is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation;
(B) Buyer has the corporate power and authority to enter into
this Agreement, to carry out the transactions contemplated hereby and to
undertake all of the obligations of Buyer set out in this Agreement;
(C) The consummation of the transactions contemplated by this
Agreement, will not in any material respect violate, nor be in conflict with,
any provision of Buyer's charter, by-laws or other governing documents, or any
material agreement or instrument to which Buyer is a party or is bound, or any
judgment, decree, order, statute, rule or regulation applicable to Buyer
(subject to governmental consents and approvals customarily obtained after the
Closing);
(D) This Agreement constitutes legal, valid and binding
obligations of Buyer, enforceable in accordance with its terms;
(E) Buyer has incurred no obligation or liability, contingent or
otherwise, for brokers' or finders' fees in respect of the matters provided for
in this Agreement, and, if any such obligation or liability exists, it shall
remain an obligation of Buyer, and Seller shall have no responsibility
therefor; and
(F) There is no suit, action, claim, investigation,
administrative proceeding or inquiry by any person, entity, administrative
agency or governmental body pending or, to Buyer's best knowledge, threatened
against Buyer or any affiliate of Buyer which has or will materially affect
Buyer's ability to consummate the transactions contemplated herein.
9. CERTAIN AGREEMENTS OF SELLER. Seller agrees and covenants that,
unless Buyer shall have otherwise agreed in writing, the following provisions
shall apply:
9.1 MAINTENANCE OF ASSETS. From the Effective Time until Closing,
Seller agrees that it will:
(A) Administer and operate the Assets in good and workmanlike
manner and, conduct its business and operations in a prudent manner, and in
substantially the same manner as prior to the date of this Agreement;
<PAGE>
(B) Not introduce any new methods of management, operation or
accounting with respect to any or all of the Assets;
(C) Maintain and keep the Assets in good condition and working
order; preserve the Assets in full force and effect; and fulfill all contractual
or other covenants, obligations and conditions imposed upon Seller with respect
to the Assets, including, but not limited, to payment of royalties, delay
rentals, shut-in gas royalties and any and all other required payments;
(D) Not enter into agreements to drill new wells or to rework,
plug back, deepen, plug or abandon any existing well or wells on the Leases, nor
commence any drilling, reworking or completing or other operations or make or
authorize any expenditures (except for emergency operations and operations
required under presently existing contractual obligations) without obtaining the
prior written consent of Buyer; provided that such prior written consent of
Buyer shall not be required with respect to any single expenditure that does not
exceed Twenty-five Thousand Dollars ($25,000.00) or aggregate expenditures that
do not exceed Fifty Thousand Dollars ($50,000.00) (in either case, net to
Seller's working interest), and provided further that the terms of this
paragraph shall not apply to any expenditures of Seller which will not be
charged to Buyer;
(E) Not voluntarily relinquish its position as operator to
anyone other than Buyer with respect to any of the Assets or abandon any of the
Assets;
(F) Not, without the prior written consent of Buyer, (i) enter
into any agreement or arrangement transferring, selling or encumbering any of
the Assets; (ii) grant any preferential or other right to purchase or agree to
require the consent of any party to the transfer and assignment of the Assets to
Buyer; (iii) enter into any new sales contracts or supply contracts; or (iv)
incur or agree to incur any material contractual obligation or liability
(absolute or contingent) with respect to the Assets except as otherwise provided
herein; and
(G) Promptly provide Buyer with written notice of (i) any claims,
demands, suits or actions made against Seller which materially affect the
Assets; or (ii) any proposal from a third party to engage in any material
transaction (E.G., a farmout) with respect to the Assets.
9.2 CONSENTS. Except for those consents which are typically obtained
after Closing, on or before the Closing, Seller will obtain all such
permissions, approvals and consents by governmental authorities and others
which are obtainable by Closing and are required to vest good and marketable
title to the Assets in Buyer, or as may be otherwise reasonably requested by
Buyer. Seller will execute all necessary or appropriate transfer orders (or
letters in lieu thereof) designating Buyer as the appropriate party for payment
effective as of the Closing.
9.3 CO-OPERATION. Seller will co-operate with Buyer to assist Buyer in
carrying out the agreements of Buyer.
10. CERTAIN AGREEMENTS OF BUYER. Buyer agrees and covenants that unless
Seller shall have consented otherwise in writing, the following provisions shall
apply:
<PAGE>
10.1 CO-OPERATION. Buyer will co-operate with Seller to assist Seller in
carrying out the agreements of Seller.
10.2 DISCLOSURE. Until the Closing Date and to the extent not already
public, Buyer shall exercise all due diligence in safeguarding and maintaining
secure and confidential all engineering, geological and geophysical data,
reports and maps, and other data relating to the Assets disclosed to or in the
possession of Buyer.
11. SURVIVAL. The liability of Seller under its representations,
warranties, covenants, indemnities and agreements made in this Agreement shall
survive Closing for a period of two years following Closing. Notwithstanding any
other provision of this Agreement, no party shall make any claims for the
breach of any representation or warranty or covenant, if such party had
knowledge prior to Closing of such breach and failed to notify the party making
such representation or warranty of such breach prior to Closing.
12. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. All obligations, of
Buyer under this Agreement are, at its election, subject to the fulfillment,
prior to or at the Closing, of each of the following conditions:
12.1 NO LITIGATION. At the Closing, no suit, action or other proceeding
shall be pending nor shall there be a substantial threat of such proceeding
before any court or governmental agency which attempts to prevent the occurrence
of the transactions contemplated by this Agreement.
12.2 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and
warranties of Seller contained in this Agreement shall be true as of the Closing
as if such representations and warranties were made as of the date of Closing in
all material respects, and Seller shall have performed and satisfied all
covenants and fulfilled all conditions required by this Agreement to be
performed and satisfied by Seller at or prior to the Closing in all material
respects.
12.3 CONSENTS. All necessary and material permissions, approvals and
consents of federal authorities required pursuant to Section 9.2 hereof which
are obtainable by the Closing shall be in full force and effect and all
necessary approvals or consents of the shareholders of Buyer, if required,
and other securities regulatory authorities shall have been obtained,
including approval of the Vancouver Stock Exchange.
13. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. All obligations
of Seller under this Agreement are, at Seller's election, subject to the
fulfillment, prior to or at the Closing, of each of the following conditions:
13.1 NO LITIGATION. At the Closing no suit, action or other proceeding
shall be pending nor shall there be a substantial threat of such proceeding
before any court or governmental agency which attempts to prevent the
occurrence of the transactions contemplated by this Agreement.
<PAGE>
13.2 REPRESENTATIONS AND WARRANTIES. All representations and warranties
of Buyer contained in this Agreement shall be true as of the Closing, as if such
representations and warranties were made as of the date of Closing and Buyer
shall have performed and satisfied all covenants and fulfilled all conditions
required by this Agreement to be performed and satisfied by Buyer at or prior to
the Closing in all material respects.
14. TERMINATION.
14.1 CAUSES OF TERMINATION. This Agreement and the transactions
contemplated herein shall be completely terminated:
(A) At any time by mutual consent of the Parties;
(B) By Buyer at its election if, on the Closing Date, any of the
conditions set forth in Article 13 hereof shall not have been satisfied or
waived; and
(C) By Seller at its election if, on the Closing Date, any of
the conditions set forth in Article 14 hereof shall not have been satisfied or
waived.
14.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to the provisions of this Article 14 or elsewhere in this
Agreement, this Agreement shall become void and have no further force and effect
and neither Party shall have any further right, duty or liability to the other
hereunder. Upon termination as provided in this section, each Party agrees, upon
request, to use its best efforts to return to the other or destroy, all
materials, documents and copies thereof provided, obtained or discovered in the
course of any due diligence investigations.
15. MISCELLANEOUS.
15.1 NOTICE. Any notice, request, demand, or consent required or
permitted to be given hereunder shall be in writing and delivered in person or
by certified letter, with return receipt requested, by telecopy or pre-paid
telegram addressed to the party for whom intended at the following addresses:
Seller: STARBUCKS TRUST
1000 Louisiana, Suite 1500
Houston, Texas 77002
Attn: Heather Tomlinson and Todd Grabois
Tel: (713) 739-0351
Fax: (713) 739-8402
<PAGE>
Buyer and Texstar: BENZ ENERGY, LTD.
1000 Louisiana, Suite 1500
Houston, Texas 77002
Attn: Bob Herlin
Tel: (713) 739-0351
Fax: (713) 739-8402
or at such other address as any of the above shall specify by like notice to the
other.
15.2 FEES, EXPENSES AND TAXES.
(A) Each Party shall be solely responsible for all expenses
incurred by it in connection with this transaction (including, but not limited
to fees and expenses of its counsel, its brokers and accountants) and shall not
be entitled to any reimbursements therefor from the other Party, except as
otherwise provided in this Agreement.
(B) Buyer shall pay any filing or recording fees required in
connection with the transactions contemplated by this Agreement.
(C) Sales, ad valorem taxes and use tax, if any, due in
connection with the transactions represented by this Agreement shall be paid by
the Buyer and any other transfer tax due in connection with the transactions
represented by this Agreement shall be paid by the Party upon which such tax is
imposed by law. Buyer shall prepare the sales tax returns, if any, and Seller
will assist Buyer in the filing of same.
15.3 ASSIGNMENT. This Agreement is binding on the Parties hereto and
their respective successors and assigns.
15.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
reached by the Parties with respect to the subject matter hereof, superseding
all prior negotiations, discussions, agreements and understandings, whether oral
or written, relating to such subject matter.
15.5 SEVERABILITY. In the event that any one or more covenants, clauses
or provisions of this Agreement shall be held invalid or illegal, such
invalidity or unenforceability shall not affect any other provisions of this
Agreement.
15.6 CHOICE OF LAW. This Agreement shall be construed in accordance with
and governed by the internal laws of the State of Texas without giving effect to
principles of conflict of law.
15.7 TEXAS DECEPTIVE TRADE PRACTICES ACT WAIVER. BUYER AND SELLER
CERTIFY THAT THEY ARE NOT "CONSUMERS" WITHIN THE MEANING OF THE TEXAS
DECEPTIVE TRADE PRACTICE-CONSUMER PROTECTION ACT, SUBCHAPTER E OF CHAPTER 17,
SECTIONS 17.41 ET SEQ., OF VERNON'S TEXAS CODE ANNOTATED,
<PAGE>
BUSINESS AND COMMERCE CODE, AS AMENDED (THE "DTPA"). THE PARTIES COVENANT, FOR
THEMSELVES AND FOR AND IN BEHALF OF ANY SUCCESSORS OR ASSIGNS, THAT IF THE DTPA
IS APPLICABLE, (a) THE PARTIES ARE "BUSINESS CONSUMERS" THEREUNDER; (b) EACH
PARTY HEREBY EXPRESSLY WAIVES AND RELEASES ALL OF ITS RIGHTS AND REMEDIES
THEREUNDER (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED) AS APPLICABLE TO THE
OTHER PARTY AND ITS SUCCESSORS AND (c) EACH PARTY SHALL INDEMNIFY, DEFEND AND
HOLD THE OTHER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS OR CAUSES
OF ACTION OF OR BY THAT PARTY OR ANY SUCCESSOR OR ANY OF ITS AFFILIATES BASED IN
WHOLE OR IN PART OF THE DTPA, ARISING OUT OF OR IN CONNECTION WITH THE
TRANSACTION CONTEMPLATED BY THIS AGREEMENT. FURTHERMORE, BUYER AND SELLER
EXPRESSLY AGREE THAT THIS WAIVER SHALL SURVIVE THE CLOSING, NOTWITHSTANDING ANY
PROVISIONS CONTAINED HEREIN TO THE CONTRARY.
15.8 EXHIBITS. Exhibits "A," "B," "C," "D," "E" and "F" attached hereto
and made a part hereof.
15.9 CAPTIONS. The captions in this Agreement are for convenience only
and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
15.10 COUNTERPARTS. This Purchase and Sale Agreement may be separately
executed in any number of counterparts, all of which when so executed shall be
deemed to constitute one and the same agreement.
Executed as of the day and year first above written.
SELLER:
STARBUCKS TRUST
By:
Name:
Title:
BUYER:
BENZ ENERGY, LTD.
By:
Name:
Title:
<PAGE>
TEXSTAR:
TEXSTAR PETROLEUM, INC.
By:
Name:
Title:
<PAGE>
July 20, 1999
Benz Energy Inc.
1000 Louisiana
Houston, TX 77002
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited consolidated interim
financial information of Benz Energy Inc. for the periods ended March 31,
1999 and 1998, as indicated in our report dated June 4, 1999 (except for
Notes 8, 17, and 21, as to which the date is July 20, 1999); because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above is being used in this
Registration Statement.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
<PAGE>
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
Benz Properties, LTD. Colorado
Texstar Petroleum, Inc. Texas
<PAGE>
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, 18,
and 22 as to which the date is July 20, 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 caption "Experts" in such Prospectus.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
July 21, 1999
<PAGE>
EXHIBIT 99.23
[R.A. LENSER AND ASSOCIATES, INC. LETTERHEAD]
July 20, 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. 30556
RAL/mkn
Houston, Texas
July 20, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS 4-MOS 10-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997 AUG-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 SEP-01-1997 NOV-01-1996
<PERIOD-END> MAR-31-1999 DEC-31-1998 DEC-31-1997 AUG-31-1997
<CASH> 565,183 2,319,302 3,162,320 694,306
<SECURITIES> 25,969 195,671 1,312,653 1,896,772
<RECEIVABLES> 5,982,165 6,327,220 4,552,053 4,522,174
<ALLOWANCES> 257,009 197,008 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 6,641,841 9,138,644 9,113,170 9,193,024
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<CURRENT-LIABILITIES> 41,777,529 36,499,279 24,403,576 7,408,949
<BONDS> 41,972,032 42,262,000 6,057 21,983
9,488,140 9,488,140 0 0
0 0 0 0
<COMMON> 20,424,996 20,424,996 16,222,198 7,924,329
<OTHER-SE> (16,030,676) (13,434,168) (4,415,702) 6,165,619
<TOTAL-LIABILITY-AND-EQUITY> 97,890,925 95,240,247 36,216,129 21,520,880
<SALES> 1,370,957 4,947,457 707,987 444,203
<TOTAL-REVENUES> 1,370,957 4,947,457 707,987 444,203
<CGS> 1,332,013 4,115,238 684,255 308,914
<TOTAL-COSTS> 2,265,978 9,880,975 2,771,342 2,335,313
<OTHER-EXPENSES> (29,666) 401,845 27,082 (23,283)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 1,563,223 5,802,328 648,885 49,314
<INCOME-PRETAX> (2,428,578) (11,137,691) (2,739,322) (1,917,141)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (2,428,578) (11,137,691) (2,739,322) (1,917,141)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,665,782) (11,915,191) (2,739,322) (1,917,141)
<EPS-BASIC> (0.08) (0.37) (0.10) (0.09)
<EPS-DILUTED> (0.08) (0.37) (0.10) (0.09)
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