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As filed with the Securities and Exchange Commission on February 14, 2000
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________
CANAAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 1311 73-1300132
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
(405) 232-3222
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Leo E. Woodard
199 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
(405) 232-3222
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
__________________
Copies to:
Michael M. Stewart, Esq.
Crowe & Dunlevy,
A Professional Corporation
1800 Mid-America Tower
20 North Broadway
Oklahoma City, Oklahoma 73102
(405) 235-7747
__________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
OF THE SECURITIES TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
__________________
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(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. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Offering Price Aggregate Offering Amount of
Securities to Be Registered Amount to be Registered Per Share Price Registration Fee
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Common Stock, par value
$0.01 per share.............. 5,000,000 $4.4658 $22,329,124 $6,208.00
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(1) Calculated based on the book value of the securities to be received by the
Registrant or canceled in the transaction pursuant to Rule 457(f)(2).
The Registrant hereby amends this Registration Statement on such date or
dates 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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
__________________
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mmm master
Subject to Completion ___________, 2000
PROSPECTUS/PROXY STATEMENT
CANAAN ENERGY CORPORATION
COMMON STOCK
5,000,000 SHARES
Canaan Energy Corporation, an Oklahoma based oil and gas company
previously known as Coral Reserves Group, Ltd., is offering shares of common
stock in connection with a "plan of combination." Canaan's affiliated entities,
Coral Reserves, Inc. and Coral Reserves Energy Corp., which we refer to as the
"Coral Companies" have previously sponsored and served as a general partner in
eight private limited partnerships. The plan of combination is designed to
establish Canaan as an independent oil and gas company by acquiring oil and gas
properties and related assets in exchange for Canaan common stock in the
following "combination transactions":
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
general partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate assumptions for each
entity. A limited partner in any partnership who votes in favor of the plan of
combination may also elect to receive cash in lieu of Canaan common stock equal
to 75% of such partner's Exchange Value. The aggregate amount of cash payable to
limited partners electing to receive cash or to exercise dissenter's rights is
limited to $5 million.
The combination transactions are expected to be tax-free to owners of
all of the Combining Entities, including limited partners, except those who
elect to receive cash or to exercise dissenter's rights.
Adoption of the plan of combination by a partnership requires the
consent of the general partners of the partnership and a majority-in-interest of
limited partners and the plan requires that all partnerships adopt the plan. A
combined special meeting of the partnerships will be held to consider and vote
upon the proposal to adopt the plan of combination on __________, 2000 at ______
a.m. at _________________, Oklahoma City, Oklahoma.
Prior to this transaction there has been no public market for Canaan
common stock. There is no assurance that the market value of the shares of
Canaan common stock issuable to limited partners or other owners of Combining
Entities will bear any relationship to the Exchange Value. The Exchange Value is
being used solely to determine the relative ownership of Canaan by each of the
Combining Entities and does not necessarily represent the fair value of Canaan
or its net assets. The shares of Canaan will be quoted in the NASD National
Market System under the symbol "______________".
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this Prospectus/Proxy Statement or the accompanying prospectus
supplement is truthful or complete. Any representation to the contrary is a
criminal offense.
THE COMBINATION TRANSACTIONS INVOLVE VARIOUS RISKS. PLEASE SEE
"SUMMARY - RISK FACTORS" ON PAGE 20 AND "RISK FACTORS AND MATERIAL
CONSIDERATION" ON PAGE 34. THESE RISKS INCLUDE AMONG OTHERS:
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. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships but
will receive no cash distributions or dividends in the foreseeable future
from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange Values are being used solely to determine the
relative ownership of Canaan by each Combining Entity and do not represent
the fair value of Canaan or its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which have inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
The Date of this Prospectus/Proxy Statement is: __________________, 2000
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CORAL RESERVES NATURAL GAS INCOME FUND AND
CORAL RESERVES INSTITUTIONAL
LIMITED PARTNERSHIPS
Notice of Special Meetings of Limited Partners
To Be Held ________________, 2000
To Our Limited Partners:
A combined meeting of the limited partners of the eight (8) limited
partnerships consisting of Coral Reserves Natural Gas Income Fund 1990 Limited
Partnership, Coral Reserves Natural Gas Income Fund 1991 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership, Coral Reserves
Natural Gas Income Fund 1993 Limited Partnership, Coral Reserves 1993
Institutional Limited Partnership, Coral Reserves Energy Income Fund 1995
Limited Partnership, Coral Reserves Energy Income Fund 1996 Limited Partnership
and Coral Reserves 1996 Institutional Limited Partnership, collectively (the
"Partnerships"), will be held at ____________________________, Oklahoma City,
Oklahoma 73102, on _____________, 2000 at _____ a.m. (the "Special Meeting").
At the Meetings, the limited partners of each of the Partnerships
will:
(1) consider and vote upon the adoption of a plan of combination
pursuant to which each of the Partnerships will merge with an acquisition
subsidiary of Canaan Energy Corporation in which limited partners will receive
shares of Canaan common stock in exchange for their interests in the
Partnerships; and
(2) transact such other business that may properly come before the
Special Meeting or any adjournments thereof.
Your attention is directed to the accompanying prospectus/proxy statement and
prospectus/proxy statement supplement(s) which contain further information with
respect to the proposals to be considered at the Special Meeting.
Only limited partners of record of one or more of the Partnerships at
the close of business on ______________, 2000 are entitled to notice of and to
vote at the Special Meeting or any postponements or adjournments thereof. Each
Partnership's approval of the plan of combination requires an affirmative vote
by a majority-in-interest of the limited partners of the Partnership.
Information regarding voting and the revocation of proxies, making of cash
elections and exercising dissenters rights of appraisal is set forth under the
"Special Meeting of the Partnerships".
WHETHER OR NOT YOU EXPECT TO BE PERSONALLY PRESENT AT THE SPECIAL
MEETING, PLEASE BE SURE THAT THE ENCLOSED PROXY AND CASH ELECTION FORM AND
LETTER OF TRANSMITTAL PROPERLY COMPLETED, DATED, SIGNED AND RETURNED WITHOUT
DELAY IN THE ENCLOSED ENVELOPE.
CORAL RESERVES ENERGY CORP.
CORAL RESERVES, INC.
Managing General Partners
By: __________________________________
Leo E. Woodard, President
__________________, 2000
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You should rely only on the information contained in this
prospectus/proxy statement and the accompanying prospectus supplement. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus/proxy statement or the accompanying prospectus supplement is accurate
as of any date other than the date on the front of those documents.
Table of Contents
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Page
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QUESTIONS AND ANSWERS...................................................................... 1
SUMMARY.................................................................................... 4
The Parties........................................................................... 4
The Combination Transactions.......................................................... 8
Method of Determining Combination Exchange Values..................................... 9
Summary of Estimated Exchange Values.................................................. 14
Risk Factors.......................................................................... 19
Risks Related to the Combination Transactions......................................... 20
Risks Related to Canaan............................................................... 21
Risks Related to the Oil and Gas Industry............................................. 21
Background and Reasons for the Combination Transactions............................... 22
Fairness of the Combination Transactions.............................................. 24
Alternatives to the Combination Transactions.......................................... 27
Dissenters Rights; Investor Lists..................................................... 29
Summary of Tax Consequences........................................................... 29
Accounting Treatment.................................................................. 30
Business After the Completion of the Combination Transactions......................... 30
Comparative Rights of Security Holders................................................ 31
Resales of Canaan Common Stock........................................................ 31
Conditions to Combination Transactions................................................ 31
Regulatory Approvals.................................................................. 32
Certain Pro Forma Financial Data...................................................... 32
RISK FACTORS AND MATERIAL CONSIDERATIONS................................................... 34
Risks Related to the Combination Transactions......................................... 34
Risks Related to Canaan............................................................... 39
Risks Related to the Oil and Gas Industry............................................. 42
BACKGROUND AND REASONS FOR COMBINATION TRANSACTIONS........................................ 46
Background of Partnerships............................................................ 46
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Background of Combination Transactions.................................................... 47
Reasons for the Combination Transactions.................................................. 48
Alternatives to the Combination Transactions.............................................. 50
Other Transactions........................................................................ 53
THE COMBINATION TRANSACTIONS................................................................... 53
Description of the Combination Transactions............................................... 53
The Plan of Combination and Indian Acquisition Agreement.................................. 54
Effective Time of the Combination Transactions............................................ 56
Consideration to be Received in the Combination Transactions.............................. 57
Issuance of Shares; Fractional Shares..................................................... 57
Limited Partner Cash Election............................................................. 57
Conditions................................................................................ 58
Representations and Warranties............................................................ 59
Certain Covenants......................................................................... 60
Indian Excluded Assets.................................................................... 62
Termination or Amendment.................................................................. 62
Dissenters Rights......................................................................... 63
NASDAQ Listing............................................................................ 63
Interest of Certain Persons in the Transaction............................................ 63
Resales of Canaan Common Stock............................................................ 64
Accounting Treatment...................................................................... 64
Expenses and Fees......................................................................... 65
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES.............................................. 66
General................................................................................... 66
Partnership Exchange Values and Allocation to Partners, Canaan Securities and Placing
Brokers.............................................................................. 70
Canaan Securities Exchange Value.......................................................... 71
Canaan Exchange Value..................................................................... 71
Indian Exchange Value..................................................................... 72
Summary of Allocation of Exchange Values.................................................. 72
RECOMMENDATION OF THE GENERAL PARTNER AND
FAIRNESS OF THE COMBINATION TRANSACTIONS.................................................. 73
General................................................................................... 73
Consideration of Alternatives............................................................. 76
Fiduciary Duties of General Partners...................................................... 76
Access to Investor List................................................................... 77
Conflicts of Interest..................................................................... 77
No Independent Representative............................................................. 78
FAILURE TO APPROVE THE COMBINATION TRANSACTIONS................................................ 78
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SPECIAL MEETING OF THE PARTNERSHIPS.......................................................... 79
General................................................................................. 79
Voting Rights........................................................................... 79
Proxies and Cash Election Form.......................................................... 79
Solicitation............................................................................ 80
Voting Requirements..................................................................... 80
Procedure for Exercise of Dissenters Rights of Appraisal................................ 81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................................... 82
General................................................................................. 82
Limited Partners........................................................................ 83
Holders of Common Stock of Coral Companies and Indian................................... 85
Canaan Securities....................................................................... 85
Placing Brokers......................................................................... 85
Canaan.................................................................................. 85
Reporting Requirements of Limited Partners and Shareholders of Corporate Combining
Entities............................................................................ 86
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................................... 86
INFORMATION CONCERNING CANAAN................................................................ 96
General................................................................................. 96
Costs Incurred and Drilling Results..................................................... 96
Acreage ............................................................................... 97
Productive Well Summary................................................................. 97
Selected Historical Financial and Operating Data........................................ 98
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 100
INFORMATION CONCERNING THE CORAL COMPANIES................................................... 107
General................................................................................. 107
INFORMATION CONCERNING PARTNERSHIPS.......................................................... 108
1990 Partnership........................................................................ 108
1991 Partnership........................................................................ 109
1992 Partnership........................................................................ 110
1993 Partnership........................................................................ 111
1993-I Partnership...................................................................... 112
1995 Partnership........................................................................ 113
1996 Partnership........................................................................ 114
1996-I Partnership...................................................................... 115
Acreage and Productive Wells for All Partnerships....................................... 117
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Beneficial Owners of Partnerships............................................... 118
Selected Historical Financial and Operating Data For Individual Partnerships.... 119
INFORMATION CONCERNING INDIAN........................................................ 128
General......................................................................... 128
Costs Incurred and Drilling Results............................................. 128
Acreage......................................................................... 130
Productive Well Summary......................................................... 130
Selected Historical Financial and Operating Information......................... 130
Security Ownership.............................................................. 132
INFORMATION CONCERNING CANAAN SECURITIES............................................. 133
General......................................................................... 133
BUSINESS OF CANAAN AFTER COMPLETION OF THE
COMBINATION TRANSACTIONS........................................................ 133
General......................................................................... 133
Costs Incurred and Drilling Results............................................. 135
Acreage......................................................................... 136
Productive Well Summary......................................................... 136
Production Summary and Prices................................................... 136
Marketing....................................................................... 137
Competition..................................................................... 138
Regulation...................................................................... 138
Operating Hazards and Uninsured Risks........................................... 140
Employees....................................................................... 140
Facilities...................................................................... 140
Legal Proceedings............................................................... 140
Capitalization.................................................................. 140
Credit Facilities............................................................... 141
Financing Plans................................................................. 143
Quantitative and Qualitative Disclosures about Market Risk...................... 143
MANAGEMENT........................................................................... 144
Officers and Directors.......................................................... 144
Committees...................................................................... 147
Compensation of Directors....................................................... 147
Executive Compensation.......................................................... 147
Change in Control Agreements.................................................... 148
Compensation Decisions.......................................................... 149
Stock Option Plan............................................................... 149
Profit Sharing Plan and 401(k) Plan............................................. 150
Certain Transactions............................................................ 150
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................................... 151
COMPARISON OF SECURITYHOLDER RIGHTS................................................. 152
Introduction................................................................... 152
Federal Income Taxation........................................................ 152
Management and Compensation.................................................... 153
Operating Strategy............................................................. 153
Fiduciary Duties............................................................... 154
Voting Rights.................................................................. 154
Special Meetings............................................................... 155
Amendment to Organizational Documents.......................................... 155
Anti-Takeover Provisions....................................................... 156
Distributions and Dividends.................................................... 157
Liquidation Rights............................................................. 159
Limited Liability.............................................................. 159
Continuity of Existence........................................................ 160
Financial Reporting............................................................ 160
Redemption and Conversion...................................................... 160
Right to Compel Dissolution.................................................... 161
Liquidity, Marketability and Restriction on Transfer........................... 161
Limitations on Liability of Management......................................... 162
Right to Investor List; Inspection of Books and Records........................ 163
DESCRIPTION OF CAPITAL STOCK........................................................ 163
General........................................................................ 163
Common Stock................................................................... 164
Preferred Stock................................................................ 164
Oklahoma Law and Certificate and Bylaw Provisions - Anti-Takeover Effects...... 164
Transfer Agent and Registrar................................................... 168
LEGAL MATTERS....................................................................... 168
EXPERTS............................................................................. 168
AVAILABLE INFORMATION............................................................... 169
FORWARD LOOKING STATEMENTS.......................................................... 169
CERTAIN DEFINITIONS................................................................. 170
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INDEX TO FINANCIAL STATEMENTS............................................ F-1
APPENDIX A Index to Reports of Netherland, Sewell & Associates, Inc
Related to Estimated Reserves............................. A-1
</TABLE>
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QUESTIONS AND ANSWERS
Q: What is being proposed?
A: Canaan is proposing the "combination transactions" to combine eight private
limited partnerships previously sponsored by its affiliates, Indian Oil
Company and Canaan Securities, Inc. into a new publicly traded oil and gas
company.
Q: Why is the transaction being proposed?
A: Canaan believes that the combination is in the best interest of limited
partners. After the completion of the combination transactions, limited
partners should benefit from:
. a larger and more diversified asset base;
. the opportunity for future growth;
. more liquidity of their investment.
Q: What will I receive as a result of the combination transactions?
A: Limited partners will receive shares of Canaan common stock based on the
relative value of their ownership interest in a partnership compared to the
total value of all entities involved in the transaction. The number of
shares limited partners will receive in each partnership is estimated on
page 18.
Q: How is the relative value determined?
A: The relative value of each entity is being determined primarily based on
the estimated present value of future net revenues from proved reserves
based on Netherland Sewell & Associates, Inc. independent reserve report
using the same price, cost and discount assumptions for each entity. The
value of each entity also takes into consideration its bank debt and
working capital and certain other items.
Q: What happens to my partnership cash distributions?
A: The partnerships pay limited partners regular cash distributions. You will
continue to receive cash distributions until closing of the combination
transactions. Thereafter, you will receive no further cash distributions or
dividends as Canaan does not anticipate paying dividends on its common
stock.
Q: What if I do not want Canaan common stock?
A: A limited partner who votes to approve the combination transactions may
elect to receive cash in lieu of Canaan common stock in an amount equal to
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75% of his exchange value. In addition, a limited partner who votes against
the combination transactions may elect to exercise dissenters rights of
appraisal and receive a cash payment based on an appraisal of the
partnership assets by an independent appraiser. There is a limit of $5
million on the amount of cash payable to limited partners.
Q: What if the $5 million cash limit is exceeded?
A: Cash will first be used to satisfy claims of dissenting partners and
the balance will be paid to cash electing partners prorata based on
relative Exchange Value. A cash electing partner will receive his share
of Canaan common stock for the remainder of 75% of his Exchange Value.
Q: What are the tax consequences of the combination transactions?
A: The combination transaction will be treated as a transfer of your
interest in a partnership to Canaan and should be tax free to you,
unless you elect to receive cash or exercise dissenter's rights. After
the combination transactions, you will be a shareholder rather than a
limited partner so you will no longer receive the pass-through tax
treatment accorded to partners and you will no longer receive a
Schedule K-1. You should consult your tax advisor concerning the
Federal and other tax consequences of the proposed combination
transactions.
Q: What do I need to do now?
A: After carefully considering the enclosed information, please indicate
how you want to vote and sign and return your proxy and cash election
form in the enclosed envelope as soon as possible. Your interest will
then be voted at the special meeting in accordance with your
instructions. You should also complete the enclosed letter of
transmittal so that your shares will be issued promptly after the
closing.
Q: What vote is required to approve the combination transactions?
A: The combination transactions have already been approved by owners of
all of the corporations involved. For each partnership, the approval of
limited partners holding more than 50% of the partnership interests
owned by limited partners calculated based on the limited partners'
share in the profits of the partnership is required. All partnerships
must approve the combination transactions.
Q: Will I have appraisal rights in the combination transaction?
A: Maybe. You will have a right to dissent from the combination
transactions and receive the appraised value for your interest in a
partnership if the partnership receives approval of the combination
transactions by holders of less than 75% of the holders of the
partnership interests, including the interest of the General Partner
and the Additional General Partners.
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Q: What happens if I don't vote my interest?
A: The failure to vote at the special meeting will have the same effect as
voting against the combination transactions.
Q: When do you expect the combination transactions to be completed?
A: We expect the combination transactions to be completed within one or
two business days after receiving approvals of all partnerships at the
special meeting.
Q: When will shares of Canaan begin trading?
A: We anticipate that Canaan shares will begin trading on the NASDAQ
National Market System on the day after the combination transactions
are completed.
Q: How do I sell my shares of Canaan?
A: Once you receive your new certificate for shares of Canaan common stock
you can sell your shares of Canaan through any brokerage firm. It is
anticipated that certificates for Canaan common stock will be issued
promptly after completion of the combination transactions if you have
previously submitted a properly completed and executed letter of
transmittal.
Q: Are there risks in the combination transaction?
A: Yes. The combination transaction involves a number of risks. You should
review them carefully under the heading "Risk Factors and Material
Considerations" on page 34.
Q: What do the General Partners of the partnerships recommend?
A: The General Partners and Canaan recommend that limited partners vote
for approval of the combination transactions.
Q: Who can help answer additional questions that I may have?
A: Canaan Energy Corporation - (405) 232-3222
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SUMMARY
The following summary highlights selected information from this
prospectus/proxy statement and may not contain all of the information that is
important to you. For a more complete understanding of this offering, we
encourage you to read this entire prospectus and the documents to which we have
referred you. Certain terms used in this prospectus/proxy statement are defined
under the Section "Certain Definitions".
The Parties
Canaan Energy Corporation
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
Canaan, formerly known as Coral Reserves Group, Ltd., is an
independent oil and gas company headquartered in Oklahoma city, Oklahoma. Canaan
was formed in March, 1987, as an Oklahoma corporation, by Leo E. Woodard and
John K. Penton, who continue to serve the company as Chief Executive Officer and
President, respectively.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of September 30,
1999, Canaan operated 113 of the 134 wells in which it or the partnerships own
an interest. Operations are located entirely within the state of Oklahoma and
are concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. As of September 30, 1999, the
estimated value of Canaan's proved oil and gas reserves was less than $500,000.
Since 1990, when the Coral companies began sponsoring partnerships,
Canaan has provided management services to the General Partners of the
partnerships.
As a result of the combination transactions, Canaan will acquire all
of the assets of the other parties to the combination transactions and the
equity owners of the other parties to the combination transactions will become
shareholders of Canaan. Canaan will continue the combined businesses of the
partnerships, the Coral Companies and Indian after the completion of the
combination transactions.
Canaan is currently 100% owned by its management, Leo E. Woodard, John
K. Penton and Michael S. Mewbourn.
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Coral Companies
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
The Coral Companies consist of Coral Reserves, Inc. and Coral Reserves
Energy Corp.
Coral Reserves, Inc., which we refer to as Coral, Inc., serves as
general partner of three of the partnerships and conducts no other business
activities.
Coral Reserves Energy Corp., which we refer to as Coral Corp., serves
as general partner of the remaining five partnerships and conducts no other
business activities.
We occasionally refer to Coral, Inc. and Coral Corp. individually as
"General Partner" and collectively as "General Partners".
Each of the Coral Companies are owned by management of Canaan in the
same ownership percentages.
Indian Oil Company
9400 North Broadway, Suite 800
Oklahoma City, OK 73114
Indian Oil Company is a privately-held Oklahoma corporation which is
engaged in oil and gas exploration, development and production, primarily in
Oklahoma. Indian is not affiliated with the Coral Companies. On February 15,
1999, Indian and Canaan and the Coral Companies entered into an agreement for
Canaan to acquire Indian as a part of the combination transactions and since
that date Canaan has been responsible for the day to day management of Indian
subject to control by the Indian Board of Directors.
Indian is owned by five stockholders who are not currently affiliated
with Canaan, including Anthony Lasuzzo, a proposed executive officer of Canaan.
Canaan Securities, Inc.
21 Locust Avenue, Suite 2A
New Canaan, CT 06840
Canaan Securities, Inc. is not affiliated with the Coral Companies and
is a registered broker/dealer with the SEC and the National Association of
Securities Dealers. Canaan Securities served as a placement agent in connection
with the private placement of the limited partnership interests in the
partnerships. Canaan Securities also engaged other unaffiliated brokers to
assist in the placement, which are referred to as "Placing Brokers". Canaan
Securities and the Placing Brokers receive fees for these services based on the
partnership's ongoing cash distributions from
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oil and gas properties. In addition, Canaan Securities provides ongoing
reporting services to the limited partners for which it has received and
continues to receive fees based on the partnership's revenues from oil and gas
properties. Canaan Securities does not engage in any other business activities.
Canaan Securities is 100% owned by Thomas H. Henson, a proposed
executive officer and director of Canaan.
The Partnerships
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
The partnerships consist of Oklahoma limited partnerships previously
sponsored by the Coral Companies for purposes of acquiring producing oil and gas
properties primarily in Oklahoma and conducting limited additional development
activity relating to the acquired properties. Each of the partnerships raised
capital in private offerings from limited partners, primarily individuals and
substantially all of whom are considered "accredited investors" under the
federal securities laws. There is no market for the limited partnership
interests and Canaan and the General Partners are not aware of any purchases or
sales of interests within the last five years. The following table sets forth
certain information about the partnerships:
<TABLE>
<CAPTION>
Cumulative Cash
Total Initial Distributions to
Capital Limited Partners
Identity of Date Contributions of Through September
General # of Limited Commenced Limited Partners 30, 1999
Name of Partnership Partner /(1)/ Partners Operations (000 Omitted) (000 Omitted)
- ------------------- ------- -------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Coral Reserves Natural Gas Income Fund 1990 Coral, Inc. 109 04/30/90 $ 3,888 $ 5,382
Limited Partnership ("1990")
Coral Reserves Natural Gas Income Fund 1991 Coral Corp. 124 04/30/91 4,480 6,232
Limited Partnership ("1991")
Coral Reserves Natural Gas Income Fund 1992 Coral Corp. 191 06/17/92 7,500 6,867
Limited Partnership ("1992")
Coral Reserves Natural Gas Income Fund 1993 Coral Corp. 173 07/02/93 6,525 5,544
Limited Partnership ("1993")
Coral Reserves 1993 Institutional Limited Coral, Inc. 21 09/01/93 2,363 2,462
Partnership ("1993-I")
Coral Reserves Energy Income Fund 1995 Coral Corp. 196 12/13/94 6,805 4,650
Limited Partnership ("1995")
Coral Reserves Energy Income Fund 1996 Coral Corp. 226 05/30/96 9,635 2,364
Limited Partnership ("1996")
Coral Reserves 1996 Institutional Limited Coral, Inc. 54 12/21/95 6,520 $ 2,472
-- ----- --------
Partnership ("1996-I")
Totals 1,094 $47,715 $ 35,973
===== ======= ========
</TABLE>
- ----------------------
(1) In each of the partnerships, Leo Woodard and John Penton, officers and
shareholders of Canaan, serve as "Additional General Partners".
-6-
<PAGE>
The cost sharing in each partnership provided for limited partners to
bear substantially all of the costs of acquisition and development of the
partnership's oil and gas properties. The sharing of partnership net revenues
and cash distributions for all partnerships except 1993-I and 1996-I vary
depending on whether "payout" has occurred. Payout is calculated on an
individual limited partner basis and is the point when cash distributions to
such partner equal the amount of original investment. The following table sets
forth certain information about the ongoing net revenue and cash distribution
sharing in each of the partnerships:
<TABLE>
<CAPTION>
Before Payout Net Revenues After Payout Net Revenue
and Cash Distributions and Cash Distributions
---------------------------------------------- --------------------------------------------------------
Add'l Add'l
General General Limited Canaan General General Limited Canaan Placing
Partnership Partner Partners Partners Securities/(1)/Total Partner Partners Partners Securities/(1)/ Brokers/(1)/ Total
----------- ------- -------- -------- ---------- ----- ------- -------- -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990/(2)/ 8.0% 1.0% 90.0% 1.0%/(3)/ 100% 17.0% 1.0% 75.0% 2.0% 5.0% 100%
1991/(2)/ 8.0% 1.0% 90.0% 1.0%/(3)/ 100% 17.0% 1.0% 75.0% 2.0% 5.0% 100%
1992/(2)/ 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1993 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1993-I 7.2% 0.5% 87.5% 4.8% 100% 7.2% 0.5% 87.5% 2.8% 2.0% 100%
1995 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1996 8.0% 1.0% 90.0% 1.0% 100% 17.0% 1.0% 75.0% 3.0% 4.0% 100%
1996-I 7.0% 0.5% 87.5% 5.0% 100% 7.2% 0.5% 87.5% 2.9% 1.9% 100%
Totals
</TABLE>
(1) Canaan Securities' and Placing Brokers' percentages represent share of
cash otherwise distributable to General Partner.
(2) As of September 30, 1999, the 1990 and 1991 partnerships have achieved
payout for all limited partners and the 1992 partnership has achieved
payout as to some of the limited partners.
(3) Canaan Securities assigned its Before Payout 1% interest in the 1990 and
1991 partnerships to the 1991 and 1993-I partnerships, respectively, in
exchange for negotiated cash payments.
Canaan Securities also receives a fee equal to 1.5% of the gross
revenues of the partnerships, except 1993-I and 1996-I, for providing reporting
services to the limited partners. The table above reflects the net revenue and
cash distribution sharing after the payment of such fee. Canaan Securities
assigned its rights to this 1.5% fee in the 1990 and 1991 partnerships to the
1993 and 1993-I partnerships, respectively, in 1992 and 1994 in exchange for
negotiated cash payments.
-7-
<PAGE>
Coral Group
The Coral Group consists of Canaan, the partnerships, Coral, Inc.,
Coral Corp., the Additional General Partners, Canaan Securities and the Placing
Brokers.
The Combination Transactions
The combination transactions consist of:
. The acquisition of all of the limited partners' interests in each
of the partnerships by Canaan by a merger between each partnership
and separate acquisition corporations organized by Canaan for
purposes of the transactions;
. The acquisition of 100% of the stock of the Coral Companies, the
general partners of the partnerships, by Canaan;
. The acquisition of 100% of the stock of Indian by Canaan.
. The acquisition of 100% of the stock of Canaan Securities by
Canaan; and
. An increase in Canaan's outstanding common stock to result in the
appropriate number of shares outstanding based on Canaan's
relative share of the total Exchange Value.
A total of 5,000,000 shares of Canaan common stock will be issued and
be outstanding after the combination transactions, less the number of shares
otherwise issuable to limited partners who elect to receive cash or exercise
dissenter's rights. The owners of each of the Combining Entities will receive
shares of Canaan common stock in proportion to the "Exchange Value" of such
entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value is based primarily on the proved oil and gas reserve values
determined by Netherland, Sewell & Associates, Inc., an independent petroleum
engineering and consulting firm, using the same price, cost, effective date and
discount rate assumptions for each entity. A limited partner in any partnership
who votes in favor of the combination transactions may elect to receive cash in
lieu of Canaan common stock equal to 75% of the partner's Exchange Value.
Canaan's Exchange Value for purposes of determining its relative
Exchange Value within the Coral Group will also include the value of its rights
to operate the wells it operates. Indian's Exchange Value will be reduced by a
production payment obligation which will be allocated to certain of the
partnerships as a result of such partnerships' having provided financing to
Indian in the form of a production payment purchase in connection with the
acquisition agreement between Indian and the Coral Group.
-8-
<PAGE>
Each partnership's Exchange Value will generally be allocated among
the limited partners, the General Partner and the Additional General Partners in
accordance with the provisions of the applicable partnership agreement governing
the sharing of net revenues and cash distributions of the partnership. In
addition, Canaan Securities and the Placing Brokers will receive a share of a
partnership's Exchange Value based on their respective rights to receive future
cash distributions from the partnership or the General Partners.
Please see "Method of Determining Combination Exchange Values"
beginning on page 66 for a detailed explanation.
A combined special meeting of the partnerships will be held to
consider and vote upon the proposal to adopt the plan of combination on
__________, 2000 at _____ a.m. at _________________, Oklahoma City, Oklahoma.
Proxies are being solicited by Canaan and the General Partners of the
partnerships. Adoption of the plan of combination by a partnership requires the
consent of the General Partners of the partnership and a majority-in-interest of
limited partners and the plan requires that all partnerships adopt the plan.
Owners of Canaan, the Coral Companies, Indian and Canaan Securities have already
unanimously approved the Plan of Combination.
Method of Determining Combination Exchange Values
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the following assumptions:
. Gas prices were established for each well separately based on a
----------
12 month average of gas prices for the 12 months ending March 31,
2000. This average was constructed using the average of composite
spot wellhead prices as published by Natural Gas Week for the 8
months ending November 30, 1999 and the forward market prices for
the 4 months ending March 31, 2000 based on future prices quoted
on the New York Mercantile Exchange (NYMEX") as of October 29,
1999 adjusted for the historical differential between NYMEX and
Natural Gas Week composite spot wellhead prices. The prices for
all wells averaged $2.52 per MMbtu before adjustment by well for
transportation fees, BTU content and regional price differentials
and were held constant for the life of the properties.
. Oil prices were established for each well separately based on an
----------
8 year average of West Texas Intermediate crude oil posted prices
for the 8 year
-9-
<PAGE>
period beginning in 1992 and ending on December 31, 1999. This
average was constructed using average posted prices for West
Texas Intermediate crude oil for 1992 through October 1999 and
the forward market prices for November and December of 1999 as
quoted on NYMEX as of October 29, 1999 adjusted for the
differential between such forward market prices and West Texas
Intermediate posted prices. The prices for all wells averaged
$18.10 per barrel before adjustment by well for gravity,
transportation fees and regional price differentials and were
held constant for the life of the properties.
. Operating costs and production taxes were based on costs and tax
------------------------------------
rates in effect as of September 30, 1999 and were not escalated.
. A discount rate of 10% was used to discount future net revenues
---------------
to present value at September 30, 1999.
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each entity is
included as Appendix A. Netherland, Sewell & Associates was selected to perform
this reserve analysis based on its reputation, experience and expertise in this
area. Netherland, Sewell & Associates is an international petroleum consulting
firm with offices in Dallas and Houston. Netherland Sewell's staff includes
petroleum engineers and geological consultants. Services they provide include
reserve estimates, fair value appraisals, geological studies, expert witness
testimony and arbitration. Netherland Sewell has previously performed isolated
consulting services for Canaan for which it has received fees of less than
$15,000 since January 1, 1997.
The reserves estimated by Netherland Sewell include estimates of
proved undeveloped reserves as well as proved developed reserves, both producing
and nonproducing. Properties with proved developed reserves have less risk than
properties with proved undeveloped reserves. However, there was no risk factor
assigned to the type of reserves for purposes of determining the Reserve Values.
No attempt was made to assign value to oil and gas reserves categorized as
probable or possible, because the General Partners and Canaan believe such
reserves are too speculative to value. Further no value has been assigned for
purposes of the combination transaction to any undeveloped acreage or prospects
owned by any Combining Entity which do not contain proved reserves.
The Reserve Value will not be adjusted to take into account any
changes in oil and gas prices or costs subsequent to the Effective Date. The
prices for gas used to compute the Reserve Value were based on average prices
for a one year period ending on March 31, 2000 in order to eliminate seasonal
variances. The prices for oil were based on average prices for 8 years ending
December 31, 1999. In excess of 70% of the reserves of each of the Combining
Entities is
-10-
<PAGE>
gas and the Reserve Value is more sensitive to changes in gas prices than oil
prices. Further, the Reserve Value is being used to calculate the relative
ownership of Canaan by each Combining Entity and the Reserve Value of each
entity is affected similarly by changes in prices. In the absence of a
fundamental change in the market for gas, Canaan and the General Partners
believe these prices are fair for purposes of computing the Reserve Value.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date.
Working capital includes cash, short term investments, oil and gas sale
receivables and other accounts receivable and other current assets less any
current liabilities other than bank debt. All of these assets and liabilities
will be valued at book value, which in the opinion of Canaan and the General
Partners represents fair market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will
be equal to:
. Reserve Value as of the Effective Date.
-11-
<PAGE>
. Less bank debt at the Effective Date.
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank or other debt assumed by
Canaan from the Effective Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-12-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in the partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above.
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation, will be determined
and the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0
-13-
<PAGE>
million.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
Summary of Estimated Exchange Values
The following tables summarize the estimated Exchange Values allocated
to the various parties. All of these tables assume closing of the combination
transactions on June 30, 2000 and use estimated revenues and expenses from the
Netherland Sewell reserve reports for purposes of calculating estimated cash
distributions. Variances in actual cash distributions and interest expense or a
change in the closing date will result in a change in the Exchange Value for any
Combining Entity affected.
The "Estimated Exchange Value" as of the closing date for the
partnerships and Canaan set forth in the table is approximately 96.4% of the sum
of their respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded for
purposes of computing the relative Exchange Value between the Coral Group and
Indian.
-14-
<PAGE>
<TABLE>
<CAPTION>
Effective Date Estimated Estimated
--------------------------------------
Cash Interest
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Partnerships
1990
Limited Partners.................. $1,524,177 $ 491,591 $ 113,069 $322,486 $ 33,484 $ -
General Partner................... 345,481 111,427 25,629 - 7,590 -
Additional General Partners....... 20,322 6,555 1,508 4,300 446 -
Canaan Securities................. 85,908 13,109 3,015 16,310 893 (48,082)(2)
Placing Brokers................... $ 101,612 $ 32,773 $ 7,538 $ 16,310 $ 2,232 $ -
---------- --------- --------- -------- -------- --------
Total....................... $2,077,500 $ 655,454 $ 150,759 $364,595 $ 44,645 $(48,082)(2)
========== ========= ========= ======== ======== ========
Limited Partner
per $1000 Investment........... $ 392 $ 126 $ 29 $ 83 $ 9 $ -
========== ========= ========= ======== ======== ========
1991
Limited Partners.................. $1,958,656 $ 557,051 $ 163,470 $361,354 $ 36,452 $ 35,464 (2)
General Partner................... 443,963 126,265 37,053 - 8,263 8,039 (2)
Additional General Partners....... 26,115 7,427 2,180 4,818 486 473 (2)
Canaan Securities................. 110,089 14,855 4,359 19,414 972 (63,171)(2)
Placing Brokers................... $ 130,577 $ 37,137 $ 10,898 $ 24,090 $ 2,430 $ 2,364 (2)
---------- --------- --------- -------- -------- --------
Total....................... $2,669,400 $ 742,734 $ 217,960 $409,676 $ 48,603 $(16,832)(2)
========== ========= ========= ======== ======== ========
Limited Partner
per $1000 Investment........... $ 437 $ 124 $ 36 $ 81 $ 8 $ 8 (2)
========== ========= ========= ======== ======== ========
1992
Limited Partners.................. $4,118,669 $ 418,500 $ 200,681 $677,970 $ 28,819 $ -
General Partner................... 859,962 94,860 45,488 - 6,532 -
Additional General Partners....... 53,728 5,580 2,676 7,775 384 -
Canaan Securities................. 274,280 11,160 5,352 26,008 769 -
Placing Brokers................... $ 191,162 $ 27,900 $ 13,379 $ 5,742 $ 1,921 $ -
---------- --------- --------- -------- -------- --------
Total....................... $5,497,800 $ 558,000 $ 267,575 $717,495 $ 38,425 $ -
========== ========= ========= ======== ======== ========
Limited Partner
per $1000 Investment........... $ 549 $ 56 $ 27 $ 90 $ 4 $ -
========== ========= ========= ======== ======== ========
1993
Limited Partners.................. $3,613,799 $ 359,850 $ 211,544 $678,829 $ 24,074 $ -
General Partner................... 703,595 81,566 47,950 - 5,457 -
Additional General Partners....... 46,321 4,798 2,821 7,560 321 -
Canaan Securities................. 239,673 9,596 5,641 24,374 642 -
Placing Brokers................... $ 148,014 $ 23,990 $ 14,103 $ 411 $ 1,605 $ -
---------- --------- --------- -------- -------- --------
Total....................... $4,751,400 $ 479,800 $ 282,059 $711,173 $ 32,099 $ -
========== ========= ========= ======== ======== ========
Limited Partner
per $1000 Investment........... $ 554 $ 55 $ 32 $ 104 $ 4 $ -
========== ========= ========= ======== ======== ========
<CAPTION>
Closing Date(1)
---------------------------
Estimated
Exchange % of
Entity Value Partnership
------ ---------- -----------
<S> <C> <C>
Partnerships
1990
Limited Partners.................. $ 761,297 70.79%
General Partner................... 243,030 22.60%
Additional General Partners....... 10,150 0.94%
Canaan Securities................. 10,150 0.94%
Placing Brokers................... $ 50,753 4.72%
---------- ------
Total....................... $1,075,381 100.00
========== ======
Limited Partner
per $1000 Investment........... $ 196
==========
1991
Limited Partners.................. $1,159,495 72.04%
General Partner................... 341,782 21.24%
Additional General Partners....... 15,460 0.96%
Canaan Securities................. 15,460 0.96%
Placing Brokers................... $ 77,300 4.80%
---------- ------
Total....................... $1,609,496 100.00
========== ======
Limited Partner
per $1000 Investment........... $ 259
==========
1992
Limited Partners.................. $3,079,233 71.75%
General Partner................... 775,151 18.06%
Additional General Partners....... 41,131 0.96%
Canaan Securities................. 233,005 5.43%
Placing Brokers................... $ 162,903 3.80%
---------- ------
Total....................... $4,291,423 100.00%
========== ======
Limited Partner
per $1000 Investment........... $ 411
==========
1993
Limited Partners.................. $2,663,273 72.50%
General Partner................... 640,632 17.44%
Additional General Partners....... 35,152 0.96%
Canaan Securities................. 203,127 5.53%
Placing Brokers................... $ 131,218 3.57%
---------- ------
Total....................... $3,673,401 100.00%
========== ======
Limited Partner
per $1000 Investment........... $ 408
==========
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Effective Date Estimated Estimated
--------------------------------------
Cash Interest
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1993-I
Limited Partners.................. $1,836,887 $ 303,188 $ 168,661 $ 365,117 $ 17,583 $ 56,800(2)
General Partner................... 151,151 24,948 13,878 - 3,376 4,674(2)
Additional General Partners....... 10,496 1,733 964 2,086 234 325(2)
Canaan Securities................. 58,780 9,702 5,397 11,684 1,313 1,818(2)
Placing Brokers................... $ 41,986 $ 6,930 $ 3,855 $ 8,346 $ 938 $ 1,298(2)
---------- ---------- ---------- ---------- -------- ----------
Total...................... $2,099,300 $ 346,500 $ 192,755 $ 387,232 $ 23,444 $ 64,914(2)
========== ========== ========== ========== ======== ==========
Limited Partner
per $1000 Investment........ $ 778 $ 128 $ 71 $ 155 $ 7 $ 24(2)
========== ========== ========== ========== ======== ==========
1995
Limited Partners.................. $4,914,736 $ - $ 526,143 $ 955,477 $ - $ -
General Partner................... 877,802 - 119,259 - - -
Additional General Partners....... 61,652 - 7,015 10,616 - -
Canaan Securities................. 258,376 - 14,030 32,918 - -
Placing Brokers................... $ 203,434 $ - $ 35,076 $ - $ - $ -
---------- ---------- ---------- ---------- -------- ----------
Total...................... $6,316,000 $ - $ 701,524 $ 999,011 $ - $ -
========== ========== ========== ========== ======== ==========
Limited Partner
per $1000 Investment......... $ 722 $ - $ 77 $ 140 $ - $ -
========== ========== ========== ========== ======== ==========
1996
Limited Partners.................. $6,151,521 $1,660,500 $2,933,895 $1,192,126 $110,668 $1,440,000(3)
General Partner................... 1,073,125 376,380 258,376 - 25,085 128,000(3)
Additional General Partners....... 76,839 22,140 15,199 13,246 1,476 16,000(3)
Canaan Securities................. 425,145 44,280 30,397 43,169 2,951 16,000(3)
Placing Brokers................... $ 222,870 $ 110,700 $ 75,993 $ - $ 7,378 $ -
---------- ---------- ---------- ---------- -------- ----------
Total...................... $7,949,500 $2,214,000 $3,313,859 $1,248,542 $147,557 $1,600,000(3)
========== ========== ========== ========== ======== ==========
Limited Partner
per $1000 Investment......... $ 638 $ 172 $ 305 $ 124 $ 11 $ 149(3)
========== ========== ========== ========== ======== ==========
1996-I
Limited Partners.................. $5,383,525 $1,662,500 $2,650,766 $ 973,650 $ 94,783 $1,225,000(3)
General Partner................... 446,064 137,750 219,635 - 18,325 101,500(3)
Additional General Partners....... 30,763 9,500 15,147 5,564 1,264 7,000(3)
Canaan Securities................. 177,195 54,720 87,248 32,047 7,279 40,320(3)
Placing Brokers................... $ 115,053 $ 35,530 $ 56,651 $ 20,808 $ 4,726 $ 26,180(3)
---------- ---------- ---------- ---------- -------- ----------
Total...................... $6,152,600 $1,900,000 $3,029,447 $1,032,069 $126,377 $1,400,000(3)
========== ========== ========== ========== ======== ==========
Limited Partner
per $1000 Investment......... $ 826 $ 255 $ 407 $ 149 $ 15 $ 188(3)
========== ========== ========== ========== ======== ==========
<CAPTION>
Closing Date (1)
---------------------------
Estimated
Exchange % of
Entity Value Partnership
------ ---------- -----------
<S> <C> <C>
1993-I
Limited Partners.................. $1,326,976 86.04%
General Partner................... 136,297 8.84%
Additional General Partners....... 7,453 0.48%
Canaan Securities................. 41,740 2.71%
Placing Brokers................... $ 29,814 1.93%
---------- ------
Total...................... $1,542,280 100.00%
========== ======
Limited Partner
per $1000 Investment........ $ 562
==========
1995
Limited Partners.................. $4,324,150 74.53%
General Partner................... 961,216 16.57%
Additional General Partners....... 55,964 0.96%
Canaan Securities................. 230,879 3.98%
Placing Brokers................... $ 229,935 3.96%
---------- ------
Total...................... $5,802,144 100.00%
========== ======
Limited Partner
per $1000 Investment......... $ 635
==========
1996
Limited Partners.................. $7,539,617 84.52%
General Partner................... 850,436 9.53%
Additional General Partners....... 58,643 0.66%
Canaan Securities................. 347,490 3.90%
Placing Brokers................... $ 124,414 1.39%
---------- ------
Total...................... $8,920,601 100.00%
========== ======
Limited Partner
per $1000 Investment......... $ 783
==========
1996-I
Limited Partners.................. $6,293,660 86.77%
General Partner................... 589,154 8.12%
Additional General Partners....... 35,267 0.49%
Canaan Securities................. 203,141 2.80%
Placing Brokers................... $ 131,900 1.82%
---------- ------
Total...................... $7,253,123 100.00%
========== ======
Limited Partner
per $1000 Investment......... $ 965
==========
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated
Effective Date Cash Interest
------------------------------------------
Reserve Bank Working Distributions Expense Other
Entity Value Debt Capital Before Closing Before Closing Adjustments
------ ----- ---- ------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Partnerships................... $37,513,500 $ 6,896,488 $ 8,155,939 $5,869,793 $ 461,150 $ 3,000,000 (3)
Canaan............................... $ 490,900 $ - - $ 484,891 $ - $ 5,010,676 (1)
----------- ----------- ----------- ---------- ----------- -----------
Total Coral Group with Operating
Fees (1)...................... $38,004,400 $ 6,896,488 $ 8,640,830 $5,869,793 $ 461,150 $ 8,010,676
=========== =========== =========== ========== =========== ===========
CORAL GROUP/INDIAN RELATIVE EXCHANGE VALUES
Total Coral Group without Operating
Fees (1)............................. $41,525,700 $ 6,896,488 $ 8,640,830 $5,869,793 $ 461,150 $ 3,000,000 (3)
----------- ----------- -----------
Indian............................... $45,467,800 $24,536,000 $(4,991,609) - $ 1,444,266 $(3,000,000)(3)
----------- ----------- ----------- ---------- ----------- -----------
Total................................ $86,993,500 $31,432,488 $ 3,649,221 $5,869,793 $ 1,905,416
=========== =========== =========== ========== ===========
<CAPTION>
Closing Date
Estimated
Exchange
Entity Value
------ -----------
<S> <C>
Total Partnerships.................... $34,167,848
Canaan................................ $ 5,771,250
Total Coral Group with Operating
Fees (1)....................... $39,939,098
===========
Total Coral Group without Operating
Fees (1).............................. $39,939,098
Indian................................ $11,495,925
-----------
Total................................. $50,435,024
===========
</TABLE>
_________________
(1) Closing Date Estimated Exchange Values and percentages reflect effects of
elimination of the Canaan operating rights adjustment for purposes of the
relative Exchange Values between the Coral Group and Indian. "Total Coral
Group with Operating Fees" calculates Reserve Value including operating
fees paid by partnerships to Canaan. "Total Coral Group without Operating
Fees" excludes operating fees paid to Canaan.
(2) Adjustments to reflect sale of a portion of Canaan Securities' interests in
the 1990 and 1991 partnerships to the 1993 and 1993-I partnerships
respectively.
(3) Reflects $3 million adjustment in Contingent Production Payment due to
the 1996 and 1996-I partnership's from Indian existing obligation of
$5,606,250 as of Effective Date, included in Working Capital of
partnerships and Working Capital of Indian as of Effective Date.
-17-
<PAGE>
The following table sets forth the historical and estimated cash
distributions, estimated Exchange Value, cash distributions and Exchange Value
as a percent of original investment and estimated ownership of Canaan by each
ownership group and assuming no limited partners elect to receive cash or to
exercise dissenter's rights.
<TABLE>
<CAPTION>
Actual and Cash Distributions
Estimated Cash Estimated Plus Exchange Canaan Common Stock
-----------------------------
Distributions Exchange Value as % Number % of Total Shares
Entity or Group thru Closing Date Value of Investment of Shares Outstanding
--------------- ----------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Partnerships
1990
Limited Partners................. $ 5,678,477 $ 761,297 165.65% 75,488 1.51%
General Partner.................. 758,850 243,030 23,972 0.48%
Additional General Partners...... 67,192 10,150 1,020 0.02%
Canaan Securities................ 55,625 10,150 1,020 0.02%
Placing Brokers.................. 122,949 50,753 3,000 0.06%
----------- ----------- --------- -------
Total $ 6,683,093 $ 1,075,381 104,500 2.09%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 1,461 $ 196 165.65% 19 *
=========== ===========
1991
Limited Partners................. $ 6,557,442 $ 1,159,495 172.25% 114,786 2.30%
General Partner.................. 870,379 341,782 34,174 0.68%
Additional General Partners...... 77,499 15,460 1,530 0.03%
Canaan Securities................ 70,438 15,460 1,530 0.03%
Placing Brokers.................. $ 139,151 $ 77,300 4,500 0.09%
----------- ----------- --------- -------
Total $ 7,714,907 $ 1,609,496 156,500 3.13%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 1,464 $ 259 172.25% 26 *
=========== ===========
1992
Limited Partners................. $ 7,468,904 $ 3,079,233 140.64% 303,772 6.08%
General Partner.................. 642,092 775,151 76,705 1.53%
Additional General Partners...... 78,500 41,131 4,064 0.08%
Canaan Securities................ 236,425 233,005 22,859 0.46%
Placing Brokers.................. $ 5,742 $ 162,903 9,600 0.19%
----------- ----------- --------- -------
Total $ 8,431,663 $ 4,291,423 417,000 8.34%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 996 $ 411 140.64% 41 *
=========== ===========
1993
Limited Partners................. $ 6,148,460 $ 2,663,273 135.05% 262,915 5.26%
General Partner.................. 547,591 640,632 62,937 1.26%
Additional General Partners...... 68,333 35,152 3,553 0.07%
Canaan Securities................ 220,308 203,127 19,795 0.40%
Placing Brokers.................. $ 411 $ 131,218 7,800 0.15%
----------- ----------- --------- -------
Total $ 6,985,102 $ 3,673,401 357,000 7.14%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 942 $ 408 135.05% 40 *
=========== ===========
1993-I
Limited Partners................. $ 2,725,864 $ 1,326,976 171.55% 130,053 2.61%
General Partner.................. 224,217 136,297 13,610 0.27%
Additional General Partners...... 15,576 7,453 504 0.01%
Canaan Securities................ 87,103 41,740 4,033 0.08%
Placing Brokers.................. $ 62,513 $ 29,814 1,800 0.03%
----------- ----------- --------- -------
Total $ 3,115,274 $ 1,542,280 150,000 3.00%
=========== =========== ========= =======
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Actual and Cash Distributions
Estimated Cash Estimated Plus Exchange Canaan Common Stock
-----------------------------
Distributions Exchange Value as % Number % of Total Shares
Entity or Group thru Closing Date Value of Investment of Shares Outstanding
--------------- ----------------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Limited Partner
per $1000 Investment......... $ 1,154 $ 562 171.55 55 *
=========== ===========
1995
Limited Partners................. $ 5,510,761 $ 4,324,150 144.52% 427,489 8.55%
General Partner.................. 489,845 961,216 94,545 1.89%
Additional General Partners...... 61,231 55,964 5,592 0.11%
Canaan Securities................ 189,203 230,879 22,874 0.46%
Placing Brokers.................. $ - $ 229,935 13,500 0.27%
----------- ----------- --------- -------
Total $ 6,251,040 $ 5,802,144 564,500 11.29%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 810 $ 635 144.52% 63 *
=========== ===========
1996
Limited Partners................. $ 3,403,499 $ 7,539,617 113.58% 737,112 14.74%
General Partner.................. 302,533 850,436 83,466 1.67%
Additional General Partners...... 37,817 58,643 5,531 0.11%
Canaan Securities................ 119,031 347,490 34,191 0.68%
Placing Brokers.................. $ - $ 124,414 7,200 0.15%
----------- ----------- --------- -------
Total $ 3,862,880 $ 8,920,601 867,500 17.35%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 353 $ 783 113.58% 77 *
=========== ===========
1996-I
Limited Partners................. $ 3,331,941 $ 6,293,660 147.63% 616,094 12.32%
General Partner.................. 276,269 589,154 57,932 1.16%
Additional General Partners...... 19,040 35,267 3,527 0.07%
Canaan Securities................ 109,824 203,141 19,647 0.39%
Placing Brokers.................. $ 70,859 $ 131,900 7,800 0.16%
----------- ----------- --------- -------
Total $ 3,807,932 $ 7,253,123 712,000 14.10%
=========== =========== ========= =======
Limited Partner
per $1000 Investment......... $ 511 $ 965 147.63% 94 *
=========== ===========
Total Partnerships
Limited Partners................. $40,825,348 $27,147,701 142.46% 2,667,689 53.37%
General Partner.................. 4,111,774 4,537,698 447,341 8.94%
Additional General Partners...... 425,188 259,220 25,321 0.50%
Canaan Securities................ 1,087,957 1,284,992 126,949 2.52%
Placing Brokers.................. $ 401,624 $ 938,237 55,200 1.10%
----------- ----------- --------- -------
Total $46,851,891 $34,167,848 3,321,500 66.43%
----------- ----------- --------- -------
Indian N/A 10,995,925 N/A 1,117,500 22.35%
Canaan N/A 5,771,250 N/A 561,000 11.22%
----------- ---------
Total $46,851,891 $50,935,024 5,000,000 100.00%
=========== =========== ========= =======
</TABLE>
____________________
*Percent of ownership less than 0.1%
(1) Number of shares for Placing Brokers includes only 60% portion for which
Canaan common stock will be issued. Placing Brokers will receive 40% of Exchange
Value in cash estimated to be: 1990 - $20,301; 1991 - $30,920; 1992 - $65,161;
1993 - $52,487; 1993-I - $11,926; 1995 - $91,974; 1996 - $49,766; and, 1996-I -
$52,760.
-19-
<PAGE>
Risk Factors
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see "Risk Factors".
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual
existence rather than a partnership interest in a limited partnership
with a limited life resulting in material changes in the nature of
their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the
value of the common stock received by a limited partner will be equal
to the Exchange Value. The Exchange Values are being used solely to
determine the relative ownership of Canaan by each Combining Entity and
do not represent the fair value of Canaan or its net assets.
. The consideration to be received by the limited partners and the
general partners and Canaan and the other terms of the combination
transactions were determined by Canaan and the Coral Companies, which
have inherent conflicts of interest, and may not reflect the value of
the net assets of the respective partnership if sold to an unaffiliated
third party in an arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values
do not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of
the Combining Entities or the relative share of the limited partners
and General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their
assets could potentially be more beneficial to limited partners than
the combination transactions.
. No independent representative was engaged to represent the limited
partners in negotiating the terms of the combination transactions which
may be inferior to those that could have been negotiated by an
independent representative. No fairness opinion has been obtained
regarding the fairness of the combination transactions to limited
partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be
no dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is
not intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner
-20-
<PAGE>
electing to receive cash may not receive all cash if the $5 million
limit on cash payable to limited parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being
exposed to risks of a larger enterprise without restrictions on
leverage.
. For the 1996 and 1996-I partnerships, failure to approve the
combination transactions may result in a material adverse effect on
returns to limited partners due to a $3 million downward adjustment in
the Indian Contingent Production Payment.
. We have not requested a ruling from the IRS on the tax consequences of
the combination transactions and the IRS may disagree with the opinion
of our counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could
delay or prevent an acquisition of our company, even if such an
acquisition would be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment
regarding the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise
further financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material
impact on us.
. Estimating our reserves and future net cash flows is difficult to do
with any certainty.
. We may incur writedowns of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
-21-
<PAGE>
. Operational risks in our business are numerous and could materially
impact us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
Background and Reasons for the Combination Transactions
The partnerships were formed between 1990 and 1996. As
contemplated when the partnerships were organized, the oil and gas production
from the producing properties owned by the older partnerships has steadily
declined over time. These reductions are due to the natural decline occurring in
connection with the depletion of oil and gas properties. These production
declines have contributed to a reduction in cash distributions, particularly in
the earlier partnerships. Similar production declines can be expected from the
recently formed 1996 and 1996-I partnerships in the future. Please see
"Information Concerning the partnerships - Selected Historical Financial and
Operating Data for Individual Partnerships" on page 119 for cash distribution
information.
In 1997, Canaan and the General Partners began to consider the
possibility of combining the partnerships in order to achieve the benefits of a
corporate entity with a larger asset base and greater growth potential than
available to the General Partners or any individual partnership. Actions to
implement the plan were not taken at that time pending the closing of the
offering of partnership interests for the 1996 and 1996-I partnerships and the
investment of the capital contributions in oil and gas properties.
In evaluating the possible combination of the partnerships into a
publicly traded corporation, management of Canaan considered whether the size of
the combined partnerships would be sufficient to attract a market following and
determined it would be desirable to include additional oil and gas properties in
the new entity. Canaan sought another company to join in the transaction and
management was aware that Indian was considering a possible sale or business
combination. Canaan and Indian executed an agreement in February 1999 providing
for Indian to be included in the combination transactions with Indian and the
Coral Group to receive shares of the new entity based on their relative Exchange
Values. In order to induce Indian to make this agreement, the 1996 and 1996-I
partnerships advanced to Indian a combined sum of $6 million to be applied on
Indian's bank debt. The partnerships received in exchange a Contingent
Production Payment from Indian payable out of production revenues at the rate of
$56,250 per month until paid in full. The Contingent Production Payment is $9
million if the combination transactions are consummated and $6 million if they
are not. At the same time, Indian and Canaan entered into a management agreement
providing for Canaan to manage the business of Indian subject to the control of
Indian's board of directors.
After the execution of the Indian acquisition agreement and the
full investment of the 1996 and 1996-I partnerships, Canaan and the Coral
Companies began the process of planning the combination transactions in more
detail and reviewing the oil and gas properties of all of the
-22-
<PAGE>
Combining Entities to prepare them for a reserve evaluation by Netherland
Sewell. Canaan also engaged legal counsel and accountants to perform services in
connection with the transaction.
Canaan and the General Partners recommend that the limited
partners in each of the partnerships vote in favor of the combination
transactions. In considering the combination transactions, Canaan and the
General Partners took into account various advantages and disadvantages of the
combination transactions to each of the partnerships and its respective limited
partners. The advantages they considered included:
. The continuation of the partnerships will likely result in
declining cash distributions to limited partners as a result
of the natural depletion of each of the partnerships oil and
gas properties and the requirement that partnerships other
than the 1995 partnership repay borrowings with cash flow
otherwise distributable to partners.
. The combination transactions permit the limited partners to
participate in an investment in a larger company with a more
diversified property base and a potential for growth and
appreciation in the future.
. For limited partners whose investment is based on the
potential for increases in oil or gas prices, ownership of
stock in a publicly traded oil and gas company continues to
afford an opportunity to benefit indirectly from these price
increases.
. The structure of the transaction gives limited partners the
opportunity to exchange their interest in the partnerships
for common stock without immediate tax consequences or to
receive cash in a taxable transaction if they do not wish to
receive Canaan common stock.
. The ownership of common stock in a publicly traded company
will afford those limited partners the opportunity to
liquidate their investment should they desire to do so.
. The organization of a publicly held oil and gas company will
potentially afford access to capital and other resources
that will provide Canaan opportunities for future growth
that are not available in the partnerships or the other
Combining Entities.
. The inclusion of Indian in the combination transactions adds
reserves in the same areas as reserves owned by the Coral
Group and further diversifies Canaan's reserve base and
property ownership. Indian and the Coral Group are being
valued in a consistent manner for purposes of the
combination transactions.
-23-
<PAGE>
. For the 1996 and 1996-I partnerships, the terms of the
Indian Contingent Production Payment obligation to them
effectively provide an enhanced return compared to the
return such partnerships could realistically achieve if the
combination transactions are not consummated.
. Canaan believes that shares of publicly held oil and gas
companies generally trade at values greater than their
underlying reserve values affording limited partners
potentially greater value than represented by the
partnerships' oil and gas properties.
Canaan and the General Partners also considered certain
disadvantages of the combination transactions that included:
. Limited partners will no longer receive cash distributions.
However, most limited partners are high income or high net
worth individuals classified as "accredited investors" under
the SEC rules and are likely to be less dependent on
partnership cash distributions than individuals with lower
incomes or net worths.
. Canaan will engage in the acquisition and exploitation of
new oil and gas properties which will expose limited
partners to all of the attendant risks associated with such
activities. The partnerships generally do not conduct
significant drilling activities, but own producing
properties. The activities of Canaan may, therefore, involve
greater risks than the activities of the partnerships, but
also offer the potential for additional benefits if the
acquisition and exploitation activities are successful.
. Increases in prices for oil and gas may have a more direct
effect on limited partners in the partnerships due to the
immediate effect on potential cash distribution. However,
Canaan and the General Partners believe that an increase in
oil and gas prices will also have an indirect beneficial
effect on the market price for Canaan common stock.
. Limited partners will become subject to the volatility of
the market value of Canaan common stock. Market factors that
may affect the common stock price will include factors other
than those that affect the value of a limited partner's
interest in a partnership, such as general market
conditions.
Fairness of the Combination Transactions
Canaan and the General Partners believe that the proposed
combination transactions are fair to the limited partners of each of the
partnerships.
The principal structural element affecting the limited partners
and the other parties to the combination transactions is the determination of
the Exchange Values. As noted elsewhere,
-24-
<PAGE>
the Exchange Values are based primarily on the Reserve Value based on Netherland
Sewell's independent valuations. See "Method of Determining Combination Exchange
Values". By using Reserve Values calculated in a consistent manner by a single
engineer based on the same price, cost and discount assumptions, Canaan and the
General Partners believe that the relative value of each of the Combining
Entities has been fairly determined for purposes of determining its relative
ownership of Canaan after the combination transactions. Further, Canaan and the
General Partners believe the following facts support the fairness of transaction
to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited
partners who elect to receive cash, and the relative number
of shares to be received by the owners of each entity is
being calculated on a consistent basis for each Combining
Entity.
. All of the partnerships had similar investment objectives
and all own similar properties, principally non-operating
interests in proved developed producing gas properties
located primarily in Oklahoma in the Mid-Continent basin.
Therefore, Canaan and the General Partners do not believe
that there are material differences in the assets of the
partnerships that would cause their values to vary based on
quality of reserves or differences in commodity prices for
gas or oil.
. The use of Reserve Value to evaluate the Combining Entities
is a commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners,
the allocation of Exchange Value in each partnership is
based on the profit sharing percentages provided in the
partnership agreements and there is no additional
consideration being allocated to the General Partners or
Canaan which is not currently being received.
. The actual market value of the Canaan common stock received
by limited partners may be more or less than their Exchange
Value, but the owners of Canaan, the General Partners and
Indian will all be similarly affected by any differences.
. The methodology for determining Exchange Values as between
Indian and the Coral Group was agreed to by the owners of
Indian in an arms length negotiated transaction between
Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all
partnerships are required to be included in the combination
transactions for it to be consummated so it is not possible
that any one partnership will be excluded.
-25-
<PAGE>
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu
of Canaan common stock in an amount equal to 75% of the
exchange value of such limited partner's interest. See "The
Combination Transactions- Limited Partner Cash Election" on
page 57. This cash election provides the opportunity for
limited partners who are unwilling to take market risks with
respect to Canaan common stock the opportunity to receive
cash in an amount which Canaan and the General Partners
believe approximates fair value. In addition, if a limited
partner believes that the cash election does not represent
the fair value of his interests, he may vote against the
combination transactions and elect to exercise dissenters
rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal
of the partnership assets.
. In each partnership, the General Partner is entitled to
receive a reimbursement for a portion of its overhead
expenses, including office rent and salaries for clerical
staff and appropriate production supervisory personnel and
any other overhead expenses which the General Partner deems
reasonable. The amount of the overhead reimbursement is
limited to 5% of the amount of distributable cash. This
overhead reimbursement amount is not being taken into
consideration in the calculation of the General Partner's
share of the Exchange Value. However, if the partnerships
were to continue to operate, the General Partner would
continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited
partners, if the partnerships were continued, based on the
same projections of future net revenues used to calculate
the Exchange Values would be less than the Exchange Value
allocated to limited partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled to continue to receive if the combination transactions did not occur.
This allocation of Exchange Value to Canaan is intended to recognize the
economic benefits that Canaan currently receives in connection with the
operation of wells and is not intended to allocate additional new economic
benefits to Canaan.
For purposes of determining relative Exchange Values between
Indian and the Coral Group as a whole, the operating rights value allocated to
Canaan is disregarded because the combination of the Coral Group essentially
results in the elimination of these intercompany items. Further, Canaan and
Indian have agreed that neither of them will be allocated value for operating
rights for purposes of determining the Exchange Value.
-26-
<PAGE>
The Reserve Value for each of the Combining Entities will not be
adjusted for any changes in oil and gas prices subsequent to the Effective Date.
The gas prices used to calculate the Reserve Value were based on an average of
12 months of prices for a period ending on March 31, 2000 using 8 months of
historical actual prices and 4 months of forward market prices in effect at the
Effective Date. The oil prices were based on an 8 year average price ending
December 31, 1999. The Reserve Value thus takes into effect seasonal
fluctuations in gas prices and historical volatility of oil prices. Further,
more than 70% of the Reserve Value of each Combining Entity is gas and the
Reserve Values are, therefore, more sensitive to gas price changes than oil
price changes. Canaan and the General Partners believe that the Reserve Value of
all of the Combining Entities would be affected similarly by changes in prices.
However, because all but one of the partnerships and Indian have bank
indebtedness the Exchange Value for such entities will be more than
proportionately benefited by increases in prices and more than proportionately
disadvantaged by decreases in prices. Because Indian has more debt relative to
Reserve Value than any other Combining Entity, its Exchange Value is more
dramatically affected by changes in prices. However, because of the numerous
uncertainties associated with the calculation of the Reserve Value in addition
to the price assumptions, Canaan and the General Partner do not believe that a
recalculation of the Reserve Value based on temporary changes in product prices
is appropriate. Canaan and the General Partners have also disregarded short term
hedges of oil and gas production by the partnerships and Indian in the
calculation of Reserve Values for the same reasons and because these hedges
expire on or before the end of 2000.
Alternatives to the Combination Transactions
Canaan and the General Partners have given consideration to
alternatives of continued operation of the partnerships for a longer period or
the possibility of selling the partnership assets and liquidation of the
partnerships prior to proposing the combination transactions to limited partners
for their approval.
Continuation of the partnerships, while avoiding the risks
associated with the combination transactions and the discontinuance of cash
distributions, would result in declining operating results and distribution
rates for each of the partnership because:
. Reserves will be depleted in the ordinary course from
ongoing production.
. Lease operating costs will remain the same or increase and
potentially become a greater percentage of oil and gas
revenues as production declines regardless of the operating
results of the partnerships assets.
. The partnerships would have to incur the costs of plugging
and abandoning partnership wells when they become uneconomic
or any future sale of the partnership's wells would be at a
price which would reflect the anticipated costs of such
plugging and abandonment expenses.
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. The partnerships do not have additional sources of capital
to support growth or additional development activity.
. All of the partnerships except the 1995 partnership have
incurred debt to engage in additional development. This debt
has not been amortized. Principal payments on partnership
debt will adversely affect cash distributions.
. The partnerships will continue to incur general and
administrative reimbursement costs in favor of the General
Partner.
A sale of the partnership assets and liquidation of the
partnership would result in immediate cash distributions to the limited partners
and avoid the market risks associated with the ownership of Canaan common stock.
However, Canaan and the General Partners believe liquidation of the partnerships
is less beneficial to limited partners because:
. Liquidation would result in a taxable transaction to all
limited partners, many of whom may not desire such
consequences and a significant portion of the proceeds would
be taxable as ordinary income. The ability of limited
partners to receive shares of Canaan common stock in a tax-
free transaction gives them the benefit of an investment in
a larger more diversified property base, together with the
ability to liquidate their investment in the market by
selling their common stock if they desire to do so with tax
at potentially lesser long term capital gain rates.
. Canaan and the General Partners believe that shares of
publicly held oil and gas companies are generally traded in
the market at prices in excess of net liquidation value
based on estimated oil and gas property values. As a result,
limited partners are expected to have more value in Canaan
common stock than if the underlying assets were sold.
. The properties owned by many of the partnerships consist of
small non- operated interests which are not likely to be
valued favorably in the property market, resulting in
discounted sale prices.
. Limited partners desiring to receive cash may make an
election to receive cash at 75% of Exchange Value if they
vote in favor of the combination transactions, which Canaan
and the General Partners believe approximates the amount a
limited partner would receive in a sale and liquidation.
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Dissenters Rights; Investor Lists
Under Oklahoma law, limited partners of the partnerships are not
entitled to dissenters rights. However, under the Plan of Combination, limited
partners in a partnership may be entitled to exercise dissenters rights
depending upon the level of approval received by such partnership for
participation in the combination transactions. If approval is obtained by
holders of less than 75% of the partnership interests in a partnership,
including the interests of the General Partner and additional General Partners,
limited partners in that partnership will be entitled to exercise dissenters
rights of appraisal. Such rights will entitle dissenting limited partners to
receive a cash payment for their interest in the partnership, based on an
appraisal of the partnership assets to be performed by Madison Energy Advisors,
Inc. subsequent to the closing, which will value the partnership assets as if
sold in an orderly manner, in a reasonable period of time and in a manner
consistent with appropriate industry practice. If a partnership receives
approval of the Plan of Combination by holders of 75% or more of the partnership
interests, including the interests of the General Partners and the Additional
General Partners, there will be no dissenters rights of appraisal and all
limited partners in such partnership will receive shares of Canaan common stock
as described herein, even if they have voted against the Plan of Combination,
unless they elect to receive cash.
A limited partner may obtain a list of limited partners in his
partnership by making a written request to the General Partners at 119 North
Robinson, Oklahoma City, Oklahoma 73102.
Summary of Tax Consequences
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as
a result of the receipt solely of Canaan common stock in
connection with the combination transactions.
. The basis of the Canaan common stock received by each
limited partner who does not recognize gain in the
combination transactions will be equal to the basis of his
partnership interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes
of computing eligibility for long-term capital gain or loss
will include the period of a limited partner's ownership of
his partnership interest exchanged for such stock and, to
the extent the Canaan common stock received is attributable
to certain ordinary income assets of the partnership, may
begin on the day after the closing of the combination
transactions.
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. A limited partner who elects to receive solely cash or
dissents will recognize gain or loss equal to the difference
between the cash received and his adjusted tax basis in his
partnership interest. Gain recognized by a limited partner
will be capital gain except to the extent of such limited
partner's share of ordinary income assets of the
partnership, including recapture of depletion, depreciation
and intangible drilling cost deductions previously allocated
to the limited partner.
Accounting Treatment
The combination transactions will be accounted for as:
. A reorganization of entities under common control for the
Coral Companies and the partnerships. As a result, the value
of the assets and liabilities of the partnerships and the
Coral Companies will be recorded at their historical cost.
. A purchase of Indian. As a result, the purchase price equal
to the fair value of Indian's assets acquired and
liabilities assumed will be allocated to the assets and
liabilities of Indian as of the date of closing of the
combination transactions.
. A purchase of Canaan Securities. As a result, the purchase
price equal to the fair value of Canaan Securities right to
receive cash distributions and future fees for services
based on the partnerships' ongoing revenues from oil and gas
properties will be allocated to the assets and liabilities
of Canaan Securities based on their estimated values as of
the date of closing of the combination transactions.
Business After the Completion of the Combination Transactions
Canaan will become an independent publicly held oil and gas
company after the completion of the combination transactions.
Canaan will seek growth through an active development drilling
program, identification and development of extension prospects and impact
acquisitions. The company will utilize in-house geological and engineering
expertise to identify and evaluate prospective locations, whether proved or
unproved. Canaan will employ aggressive land strategies to increase ownership in
existing properties with development potential and to obtain acreage in areas of
interest through acquisitions, leases or farm-ins. Canaan will concentrate its
efforts in the Mid-Continent area, with a preference for natural gas producing
properties, and will seek operations whenever possible.
On a pro forma basis as of September 30, 1999, Canaan will have
interests in 740 gross (132 net) gas wells, 187 gross (58 net) oil wells for a
total of 927 gross (190 net) wells, of which 199 (or 21%) will be operated by
Canaan. Its proved reserves will consist of 107.7 Bcfe with an estimated Reserve
Value of $87 million.
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Canaan intends to finance its growth through various methods including
public and private offerings of equity and debt securities and bank and other
borrowings. Canaan expects to complete a public offering of common stock after
closing of the combination transactions when Canaan determines market conditions
are desirable.
Comparative Rights of Security Holders
For comparison of the rights of Canaan's shareholders under Oklahoma
law and Canaan's certificate of incorporation and bylaws with rights of the
partners of each of the partnerships under Oklahoma law and the respective
partnership agreements, please see "Comparative Rights of Security Holders."
Resales of Canaan Common Stock
The shares of Canaan common stock that will be issued to limited
partners in connection with the combination transactions have been registered
under the Securities Act. All shares of common stock received by limited
partners will be freely tradeable after completion of the combination
transactions.
Likewise, all shares of Canaan common stock issued in the combination
transactions to the shareholders of Canaan, the General Partners, Indian and
Canaan Securities will be registered under the Securities Act. However, certain
shareholders of these entities have entered into an agreement granting to each
other reciprocal rights of first refusal in connection with any proposed sales
of Canaan common stock by them, except sales of less than a nominal number of
shares.
Conditions to Combination Transactions
The closing of the combination transactions is conditioned upon, among
other things:
. The approval of the Plan of Combination by a majority in
interest of the limited partners in all of the partnerships.
. The absence of any material adverse change affecting any of the
entities participating in the combination transactions.
. No more than $5 million will be required to be paid in cash to
limited partners electing to receive cash or to exercise
dissenter's rights.
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Regulatory Approvals
No federal or state regulatory approvals are required in connection
with the consummation of the combination transactions by the partnerships, the
Coral Companies or Indian or Canaan Securities.
Certain Pro Forma Financial Data
The following unaudited summary pro forma financial data is based on
Canaan's historical financial statements, adjusted to give effect to the
combination transactions, and assuming no limited partners elect to receive cash
or to exercise dissenter's rights. The pro forma data is not necessarily
indicative of results that actually would have occurred if the combination
transactions had been in effect on the dates indicated or which may be obtained
in the future.
The information presented below should be read in conjunction with the
historical financial statements and related notes thereto, the unaudited pro
forma financial information included elsewhere herein and the Selected Financial
Data for Canaan, the partnerships and Indian and proxy statements and the other
financial information included elsewhere in this joint proxy
statement/prospectus.
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<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma
-----------------------------------------------
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
---------------------- -------------------------
Statement of Operations Data: (in thousands, except per share data and as
otherwise indicated)
<S> <C> <C>
Oil and gas sales................................ $ 19,534 $ 14,113
Other income (loss).............................. 585 327
--------- --------
Total revenues.............................. 20,119 14,440
--------- --------
Operating costs.................................. 5,827 4,066
Depreciation, depletion and amortization......... 7,539 5,379
General and administrative....................... 3,499 2,485
Interest......................................... 2,939 2,117
--------- --------
Reduction in carrying value of oil and gas
properties..................................... 1,881 -
--------- --------
Total costs and expenses.................... 21,685 14,047
--------- --------
Other income..................................... 42 26
Earnings (loss) before income taxes.............. (1,525) 419
Income tax expense (benefit)..................... (580) 159
--------- --------
Net earnings (loss).............................. (945) 260
========= ========
Net earnings (loss) per share--basic
and diluted.................................... (.19) .05
========= ========
Net earnings (loss) after transaction
expenses and payments.......................... (1,595) 260
========= ========
Net earnings (loss) after transaction
expenses and payments per share-basic
and diluted................................... (0.32) 0.05
========= ========
Weighted average diluted common shares........... 5,000 5,000
EBITDA(1)........................................ $ 10,793 $ 7,889
Production:
Gas production (Mmcf)............................ 8,406 6,152
Oil Production (MBbls)........................... 213 157
Equivalent production (MMcfe).................... 9,680 7,091
Average Sales Price:
Gas price (per Mcf):............................. $ 1.99 $ 1.89
Oil price (per Bbl):............................. 13.08 15.76
Average sales price (per Mcfe)................... 2.02 1.99
Operating and Overhead Costs (per Mcfe):
Lease operating expenses......................... $ 0.47 $ .45
Production taxes................................. 0.13 .13
General and administrative....................... 0.36 .31
Total............................................ 0.96 .89
</TABLE>
- --------------------
(1)See "Certain Definitions
<TABLE>
<CAPTION>
Unaudited
Pro Forma
September 30, 1999
--------------------------
<S> <C>
Balance Sheet Data
Oil and gas properties, net............................ $ 58,327
Total assets........................................... 65,873
Long-term debt, including current maturities........... 31,432
Total liabilities...................................... 40,548
Shareholders' equity................................... 25,325
Book value per share................................... 5.07
Estimated Net Proved Reserves(1)
Gas (MMcf)............................................. 94,839
Oil (MBbls)............................................ 2,144
Total (MMcfe).......................................... 107,703
Estimated Future Net Revenues ($000)................... 164,149
Reserve Value ($000) .................................. 86,994
</TABLE>
(1) Based on the Reserve Value estimated by Netherland, Sewell & Associates for
purposes of the combination transactions.
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RISK FACTORS AND MATERIAL CONSIDERATIONS
In addition to the material contained elsewhere herein, the following
factors should be considered.
Risks Related to the Combination Transactions
Limited partners will own stock in a corporation with perpetual existence rather
than a partnership interest in a limited partnership with a limited life
resulting in material changes in the nature of their investments.
Limited partners currently own interests in the partnerships which are
subject to a single level of federal and state income taxes at the partner level
and which were organized for the purposes of acquiring producing properties and
making cash distributions to limited partners. The partnerships have a limited
life and a limited purpose. Upon consummation of the transaction, the limited
partners will become shareholders of a corporation subject to income tax at both
the corporate and shareholder levels with perpetual existence and with a broad
business purpose. While the rights of limited partners and shareholders are in
some respects similar, there are material differences to the nature of an
investment in a limited partnership and a corporation.
Limited partners have received cash distributions from the partnerships, but
will receive no cash distributions or dividends in the foreseeable future.
The combination transactions will result in the limited partners
holding shares of our common stock, unless a limited partner elects to receive
cash. We do not anticipate paying dividends on our common stock in the
foreseeable future. Despite the elimination of cash distributions to the limited
partners in connection with the combination transactions, we believe that if the
partnerships continued operations, the cash distributions that limited partners
would receive from the partnerships would decline as the reserves of the
partnerships are depleted. Furthermore, we believe that Canaan's operations
after the combination transactions has the potential to result in increased
shareholder value which may offset any loss in dividend income.
There has been no public market for our common stock and there is no assurance
that a market will develop. There is no assurance that the value of the Canaan
common stock received by a limited partner will be equal to the Exchange Value.
The Exchange Values are being used solely to determine the relative ownership of
Canaan by the owners of each Combining Entity and do not represent the fair
value of Canaan or its net assets.
Our common stock will be listed on the NASDAQ National Market System
but there has been no prior market for our common stock. The price at which the
common stock will trade will be established by the market and there is no
assurance such price will bear any relationship to the Exchange Value. Liquidity
for our common stock may be limited because the
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<PAGE>
number of holders will be relatively small. There may be a large number of
shares of our common stock offered for sale immediately after the closing date
for various reasons, including the liquidity that the combination transactions
will afford to limited partners, who have not had access to a trading market for
the partnership interests and now may wish to liquidate their investment at the
first opportunity. The inclusion of the cash election for limited partners may
mitigate some of this risk. However, sales by limited partners may tend to lower
the market price for our common stock.
A decline in oil or gas prices or depressed conditions in the oil and
gas industry in general could adversely affect the market price of our common
stock. A downturn in the general economic and stock market conditions or in our
drilling record and production performance or results of our operations that are
lower than expected by the marketplace could also be expected to have a negative
effect on the market price of our common stock.
The consideration limited and general partners receive and the other terms of
the combination transactions were determined by Canaan and the Coral Companies,
which has inherent conflicts of interest, and may not reflect the value of the
net assets of the respective partnerships if sold to an unaffiliated third party
in an arms length transaction.
Canaan and the Coral Companies determined the Exchange Values of the
partnerships based, in part, on the estimated value of each of the partnerships'
proved oil and gas reserves as estimated by Netherland Sewell, its bank debt and
net working capital. Canaan and the Coral Companies believe that the methodology
employed in determining the Exchange Values is fair to the limited partners.
However, the determination of the Exchange Values involves a conflict of
interest because the Coral Companies serve as General Partners of the
partnerships, their principal shareholders have been involved in the
organization and promotion of the combination transactions, and Canaan will be
allocated additional Exchange Value for its operating rights. Accordingly, the
determination of the Exchange Values may not reflect the allocation of relative
value between the limited partners and the General Partners if the combination
transactions were negotiated with an unaffiliated third party in an arm's length
transaction.
The Exchange Values were based primarily on estimates of proved oil and gas
reserves and future net cash flows which have inherent uncertainties. Exchange
Values do not represent fair market value.
The present value of estimated future net cash flows from the proved
oil and gas reserves is the primary factor considered in determining the
Exchange Values. However, reserves cannot be determined with a high degree of
certainty. There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production, future
development, recompletion and workover expenditures, prices to be received upon
the sale, and costs to be incurred in production. The Reserve Value for each of
the Combining Entities only represents an estimate and may vary materially from
the quantities of oil and gas actually recovered, and consequently the future
net cash flows received upon the sale thereof. The use of
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<PAGE>
these estimates in determining the Exchange Values for the Combining Entities
could therefore result in an undervaluation or overvaluation of the various
Combining Entities, including the partnership interests owned by limited
partners. For these reasons the Exchange Values do not represent fair market
value.
The price assumptions used to calculate the Reserve Value will not be modified
for changes in prices which could alter the relative values of the Combining
Entities or the relative share of the limited partners and General Partners
which have not achieved payout.
Canaan established the oil and gas prices used by Netherland Sewell &
Associates to calculate the Reserve Value of the Combining Entities. These
prices did not take into consideration existing hedge transactions which the
partnerships and Indian have entered into which expire on or before December 31,
2000 and which are at prices different from the prices used to calculate Reserve
Value. Further, the Reserve Value will not be adjusted for any changes in oil
and gas prices that occur subsequent to the Effective Date and prior to the
closing date. Although the Reserve Value of all of the Combining Entities should
be equally affected by changes in oil and gas prices, different oil and gas
prices from those used to calculate the Reserve Value would have an effect on
the timing of payout in the partnerships which have not yet achieved payout and
thereby affect the allocation of Reserve Value between the limited partners and
the General Partner. In addition, changes in prices would affect the Exchange
Value of the Combining Entities differently because of the differences in
relative levels of indebtedness of these entities.
The alternatives to continuing the partnerships or liquidating their assets
potentially could be more beneficial to limited partners than the combination
transactions.
Instead of entering into the combination transactions, a partnership
instead could continue to operate, or with the approval of the limited partners
of the partnership, seek to liquidate the partnership's assets and distribute
the liquidation proceeds in accordance with the provisions of the respective
partnership agreement, enabling limited partners to reinvest proceeds from the
asset sales in the case of a liquidation and avoid the market risks associated
with the ownership of Canaan common stock. However, Canaan and the Coral
Companies rejected both alternatives based on an analysis of their comparative
risks and benefits. Please see "Background and Reasons For the Combination
Transactions - Alternatives to the Combination Transactions" on page _____.
No independent representative was engaged to represent the limited partners in
negotiating the terms of the combination transactions, which terms may be
inferior to those that could have been negotiated by an independent
representative. Furthermore, no fairness opinion has been obtained regarding the
fairness of the combination transactions.
We did not engage an independent representative, such as an investment
bank, to negotiate the terms of the combination transactions. As a result, the
Exchange Values and other terms of the combination transactions may not be as
favorable as the terms that an independent
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<PAGE>
representative might have obtained. In addition, we did not retain an
independent third party to render an opinion with regard to the fairness of the
combination transactions to the limited partners and/or the partnerships.
For partnerships in which the combination transaction is approved by partners
holding 75% or more of the partnership interests, there will be no dissenters'
rights of appraisal.
Under the rules adopted by the NASD, limited partners in roll-up
transactions such as the combination transactions are entitled to certain
dissenters' rights unless the sponsor adopts a seventy-five percent (75%)
approval requirement for the transaction or other procedures designed to protect
the rights of the limited partners. Therefore, if the combination transaction
for any of the partnerships is approved by less than seventy-five percent (75%)
of the holders of the partnership interests, dissenters' rights will be offered.
However, if the combination transaction for any of the partnerships is approved
by seventy-five percent (75%) or more of the holders of the partnership
interests, no dissenter's rights will be offered to limited partners in that
partnership and they will be required to accept our common stock, unless they
elect to receive cash equal to 75% of the Exchange Value.
The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a partnership,
but is offered as a method for limited partners to receive cash if they desire
to do so. A limited partner electing to receive cash may not receive all cash if
the $5 million limit on cash payable to limited partners is reached.
A limited partner who votes to approve the combination transactions
may elect to receive cash equal to 75% of his Exchange Value. This 75% of
Exchange Value may or may not represent the fair value of the limited partner's
interest in the partnership but is being offered as a means for limited partners
who do not wish to bear the market risk associated with ownership of Canaan
common stock to receive cash in lieu thereof. A cash electing partner will not
receive cash for his entire interest in the partnership if the amount of cash
required to pay limited partners electing to receive cash or to exercise
dissenter's rights exceeds $5 million. In this event, dissenting limited
partners will be satisfied first and the amount of cash payable to cash electing
partners will be prorated based on their relative Exchange Values and they will
receive Canaan common stock for the balance of 75% of their Exchange Value.
The combination transactions will reduce and dilute a limited partner's voting
rights.
The combination transactions will result in each limited partner
receiving a smaller proportionate ownership interest in Canaan than the interest
such partner owns in the partnership. This will reduce a limited partner's
ability to influence the taking of action in those instances where the
partnership agreements provide for the vote or consent of limited partners.
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The combination transactions will result in a limited partner being exposed to
risks of a larger enterprise without restrictions on leverage.
Each of the partnerships acquired specific producing properties and
they have not engaged in material additional development activities. The limited
additional development that has been conducted by the partnerships was financed
using borrowings which under the terms of each of the partnership agreements was
limited to 20-30% of original capital contributions. After the combination
transactions, Canaan will engage in additional oil and gas property acquisitions
and development drilling without any specific limitations on the amount of
leverage that may be incurred to conduct its activities. While the limited
partners in an individual partnership will reduce the risk of ownership of
specific properties by obtaining an indirect ownership interest in a more
diversified group of properties, they will forsake the economic benefit of any
extraordinary increase in value attributable to the specific oil and gas
properties now held by their individual partnerships. In addition, the
additional property acquisition and development activities will expose limited
partners to all of the risks associated with the conduct of those activities and
the absence of any limitation on the amount of leverage that may be incurred by
Canaan exposes its shareholders to greater risk than exists in the partnerships.
The 1996 and 1996-I partnerships' failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
In connection with the negotiation of the Acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
Partnerships in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. The 1996 and 1996-I share of the
Contingent Production Payment is 53% and 47%, respectively. If the combination
transactions are not consummated, Indian is expected to be liquidated and
proceeds of liquidation after payment of all obligations to be shared 50% by the
Indian shareholders and 50% by the 1996 and 1996-I partnerships. Accordingly, if
the combination transactions are not consummated, the 1996 and 1996-I
partnerships may not receive any gain or return on the amount of their
investments in the Contingent Production Payment. The payment of this obligation
is subordinate to Indian's obligations to its bank lenders and depending upon
the amount of liquidation proceeds, the Contingent Production Payment may not be
paid in full. The amount invested in the Contingent Production Payment
represented 33% and 43%, respectively, of the initial capital of the 1996 and
1996-I Partnerships.
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We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
The receipt of the Canaan common stock by the limited partners and the
shareholders of Indian and Coral Companies as a result of the combination
transactions should, in almost all cases, be nontaxable to you for Federal
income tax purposes. However, a limited partner who elects to receive cash or
exercises dissenter's rights will recognize gain or loss equal to the difference
between the cash received and his adjusted tax basis in his partnership interest
on the date of the combination transactions. An electing or dissenting limited
partner who receives Canaan common stock and cash also will recognize such gain
(but not loss), but not in excess of the amount of cash received.
Canaan has received an opinion of counsel relating to certain income
tax consequences of the combination transactions. However, counsel has not
expressed an opinion on all consequences. No rulings have been, or will be,
requested from the IRS with respect to the tax consequences resulting from the
proposed combination transactions and, accordingly, we can give no assurance
that the IRS or the courts would agree with the opinion described in "Certain
Federal Income Tax Consequences."
The partnerships presently are taxed as limited partnerships and, as
such do not generally pay federal income tax at the partnership level. Rather,
the items of income, gain, loss and deduction flow through to their partners.
The limited partners will receive Canaan common stock in the proposed
combination transactions. Because Canaan is a corporation, its income will be
taxed at the corporate level and, to the extent distributions are made to its
shareholders, such distributions will be taxable to the shareholders to the
extent of Canaan's accumulated and current earnings and profits. As a result of
the proposed combination transactions, the former limited partners who become
Canaan shareholders will no longer receive the pass-through tax treatment
accorded to partners.
Risks Related to Canaan
Our future performance depends upon our ability to find or acquire additional
oil and gas reserves that are economically recoverable.
Unless we successfully replace the reserves that we produce, our
reserves will decline, resulting eventually in a decrease in oil and gas
production and lower revenues and cash flow from operations. While we believe
that we can replace reserves through drilling and acquisitions, we may not be
able to replace such reserves at acceptable costs. The business of exploring
for, developing or acquiring reserves is capital intensive. We may not be able
to make the necessary capital investment to maintain or expand our oil and gas
reserves if cash flow from operations is reduced, due to lower oil and gas
prices or otherwise, or if external sources of capital become limited or
unavailable. In addition, our drilling activities will be subject to numerous
risks, including the risk that no commercially productive oil or gas reserves
will be encountered. Exploratory drilling involves more risk than development
drilling because exploratory drilling is designed to test formations for which
proved reserves have not been discovered.
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<PAGE>
We will continually identify and evaluate acquisition opportunities.
We cannot assure you that we will successfully consummate any acquisition, that
we will be able to acquire producing oil and gas properties that contain
economically recoverable reserves or that any acquisition will be profitably
integrated into our operations.
Our initial property base will not include a significant number of exploratory
or development prospects.
Our property base after consummation of the combination transactions
will consist primarily of oil and gas properties containing proved developed
producing reserves. Our proved undeveloped reserves will constitute
approximately 25% of our total proved reserves. We will not have any significant
exploratory or other prospects without proved reserves. Our ability to generate
additional reserves will be dependent upon our ability to locate, acquire and
successfully drill and develop additional oil and gas prospects.
We are subject to anti-takeover provisions in our charter that could delay or
prevent an acquisition of our company, even if such an acquisition would be
beneficial to our shareholders.
Certain provisions of our certificate of incorporation, our bylaws,
Oklahoma law and management contracts could make it more difficult for a third
party to acquire us even if doing so might be beneficial to our shareholders.
These provisions include:
. A classified board, the members of which serve staggered three-
year terms and may be removed by shareholders only for cause;
. A prohibition on shareholders calling special meetings and acting
by written consent;
. A requirement for advance notice of shareholder proposals and
director nominations; and,
. Restrictions on business combinations with interested
shareholders and limitations on voting power of control share
acquisitions.
. Contracts providing severance benefits to management of a change
in control.
Please see "Management - Change in Control Agreements" and "Description of
Securities."
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We depend on the continued services of our senior management.
As we continue to grow, we will need to hire additional personnel in
all areas. In order to be successful, we must attract, retain and motivate key
employees and we face significant competition from other oil and gas companies
in doing so. We may be unable to retain our key employees or retain other
qualified employees in the future. Please see "Management" for detailed
information on our senior management.
Investors will be relying on our board and management judgment regarding the
future directions and activities of the company.
Our management and board of directors will have broad discretion with
respect to the future activities of Canaan and limited partners will be relying
on a judgment of our management regarding our activities. Presently, anticipated
uses include for general corporate purposes, including the acquisition and
development of additional unspecified oil and gas properties. Please see
"Information concerning Canaan - Business after the Combination Transactions".
We will need additional financing to grow and our ability to raise further
financing is uncertain.
After completion of the combination transactions, we anticipate that
our cash flow from operations will be sufficient to meet our anticipated working
capital and debt service requirements, but such cash flow may not be sufficient
to finance significant growth through additional acquisitions or drilling. We
anticipate seeking additional equity financing by an underwritten public
offering of common stock after completion of the combination transactions when
we believe market conditions are appropriate. There is no assurance we will
complete such an offering. We may pursue alternative sources of financing
through private placements of equity or debt securities or through asset sales.
If additional funds are raised through the issuance of equity or
convertible securities, the percentage ownership of our shareholders will be
reduced and these newly issued securities may have rights, preferences or
privileges senior to those of existing shareholders, including those receiving
shares in the combination transactions. We cannot assure you that additional
financing will be available on terms favorable to us or at all. If adequate
funds are not available or not available on acceptable terms, our ability to
fund our operations and take advantage of unanticipated opportunities will be
significantly limited.
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<PAGE>
Risks Related to the Oil and Gas Industry
A substantial decrease in oil and gas prices would have a material impact on us.
Our future financial condition and results of operations are dependent
upon the prices we receive for our oil and gas production. Oil and gas prices
historically have been volatile and likely will continue to be volatile in the
future. This price volatility also affects our common stock price. We cannot
predict oil and gas prices and such prices may decline in the future. The
following factors have an influence on oil and gas prices:
. relatively minor changes in the supply of and demand for oil and
gas;
. weather conditions;
. market uncertainty;
. domestic and foreign governmental regulations;
. the availability and cost of alternative fuel sources;
. the domestic and foreign supply of oil and gas;
. the price of foreign oil and gas;
. political conditions in oil and gas producing regions, including
the Middle East; and
. overall economic conditions.
Estimating our reserves and future net cash flows is difficult to do with any
certainty.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and their values, including many factors beyond our
control. The reserve data included herein represents only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data, the precision
of the engineering and geological interpretation, and judgment. As a result,
estimates of different engineers often vary. The estimates of reserves, future
cash flows and present value are based on various assumptions, including those
prescribed by the SEC, and are inherently imprecise. Actual future production,
cash flows, taxes, development expenditures, operating expenses and quantities
of recoverable oil and gas reserves may vary substantially from our estimates.
Also, the use of a 10% discount factor for reporting purposes may not
necessarily represent the most appropriate
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discount factor, given actual interest rates and risks to which our business or
the oil and gas industry in general are subject.
Quantities of proved reserves are estimated based on economic
conditions, including oil and gas prices in existence at the date of assessment.
Our reserves and future cash flows may be subject to revisions, based upon
changes in economic conditions, including oil and gas prices, as well as due to
production results, results of future development, operating and development
costs, and other factors. Downward revisions of our reserves could have an
adverse affect on our financial condition and operating results.
We may incur write-downs of the net book values of our oil and gas properties
which would adversely affect our shareholders equity and earnings.
The full cost method of accounting which we follow requires that we
periodically compare the net book value of our oil and gas properties, less
related deferred taxes, to a calculated "ceiling". The ceiling is the estimated
after-tax present value of the future net revenues from proved reserves using a
10% discount rate and using constant prices and costs. Any excess of net book
value of oil and gas properties is written off as an expense and may not be
reversed in subsequent periods even though higher oil and gas prices may have
increased the ceiling in these periods. A write-off constitutes a charge to
earnings and reduces shareholders equity, but does not impact our cash flows
from operating activities. Future write-offs may occur which would have a
material adverse effect on our net income in the period taken, but would not
affect our cash flows.
Operational risks in our business are numerous and could materially impact us.
Our operations will involve operational risks and uncertainties
associated with drilling for, and production and transportation of, oil and gas,
all of which can affect our operating results. Our operations may be materially
curtailed, delayed or canceled as a result of numerous factors, including:
. the presence of unanticipated pressure or irregularities in
formations;
. accidents;
. title problems;
. weather conditions;
. compliance with governmental requirements; and
. shortages or delays in the delivery of equipment.
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<PAGE>
Also, our ability to market oil and gas production depends upon
numerous factors, many of which are beyond our control, including:
. capacity and availability of oil and gas systems and pipelines;
. effect of federal and state production and transportation
regulations; and
. changes in supply and demand for oil and gas.
We do not insure against all potential losses and could be materially impacted
by uninsured losses.
Our operations will be subject to the risks inherent in the oil and
gas industry, including the risks of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental accidents, such as oil spills,
gas leaks, salt water spills and leaks, ruptures or discharges of toxic gases.
If any of these risks occur in our operations, we could experience substantial
losses due to:
. injury or loss of life;
. severe damage to or destruction of property, natural resources
and equipment;
. pollution or other environmental damage;
. clean-up responsibilities;
. regulatory investigation and penalties; and
. other losses resulting in suspension of our operations.
In accordance with customary industry practice, we maintain insurance
against some, but not all, of the risks described above. The occurrence of an
uninsured loss could have a material adverse effect on our financial condition
or results of operations.
Governmental and environmental regulations could adversely affect our business.
Our business will be subject to certain foreign, federal, state and
local laws and regulations on taxation, the exploration for and development,
production and marketing of oil and gas, and environmental and safety matters.
Many laws and regulations require drilling permits and govern the spacing of
wells, rates or production, prevention of waste and other matters. Such laws and
regulations have increased the costs of planning, designing, drilling,
installing, operating and abandoning our oil and gas wells and other facilities.
In addition, these laws and regulations, and
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any others that are passed by the jurisdictions where we have production, could
limit the total number of wells drilled or the allowable production from
successful wells which could limit our revenues.
Our operations will be subject to complex environmental laws and
regulations adopted by the various jurisdictions where we operate. We could
incur liability to governments 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 these
materials into the environment in any of the following ways:
. from a well or drilling equipment at a drill site;
. leakage from gathering systems, pipelines, transportation
facilities and storage tanks;
. damage to oil and gas wells resulting from accidents during
normal operations; and
. blowouts, cratering and explosions.
Because the requirements imposed by all of the laws and regulations
relating to our business are frequently changed, we cannot assure you that laws
and regulations enacted in the future, including changes to existing laws and
regulations, will not adversely affect our business. In addition, because we may
acquire interests in properties that have been operated in the past by others,
we may be liable for environmental damage caused by such former operators.
Competition in the oil and gas industry is strong and can harm our business.
The oil and gas industry is highly competitive. We will compete in the
areas of proved reserve and undeveloped acreage acquisitions and the
development, production and marketing of oil and gas, as well as contracting for
equipment and recruiting and retaining qualified employees. Our competitors
include major oil and gas companies, other independent oil and gas concerns, gas
marketing companies, and individual producers and operators. Most of our
competitors have financial and other resources which substantially exceed those
which are available to us. Competition in the regions in which we own properties
may result in occasional shortages or unavailability of drilling rigs and other
equipment used in drilling activities, as well as limited availability of and
access to pipelines. Competitive circumstances could result in curtailment of
activities, increased costs, delays or losses in production or revenues, or
cause interests in oil and gas leases to lapse. All of the competitive
influences could have a material adverse impact on our operations and
profitability.
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<PAGE>
BACKGROUND AND REASONS FOR COMBINATION TRANSACTIONS
Background of Partnerships
Each of the partnerships was organized by the General Partners for the
purpose of acquiring interests in producing oil and gas properties and to engage
in drilling of development and offset wells for the reworking, recompletion,
deepening or plugging back of existing wells and secondary or tertiary recovery
operations and other production enhancement techniques incident to the operation
of producing properties acquired by the partnerships. The partnerships were not
organized to engage in exploratory drilling activities. The objective of each of
the partnerships is to provide cash distributions generated by the sale of oil
and gas from the properties acquired. Each of the partnerships raised capital in
private offerings from limited partners, primarily individuals and substantially
all of whom are considered "accredited investors" under the federal securities
laws.
All of the funds invested by limited partners have been invested in
oil and gas properties as contemplated by the partnership agreements, after
required payments of organization and offering costs. Properties acquired by
each partnership have generated revenues from the sale of oil and gas and cash
distributions have been made to limited partners in accordance with the terms of
the partnership agreements. Accordingly, the investment objectives of each of
the partnerships have been achieved. The following table sets forth certain
information about the partnerships:
<TABLE>
<CAPTION>
Cumulative Cash
Distributions to
Total Initial Capital Limited Partners
Identity of Date Contributions of Through September
General # of Limited Commenced Limited Partners 30, 1999
Name of Partnership Partner/(1)/ Partners Operations (000 Omitted) (000 Omitted)
- ------------------- ------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Coral Reserves Natural Gas Income Fund 1990 Coral, Inc. 109 04/30/90 $3,888 $5,382
Limited Partnership
Coral Reserves Natural Gas Income Fund 1991 Coral Corp. 124 04/30/91 4,480 6,232
Limited Partnership
Coral Reserves Natural Gas Income Fund 1992 Coral Corp. 191 06/17/92 7,500 6,867
Limited Partnership
Coral Reserves Natural Gas Income Fund 1993 Coral Corp. 173 07/02/93 6,525 5,544
Limited Partnership
Coral Reserves 1993 Institutional Limited Coral, Inc. 21 09/01/93 2,363 2,462
Partnership
Coral Reserves Energy Income Fund 1995 Coral Corp. 196 12/13/94 6,805 4,650
Limited Partnership
Coral Reserves Energy Income Fund 1996 Coral Corp. 226 05/30/96 9,635 2,364
Limited Partnership
Coral Reserves 1996 Institutional Limited Coral, Inc. 54 12/21/95 6,520 $2,472
Partnership
-- ----- ------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Cumulative Cash
Distributions to
Total Initial Capital Limited Partners
Identity of Date Contributions of Through September
General # of Limited Commenced Limited Partners 30, 1999
Name of Partnership Partner/(1)/ Partners Operations (000 Omitted) (000 Omitted)
- ------------------- ------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Totals 1,094 $47,715 $35,973
===== ======= =======
</TABLE>
_______________________
/(1)/ In each of the partnerships, Leo E. Woodard and John Penton, officers
and shareholders of Canaan, serve as "Additional General Partners".
Neither Canaan, the General Partners nor Canaan Securities have
experienced since January 1, 1998 or is likely to experience any material
adverse financial development. All of the partnerships except the 1995
partnership have incurred indebtedness in order to finance limited development
activities. Through September 30, 1999, all of the partnerships have generally
paid interest only on such borrowings and no material principal payments have
been made because the collateral value of each partnership's oil and gas
properties has been substantially more than required by the partnerships'
lender. In some of the partnerships, the level of debt in relation to the
collateral value of the partnership's oil and gas properties is sufficiently
high that repayment of principal of the debt will need to be commenced in 2000
if the combination transactions do not occur. The partnerships likely to require
debt repayment are the 1990 and 1991 partnerships. Commencement of amortization
of principal payments on indebtedness of these partnerships will reduce cash
distributions to limited partners in these partnerships and limited partners
will also be required to report as income their share of partnership principal
repayments.
Background of Combination Transactions
The partnerships were formed between 1990 and 1996. As contemplated
when the partnerships were organized, the oil and gas production from the
producing properties owned by the older partnerships has steadily declined over
time. These reductions are due to the natural decline occurring in connection
with the depletion of oil and gas properties. These production declines have
contributed to a reduction in cash distributions, particularly in the earlier
partnerships. Similar production declines can be expected from the recently
formed 1996 and 1996-I partnerships in the future. Please see "Information
Concerning the Partnerships - Selected Historical Financial and Operating Data
for Individual Partnerships" on page 119 for cash distribution information.
In 1997, Canaan and the General Partners began to consider the
possibility of combining the partnerships in order to achieve the benefits of a
corporate entity with a larger asset base and greater growth potential than
available to the General Partners or any individual partnership. Actions to
implement the Plan were not taken at that time pending the closing of the
offering of partnership interests for the 1996 and 1996-I partnerships and the
investment of the capital contributions in oil and gas properties.
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In evaluating the possible combination of the partnerships into a
publicly traded corporation, management of Canaan considered whether the size of
the combined partnerships would be sufficient to attract a market following and
determined it would be desirable to include additional oil and gas properties in
the new entity. Canaan sought another company to join in the transaction and
management was aware that Indian was considering a possible sale or business
combination. Canaan and Indian executed an agreement in February 1999 providing
for Indian to be included in the combination transactions with Indian and the
Coral Group to receive shares of the new entity based on their relative Exchange
Values. In order to induce Indian to make this agreement, the 1996 and 1996-I
partnerships advanced to Indian a combined sum of $6 million to be applied on
Indian's bank debt. The partnerships received in exchange a Contingent
Production Payment from Indian payable out of production's revenues at the rate
of $56,250 per month until paid in full. The Contingent Production Payment is $9
million if the combination transactions are consummated and $6 million if they
are not, less any payments previously made. At the same time, Indian and Canaan
entered into a management agreement providing for Canaan to manage the business
of Indian subject to the control of Indian's board of directors.
After the execution of the Indian acquisition agreement and the full
investment of the 1996 and 1996-I partnerships, Canaan and the Coral Companies
began the process of evaluating the combination transactions and reviewing the
oil and gas properties of all of the Combining Entities to prepare them for a
reserve evaluation by Netherland Sewell. Canaan also engaged legal counsel and
accountants to perform services in connection with the transaction.
Reasons for the Combination Transactions
Canaan and the General Partners recommend that the limited partners in
each of the partnerships vote in favor of the combination transactions. In
considering the combination transactions, Canaan and the General Partners took
into account various advantages and disadvantages of the combination
transactions to each of the partnerships and its respective limited partners.
The advantages they considered included:
. The continuation of the partnerships will likely result in
declining cash distributions to limited partners as a result of
the natural depletion of each of the partnership's oil and gas
properties and the requirement that partnerships, other than the
1995 partnership, repay borrowings with cash flow otherwise
distributable to partners.
. The combination transactions permit the limited partners to
participate in an investment in a larger company with a more
diversified property base and a potential for growth and
appreciation in the future.
. For limited partners whose investment is based on the potential
for increases in oil or gas prices, ownership of stock in a
publicly traded oil and gas
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<PAGE>
company continues to afford an opportunity to benefit indirectly
from these price increases.
. The structure of the transaction gives limited partners the
opportunity to exchange their interest in the partnerships for
Canaan common stock without immediate tax consequences or to
receive cash in a taxable transaction if they do not wish to
receive Canaan common stock.
. The ownership of common stock in a publicly traded company will
afford those limited partners the opportunity to liquidate their
investment should they desire to do so.
. The organization of a publicly held oil and gas company will
potentially afford access to capital and other resources that
will provide Canaan opportunities for future growth that are not
available in the partnerships or the other Combining Entities.
. The inclusion of Indian in the combination transactions adds
reserves in the same areas as reserves owned by the Coral Group
and enhances Canaan's reserve base and property ownership. Indian
and the Coral Group are being valued in a consistent manner for
purposes of the combination transactions.
. For the 1996 and 1996-I partnerships, the terms of the Indian
Contingent Production Payment obligation to them effectively
provide an enhanced return compared to the return such
partnerships could realistically achieve if the combination
transactions are not consummated.
. Canaan believes that shares of publicly held oil and gas
companies generally trade at values greater than their underlying
reserve values affording limited partners potentially greater
value than represented by the partnership's oil and gas
properties.
Canaan and the General Partners also considered certain disadvantages
of the combination transactions that included:
. Limited partners will no longer receive cash distributions.
However, most limited partners are high income or high net worth
individuals classified as "accredited investors" under the SEC
rules and are likely to be less dependent on partnership cash
distributions than individuals with lower incomes or net worths.
. Canaan will engage in the acquisition and exploitation of new oil
and gas properties which will expose limited partners to all of
the attendant risks
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associated with such activities. The partnerships generally do
not conduct significant drilling activities, but own producing
properties. The activities of Canaan may, therefore, involve
greater risks than the activities of the partnerships, but also
offer the potential for additional benefits if the acquisition
and exploitation activities are successful.
. Increases in prices for oil and gas may have a more direct effect
on limited partners in the partnerships due to the immediate
effect on potential cash distribution. However, Canaan and the
General Partners believe that an increase in oil and gas prices
will also have an indirect beneficial effect on the market price
for Canaan common stock.
. Limited partners will become subject to the volatility of the
market value of Canaan common stock. Market factors that may
affect the common stock price will include factors other than
those that affect the value of a limited partner's interest in a
partnership, such as general market conditions.
Alternatives to the Combination Transactions
Canaan and the General Partners have given consideration to
alternatives of continued operation of the partnerships for a longer period or
the possibility of selling the partnership assets and liquidation of the
partnerships prior to proposing the combination transactions to limited partners
for their approval.
Continuation
Continuation of the partnerships, while avoiding the risks associated
with the combination transactions and the discontinuance of cash distributions,
would result in declining operating results and distribution rates for each of
the partnership because:
. Reserves will be depleted in the ordinary course from ongoing
production.
. Lease operating costs will remain the same or increase and
potentially become a greater percentage of oil and gas revenues
as production declines regardless of the operating results of the
partnerships assets.
. The partnerships would have to incur the costs of plugging and
abandoning partnership wells when they become uneconomic or any
future sale of the partnerships' wells would be at a price which
would reflect the anticipated costs of such plugging and
abandonment expenses.
. The partnerships do not have additional sources of capital to
support growth or additional development activity.
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. All of the partnerships except the 1995 partnership have incurred
debt to engage in additional development. This debt has not been
amortized in any material respect. Principal payments on
partnership debt will adversely affect cash distributions and
require limited partners to report taxable income on principal
repayments.
. The partnerships will continue to incur general and
administrative reimbursement costs in favor of the General
Partner.
Liquidation
A sale of the partnership assets and liquidation of the partnership
would result in immediate cash distributions to the limited partners and avoid
the market risks associated with the ownership of Canaan common stock. Canaan
and the General Partners believe that the material risks relating to a
liquidation of any one or more of the partnerships outweigh the potential
benefits thereof. The principal benefits to limited partners of any partnership
of liquidation as opposed to continuation or participation in the combination
transactions would be the immediate realization of the cash proceeds of the sale
of such properties and the avoidance of the risks and uncertainties associated
with realizing the value of such properties over time or ownership of Canaan
common stock. The material risks of such liquidation would be that the prices
the partnership would receive for its properties upon liquidation from third
party purchasers would be materially less than the value of the future cash
flows from such property discounted solely for the time value of money or less
than the market value of Canaan common stock received.
Canaan and the General Partners believe the liquidation of the
partnerships would be less beneficial to limited partners because:
. The prices paid by purchasers of partnership properties in
liquidation would likely include a substantial discount for the
risks and uncertainties of future cash flows which are not
included in the calculation of Reserve Values. Purchasers
typically apply risk discounts to reserve values for reserves
which are not proved developed producing reserves.
. In addition, Canaan and the General Partners believe that
additional discounts would be applied in the valuation of
partnership oil and gas properties related to:
. The relative large number of individual properties owned by
each partnership and the relatively small working and
revenue interests owned by the partnerships in each of its
properties;
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<PAGE>
. The fact that all partnership's properties are non-operated
and many third party purchasers prefer to operate
properties;
. The additional costs incurred during the extended amount of
time it would take to orderly dispose of a large number of
properties including the costs of brokers and agents
employed to facilitate the sale of properties;
. The complexity involved administratively to transfer a large
number of properties from several entities to a third party
purchaser.
. Liquidation would result in a taxable transaction to all
limited partners, many of whom may not desire such
consequences. The ability of limited partners to receive
shares of Canaan common stock in a tax-free transaction
gives them the benefit of an investment in a larger more
diversified property base, together with the ability to
liquidate their investment in whole or in part in the market
by selling their common stock if they desire to do so and to
determine the timing of any tax consequences. In addition, a
cash liquidation would result in a material portion of the
liquidation proceeds being taxed as ordinary income as a
result of the requirement to recapture cumulative tax
deductions for depletion, depreciation and intangible
drilling costs. A sale of Canaan common stock will be
potentially taxable at lower long-term capital gain rates.
. Canaan and the General Partners believe that shares of
publicly held oil and gas companies are generally traded in
the market at prices in excess of net liquidation value
based on estimated oil and gas property values. As a result,
limited partners are expected to have more value in Canaan
common stock than if the underlying assets were sold.
. The ability of a limited partner to make an election to
receive cash at 75% of Exchange Value, which Canaan and the
General Partners believe approximates the amount a limited
partner would receive in a sale and liquidation.
. Liquidation would require additional administrative, legal
and accounting costs for winding up of the partnerships.
The economic terms of each of the partnerships generally provided
for the limited partners to provide all of the capital of the partnership and to
bear a greater percentage of the share of costs associated with each
partnership's initial acquisition and development of properties. As a result,
the limited partners in each partnership have capital account balances which are
higher, on a relative capital account basis, than their interest in revenues of
the partnership. The partnership
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<PAGE>
agreements for each partnership require that the capital accounts be recognized
or "balanced" in connection with any liquidation of a partnership. These
balancing provisions result in the limited partners receiving a priority
allocation of the liquidation proceeds as a result of their relatively higher
capital account balances. The effect of this priority allocation is that the
limited partners receive a greater share of liquidation proceeds than what
limited partners would have received from the production of the oil and gas
properties owned by each partnership had the properties been produced to
depletion. Any liquidation of a partnership would therefore result in a relative
higher proportion of value being allocated to the limited partners than is being
done in connection with the combination transactions in which the allocation
between the limited partners and the general partners is being done based on
revenue sharing percentages.
Canaan and the General Partners believe that the discounted prices
expected to be realized in a sale of properties in a liquidation would offset
any potential incremental liquidation value allocated to limited partners.
Other Transactions
Since January 1, 1997, there have been no contacts, negotiations or
transactions concerning any of the following matters relating to the
partnerships, except the contacts, negotiations and transactions with respect to
the Indian acquisition described above:
. A merger, consolidation or combination of any of the
partnerships;
. An acquisition of any of the partnerships or a material amount of
any of their assets;
. A tender offer for or other acquisition of securities of any
class issued by any of the partnerships; or
. A change in control of any of the partnerships.
THE COMBINATION TRANSACTIONS
Description of the Combination Transactions
The combination transactions consist of:
. The acquisition of all of the limited partners' interests in each
of the partnerships by Canaan by a merger between each
partnership and acquisition corporations organized by Canaan for
purposes of the transaction;
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. The acquisition of 100% of the stock of the Coral Companies, the
general partners of the partnerships, by Canaan;
. The acquisition of 100% of the stock of Indian by Canaan;
. The acquisition of 100% of the stock of Canaan Securities by
Canaan; and
. An increase in Canaan's outstanding common stock to result in the
appropriate number of shares outstanding based on Canaan's
relative share of the total Exchange Value.
As a result of the combination transactions, Indian's separate
corporate existence will terminate and the partnerships, the Coral Companies and
Canaan Securities will be wholly-owned subsidiaries of Canaan.
A total of 5,000,000 shares of Canaan common stock will be issued and
be outstanding after the combination transactions, less the number of shares
otherwise issuable to limited partners who elect to receive cash or exercise
dissenter's rights. The owners of each of the Combining Entities will receive
shares of Canaan common stock in proportion to the "Exchange Value" of such
entity relative to the total Exchange Value of all Combining Entities. The
Exchange Value is based primarily on the proved oil and gas reserve values
determined by Netherland, Sewell & Associates, an independent petroleum
engineering and consulting firm, using the same price, cost, effective date and
discount rate assumptions for each entity. A limited partner in any partnership
who votes in favor of the combination transactions may also elect to receive
cash in lieu of Canaan common stock equal to 75% of the partner's Exchange
Value.
The Plan of Combination and Indian Acquisition Agreement
In February 1999, Canaan and the Coral Companies entered into an
agreement for Canaan to acquire Indian based on their relative Exchange Values
simultaneously with the consummation of the remaining portions of the
combination transactions. We refer to this agreement as the "Indian Acquisition
Agreement". Because the details of the combination transactions had not been
finalized at the time of execution of the Indian Acquisition Agreement, the
Combining Entities subsequently entered into the "Plan of Combination" in
February, 2000, which supplements the Indian Acquisition Agreement and provides
for the details of the combination transactions.
Copies of the Indian Acquisition Agreement and the Plan of Combination
have been filed as exhibits to the registration statement of which this
prospectus/proxy statement is a part, are incorporated herein by reference and
are available to limited partners upon request to Canaan at 119 N. Robinson,
Suite 600, Oklahoma City, Oklahoma 73102, (405) 232-3222.
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The Indian Acquisition Agreement obligated the Coral Group to advance
to Indian the sum of $6 million to be applied on Indian's existing bank debt in
exchange for which the Coral Group received a contingent production payment
("the Contingent Production Payment") payable out of Indian's oil and gas
production proceeds at the rate of $56,250 per month. The 1996 and 1996-I
partnerships provided 53% and 47% respectively, of the $6 million in funding.
The Indian Acquisition Agreement provides that for purposes of calculating the
Exchange Values, the Indian Exchange Value will be adjusted downward by the
amount of the Contingent Production Payment obligation as of the Effective Date
assuming an original total obligation of $9 million and the Exchange Values for
the 1996 and 1996-I partnerships will be adjusted upward by the same amount.
If the combination transactions do not occur, the Indian Acquisition
Agreement provides that the Contingent Production Payment is reduced to $6
million, less any payments previously made, and Indian will be liquidated, with
the proceeds of the liquidation after payment of all liabilities, including the
Contingent Production Payment, to be shared 50% by the shareholders of Indian
and 50% by the 1996 and 1996-I partnerships.
Simultaneously with the execution of the Indian Acquisition Agreement,
Indian entered into a management agreement with Canaan providing for Canaan to
manage the business of Indian pending the consummation of the combination
transactions subject to the control of Indian's Board of Directors with respect
to certain matters. The management agreement provides for Canaan to be
responsible for the day to day operations of Indian, including the authority to
make employment hiring and termination decisions and to manage the collection of
Indian's revenues and payment of Indian's obligations and expenses. The
management agreement reserved authority to Indian's board of directors to
approve:
. Any sales of Indian's oil and gas properties except as
contemplated by the Indian Acquisition Agreement;
. Actions that would change or substantially expand or enlarge the
business of Indian;
. The conduct of any exploratory or development drilling;
. Any agreement to create liens on Indian's oil and gas properties
or refinance any of its indebtedness;
. Loans to any person from the funds of Indian;
. The use of insurance proceeds received upon a total or
substantial destruction of Indian's oil and gas properties in any
manner other than may be dictated by any of Indian's loan
agreements;
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. Execute or deliver any assignment to the benefit of creditors of
Indian, confess a judgment against Indian or do any act that
would make it impossible to carry on the ordinary business of
Indian;
. Any act that would subject a shareholder or member of the board
of directors of Indian to personal liability; or
. Any changes in the terms of the Indian Acquisition Agreement or
any action which would cause Indian to be in default or in breach
of any of its representations, warranties or obligations under
the Indian Acquisition Agreement.
In order to carry out the management agreement, Leo E. Woodard,
Chairman and Chief Executive Officer of Canaan, and John K. Penton, President of
Canaan were appointed as President and Executive Vice President of Indian,
respectively.
Effective Time of the Combination Transactions
Closing of the combination transactions. Unless the Combining Entities
otherwise agree, the closing of the combination transactions will occur on the
first business day after the date on which all closing conditions have been
satisfied or waived. The closing of the combination transactions is expected to
take place immediately after the approval of the combination transactions by the
partnerships at the special meeting.
Effective time of the combination transactions. At the closing,
certificates of merger for the partnership mergers into Canaan and a certificate
of acquisition for the share acquisition of Indian by Canaan will be filed with
the Oklahoma Secretary of State and the mergers and share acquisition will be
effective at the time the certificates are so filed. Simultaneously, Canaan will
acquire 100% of the stock of the Coral Companies and Canaan Securities, and
Canaan's existing common stock will be reclassified.
Surviving corporation. Canaan will be the parent company of the other
Combining Entities. Indian, the partnerships, the Coral Companies and Canaan
Securities will become wholly-owned subsidiaries of Canaan. The certificate of
incorporation and bylaws of Canaan in effect immediately prior to the closing
will be the certificate of incorporation and bylaws of the surviving entity. See
"Comparison of Security Holder Rights" on page 152. The initial directors and
senior executive officers of Canaan following the combination transactions will
be as described in "Management" on page 144.
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Consideration to be Received in the Combination Transactions.
A total of 5,000,000 shares of Canaan common stock will be issued and
outstanding immediately after the combination transactions, less the number of
shares otherwise issuable to limited partners in the partnerships who elect to
receive cash or exercise dissenter's rights. The owners of each of the Combining
Entities will receive shares of Canaan common stock in proportion to the
Exchange Value of such entity relative to the total Exchange Value of all
Combining Entities. Placing Brokers will receive cash equal to 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
Issuance of Shares; Fractional Shares
Exchange agent. Prior to consummation of the combination transactions,
Canaan will appoint UMB Bank, n.a., Kansas City, Kansas or another exchange
agent reasonably acceptable to Canaan to effect the issuance of certificates
representing shares of Canaan common stock in the combination transactions.
Issuance of shares. The owners of the Combining Entities other than
limited partners in the partnerships will receive certificates for Canaan common
stock issuable in the combination transactions at the closing in exchange for
the surrender of the certificates of stock in the Combining Entities. Canaan
common stock will be issued to a limited partner in the partnerships by the
exchange agent as soon as the limited partner has submitted a properly completed
and signed letter of transmittal and any other documents required by the
instructions to the letter of transmittal. The letter of transmittal is being
provided to limited partners with this prospectus/proxy statement and should be
submitted prior to the special meeting, together with the proxy and cash
election form. For limited partners who have not previously submitted a letter
of transmittal, after consummation of the combination transactions, the exchange
agent will mail to each of these limited partners a letter of transmittal and
instructions explaining how to complete and submit the letter. Limited partners
will receive a certificate for the number of shares that he is entitled to
receive in accordance with the terms of the combination transactions rounded to
the nearest whole share. No fractional shares of Canaan common stock will be
issued.
Limited Partner Cash Election
A limited partner in any partnership may elect to receive cash in lieu
of Canaan common stock equal to 75% of the partner's Exchange Value if the
limited partner has voted in favor of the combination transactions.
In order to make an election to receive cash, limited partners must
vote in favor of the combination transactions and must properly complete the
cash election portion of the proxy and cash election form accompanying this
prospectus/proxy statement and return it to the General Partner prior to the
special meeting. If an election to receive cash is properly indicated and the
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combination transactions are approved, the electing limited partner will receive
cash as provided above. If no specific election is made, and the combination
transactions are consummated, the limited partner will receive Canaan common
stock. A limited partner may revoke his election at any time before the special
meeting. Any limited partner who attends a special meeting and wishes to change
his election may change his election at that time. Otherwise, a limited partner
must advise the General Partner of any change to his election in writing, which
writing must be received by the General Partner at its offices at 119 N.
Robinson, Suite 600, Oklahoma City, Oklahoma 73102, prior to the time the vote
is taken at the special meeting.
Canaan will make payments to all cash electing partners within five
days after the completion of the combination transactions.
There is a limit on the amount of cash payable to limited partners
electing to receive cash and to exercise dissenter's rights of $5 million. If
the amount of cash elections is more than this limit, cash will first be used to
satisfy dissenting limited partner claims, and the remainder will be prorated
among the cash electing partners based on their relative Exchange Values and
they will receive their share of Canaan common stock for the balance of the 75%
of their Exchange Value.
Conditions
The obligations of the Combining Entities to effect the combination
transactions are subject to the following conditions:
. All representations and warranties of each of the Combining
Entities contained in the Plan of Combination or Indian
Acquisition Agreement being true and correct in all material
respects;
. Material compliance by all of the Combining Entities with the
agreements and covenants in the Plan of Combination and Indian
Acquisition Agreement;
. The delivery of certificates of existence and good standing by
each of the Combining Entities;
. The approval of the partnership mergers by each of the
partnerships;
. All consents, approvals, permits and authorizations permitting
governmental authority having been obtained;
. None of the parties being subject to any order or injunction of
the court which prohibits or restricts consummation of the
combination transactions or any pending or threatened actions
seeking such relief or seeking damages;
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. The effectiveness of the registration statement of which this
prospectus/proxy statement is a part and the SEC not issuing a
stop order suspending the effectiveness;
. The approval of the shares of Canaan common stock to be issued in
the combination transactions for listing on the NASDAQ National
Market System; and
. The absence of any material adverse change in the financial
condition, results of operations or business of Indian or the
Coral Group excluding any change or effect resulting from general
economic conditions, any occurrence or condition affecting the
oil and gas industry generally, and any occurrence or condition
arising out the transactions contemplated by the Indian
Acquisition Agreement.
. No more than $5 million will be required to be paid in cash to
limited partners electing to receive cash or to exercise
dissenter's rights.
Representations and Warranties
The Indian Acquisition Agreement and the Plan of Combination contain
representations and warranties by the Combining Entities as to themselves
concerning, among other things:
. Organization, standing and authority;
. Capital structure;
. Absence of defaults caused by execution and delivery of the
agreements;
. Authorization to enter into the agreements and all related
transactions;
. Accuracy of disclosure of all information;
. Absence of brokers' or finders' fees;
. Compliance with all government permits;
. Title to assets;
. Accuracy of financial statements;
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. All material oil and gas leases in full force and effect;
. Absence of material adverse changes since most recent financial
statements;
. Absence of undisclosed liabilities;
. Compliance with laws;
. Compliance with environmental and safety regulations;
. Required board and shareholder approvals;
. Level of bank debt with respect to Indian;
. Accuracy of information provided for registration statement.
Certain Covenants
The Indian Acquisition Agreement and the Plan of Combination provide
various agreements of each the Combining Entities for actions to occur from the
date of the agreements to the closing date, including, among other things,
agreements with respect to:
. Reciprocal access to information and agreements to maintain the
confidentiality of confidential information;
. Conduct of the business only in the ordinary course of business.
Canaan and the Coral Companies also agreed in the Indian Acquisition
Agreement that they would not:
. Issue shares of capital stock except pursuant to existing
contractual commitments or in connection with the combination
transactions;
. Amend their certificates of incorporation or bylaws except as
contemplated by the Indian Acquisition Agreement;
. Waive any rights of substantial value;
. Enter into any agreement not in the ordinary course of business
or take any action or meant to take any action which would result
in any of their representations or warranties to become untrue.
Indian agreed in the Indian Acquisition Agreement that it would not:
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. Issue, sell or otherwise dispose of share of its capital stock;
. Declare, set aside or pay any dividend or distribution with
respect to its stock;
. Redeem, purchase or otherwise acquire any of its stock;
. Effect a split or reclassification of any capital stock of
Indian;
. Change the charter or bylaws of Indian;
. Permit Indian to grant any increase in compensation payable to
its employees other than regularly scheduled merit increases;
. Borrow any funds except for working capital purposes;
. Waive any rights of substantial value;
. Enter into any material agreements, contracts or commitments or
materially amend or change the terms of any existing material
agreement, contract or commitment or take any action or meant to
take any action which would result in any of its representations
or warranties becoming untrue;
The plan of combination contains additional agreements relating to:
. Public announcements of the transaction;
. Approval by all of the shareholders of Canaan, the Coral
Companies, Indian and Canaan Securities of the Indian Acquisition
Agreement and the Plan of Combination;
. The shareholders of Canaan, the Coral Companies, Indian and
Canaan Securities entering into a shareholders agreement as
described below;
. The elimination of any indebtedness between Canaan Securities and
its principal shareholder;
. The release of personal guaranties of shareholders of Indian and
the Coral Companies relating to bank debt of Indian and the
partnerships;
. An agreement to use best efforts to cause persons who are
affiliates of any of the Combining Entities to enter into written
agreements prior to the closing of the combination transactions
not to sell, pledge, transfer or otherwise
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dispose of any shares of Canaan common stock issued to them
except in compliance with Rule 145 under the Securities Act or
unless the shares have been registered under the Securities Act
or there is an available exemption from registration from the
registration requirements.
. The cancellation or contribution to capital of all Indian debt to
its shareholders in the amount of approximately $3.7 million, as
of December 31, 1999.
. Agreements ng to obligations between Indian and an entity owned
by certain shareholders of Indian that purchased assets from
Indian and loaned Indian $500,000 in working capital.
Indian Excluded Assets
The Indian Acquisition Agreement provides that specified undeveloped
oil and gas prospects, art, furniture and fixtures, automobiles and Section 29
tax credits will be excluded from the combination transactions. These assets
have been transferred by Indian to a company owned by certain of Indian's
shareholders in exchange for notes in the amount of $1,043,000. These notes will
be distributed by Indian to certain shareholders as a dividend prior to closing
of the combination transactions.
Termination or Amendment
Prior to the consummation of the combination transactions, the Indian
Acquisition Agreement and the Plan of Combination may be terminated:
. By mutual consent of Indian and the Coral Group;
. By either Indian or the Coral Group, if:
(i) The combination transactions are not consummated on or
before September 1, 2000;
(ii) If limited partners of all of the partnerships shall not
have approved the partnership mergers;
(iii) There is a legal prohibition to closing the combination
transactions arising from the issuance of an order, decree
or ruling of a governmental body enjoining or prohibiting
the combination transactions by any Combining Entity if
there has been a material breach by any other Combining
Entity of any representations or
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warranties set forth in the agreement or any condition to
closing in such party's favor has not been satisfied or
waived.
The Indian Acquisition Agreement may not be amended except with the
approval of Indian and the Coral Group and the Plan of Combination may not be
amended except with the approval of all of the Combining Entities.
Dissenters Rights
If a partnership receives approval of the plan of combination by
holders of less than seventy-five percent (75%) of the holders of the
partnership interests, including the interests of the General Partner and the
Additional General Partners, and the combination transactions are consummated,
the limited partners in that partnership will be entitled to exercise dissenters
rights of appraisal and be paid cash for their interest based on an appraisal of
the partnership's assets.
Please see "Meeting of the Partnerships - Procedure for Exercise of
Dissenters Rights of Appraisal" for additional information.
NASDAQ Listing
The NASDAQ National Market System has conditionally approved the
listing on a "when issued" basis of the shares of Canaan common stock to be
issued in the combination transactions under the symbol "____________".
Interest of Certain Persons in the Transaction
Leo E. Woodard and John K. Penton, directors and officers of Canaan,
are Additional General Partners of each of the partnerships and have each
personally guaranteed the partnerships' bank borrowings. Certain of the
shareholders of Indian have personally guaranteed Indian bank borrowings. All of
these personal guarantees are expected to be released upon consummation of the
combination transactions.
Anthony Lasuzzo, a proposed executive officer of Canaan, is a
consultant to Indian and assists Indian in reserve evaluation and property sale
and drilling decisions. Mr. Lasuzzo is entitled to receive a consulting fee of
$75,000 payable on March 1, 2000 for services from the period April 1, 1999
through March 1, 2001, subject to certain early termination events. If the
combination transactions are consummated, Mr. Lasuzzo is entitled to a bonus of
an additional $75,000 payable on consummation. In addition, pursuant to an
agreement with Richard R. Dunning, a shareholder and director of Indian, Mr.
Lasuzzo has an option to purchase common stock of Indian from Mr. Dunning
immediately preceding consummation of the combination transactions having a
value equal to $150,000 based on Indian's Exchange Value for a price of
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$1.00 per share, subject to the right of Mr. Dunning to deliver $150,000 cash in
lieu of shares of Indian common stock.
Resales of Canaan Common Stock
Shares of Canaan common stock to be issued to limited partners in
connection with the combination transactions have been registered under the
Securities Act. All shares of common stock received by limited partners will be
freely tradeable after completion of the combination transactions.
Likewise, all shares of Canaan common stock issued in the combination
transactions to shareholders of Canaan, the Coral Companies, Indian and Canaan
Securities will be registered under the Securities Act. The shareholders of
these entities who are affiliates will be subject to certain restrictions on
sale pursuant to Rule 145 under the Securities Act. In addition, all such
shareholders have entered into an agreement granting to Canaan certain rights of
first refusal in connection with proposed sales of Canaan common stock by them,
except sales of less than 1% of the outstanding common stock in any three month
period.
Shareholder's Agreement
Certain shareholders of Indian and the shareholders of Canaan have
entered into a shareholders' agreement among themselves and with Canaan which
will go into effect on closing of the combination transactions. This agreement
grants Canaan a right of first refusal on any sales of Canaan common stock by
these shareholders to the extent the sales by any shareholder would exceed 1% of
the outstanding Canaan common stock in any three month period. In addition,
these shareholders have a prorata right to participate in any purchases of
shares by any one of the shareholders that exceed 1% of the outstanding Canaan
common stock in any three month period. The shareholders' agreement has a term
of five years. All of the existing directors and executive officers of Canaan
are parties to the shareholders' agreement.
Accounting Treatment
The combination transactions will be accounted for as:
. A reorganization of entities under common control for the Coral
Companies and the partnerships. As a result, the value of the
assets and liabilities of the partnerships and the Coral
Companies will be recorded at their historical cost.
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. A purchase of Indian. As a result, the purchase price equal to
the fair value of Indian's assets acquired and liabilities
assumed will be allocated to the assets and liabilities of Indian
as of the date of closing of the combination transactions.
. A purchase of Canaan Securities. As a result, the purchase price
equal to the fair value of Canaan Securities' right to receive
cash distributions and future fees for service based on the
partnerships ongoing revenues from oil and gas properties will be
allocated to the assets and liabilities of Canaan Securities
based on their estimated values as of the date of closing of the
combination transactions.
Expenses and Fees
The costs and expenses incurred in connection with the combination
transactions are expected to be approximately $750,000, as summarized below:
Estimated Amount
----------------
SEC registration fee.................................. $ 6,250
NASDAQ listing fees................................... 60,000
Legal fees............................................ 150,000
Accounting fees....................................... 100,000
Reserve report preparation fees....................... 300,000
Printing costs........................................ 50,000
Solicitation expenses................................. 25,000
Transfer agent fees................................... 25,000
Miscellaneous other fees.............................. 33,750
-------------
Total $ 750,000
=============
All of such fees and expenses will be borne by either Canaan or Indian
and will not be borne by the partnerships, unless the combination transactions
do not occur. If the combination transactions do not occur, Indian will bear its
share of the reserve report preparation fees and all other fees and expenses
will be borne by the Coral Group. The partnerships will bear a share of the
total transaction costs based on their relative Exchange Values. With respect to
each partnership, its share of the transaction costs will be allocated:
. To the General Partner in proportion to their percentage interest
in the partnership operating costs, plus a percentage equal to
the percentage of limited partners who abstain or vote against
the Plan of Combination; and
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. To the limited partners in proportion to the percentages of
limited partners who voted to approve the plan of combination.
Funds for purposes of making cash payments to Placing Brokers and
limited partners electing to receive cash or to exercise dissenters rights are
expected to be borrowed by Canaan pursuant to a line of credit to be provided by
a commercial bank. The terms of the existing line of credit are described under
"Business of Canaan After Completion of Combination Transactions- Credit
Facilities".
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Value for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc., an independent petroleum engineering and
consulting firm. Netherland Sewell is a nationally recognized international
petroleum consulting firm with significant experience in petroleum engineering
and geology. Netherland Sewell was selected by Canaan to perform the reserve
studies being used for purposes of the combination transactions based on its
reputation in the industry and its experience in evaluating reserves in the Mid-
Continent basin where substantially all of the reserves owned by the Combining
Entities are located. Netherland Sewell & Associates is an international
petroleum consulting firm with offices in Dallas and Houston. Netherland
Sewell's staff includes petroleum engineers and geological consultants. Services
they provide include reserve estimates, fair value estimates, geological
studies, expert witness testimony and arbitration. Netherland Sewell has
previously performed isolated consulting services for Canaan, for which it has
received fees of less than $15,000 since January 1, 1997. There are no other
relationships between Netherland Sewell and any of the Combining Entities. The
fees paid to Netherland Sewell in connection with the performance of its reserve
analysis for the combination transactions are not contingent in any respect on
the approval or completion of the combination transactions.
Upon written request by limited partner or his representative who has
been so designated in writing, a copy of the Netherland Sewell reserve report
shall be transmitted promptly, without charge, by the General Partner. Request
for copies of the reserve report should be directed to Canaan Energy
Corporation, 119 N. Robinson, Suite 600, Oklahoma City, Oklahoma 73102.
Summaries of the reserve reports of Netherland Sewell for each Combining Entity
are included as Appendix A.
Neither Canaan nor the General Partner have had any contacts with any
other person concerning the possible preparation of reports by such persons
concerning the estimated reserves of the Combining Entities, evaluation of any
of the partnerships or their assets, the
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fairness of the combination transactions or any other report with respect to the
combination transactions.
Netherland Sewell estimated the proved reserves, future net revenues
therefrom and the present value of such future net revenues for each combining
entity as of September 30, 1999. We refer to the evaluation date of September
30, 1999 as the "Effective Date" and the present value of the estimated future
net revenues from proved reserves as of the Effective Date as the "Reserve
Value" for each Combining Entity. Netherland Sewell estimated each Combining
Entity's oil and gas reserves and applied certain assumptions described below
regarding prices and costs for purposes of calculating future net revenue.
Future net revenue by year was calculated for each property. The future net
revenue was then discounted at 10% for time using mid-year discounting. The 10%
discount factor, as used by Netherland Sewell, is considered to be an industry
standard for valuing oil and gas properties and it is the standard promulgated
by the SEC for the valuation of oil and gas reserves reported on the balance
sheet. However, this discount factor may not necessarily represent fair market
value.
The reserves estimated by Netherland Sewell included proved
undeveloped reserves as well as developed reserves, both producing and non-
producing. Properties with proved developed reserves have less risk than
properties with proved undeveloped reserves. However, there was no risk factor
assigned to the type of reserves for purposes of determining the Reserve Values.
Further, no attempt was made to assign value to oil and gas reserves categorized
as probable or possible, because the General Partners and Canaan believe such
reserves are too speculative to value. Further, no value has been assigned to
any undeveloped acreage or prospects owned by any Combining Entity which do not
contain proved reserves.
The Reserve Value is an estimate only and is not intended to represent
the fair market value of the underlying properties. The Reserve Values are being
used solely for purposes of determining the relative value of each of the
Combining Entities in the combination transactions. See "Risk Factors and
Material Considerations" on page 34 for additional information concerning risks
associated with the estimation of oil and gas reserves.
The future net revenues from the properties for purposes of computing
the Reserve Value were based on the following assumptions which were provided to
Netherland Sewell by the Canaan and the Coral Companies:
. Gas prices were established for each well separately based on a
----------
12 month average of gas prices for the 12 months ending March 31,
2000. This average was constructed using the average of composite
spot wellhead prices as published by Natural Gas Week for the 8
months ending November 30, 1999 and the forward market prices for
the 4 months ending March 31, 2000 based on future prices quoted
on the New York Mercantile Exchange ("NYMEX") as of October 29,
1999 adjusted for the historical differential between the New
York Mercantile Exchange ("NYMEX") and Natural Gas
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Week composite spot wellhead prices. The prices for all wells
averaged $2.52 per MMbtu before adjustment by well for
transportation fees, BTU content and regional price differentials
and were held constant for the life of the properties.
. Oil prices were established for each well separately based on an
----------
8 year average of West Texas Intermediate crude oil posted prices
for the 8 year period beginning in 1992 and ending on December
31, 1999. This average was constructed using average posted
prices for West Texas Intermediate crude oil for 1992 through
October 1999 and the forward market prices for November and
December of 1999 as quoted on the NYMEX as of October 29, 1999
adjusted for the differential between such forward market prices
and West Texas Intermediate posted prices. The prices for all
wells averaged $18.10 per barrel before adjustment by well for
gravity, transportation fees and regional price differentials and
were held constant for the life of the properties.
. Operating costs and production taxes were based on costs and tax
------------------------------------
rates in effect as of September 30, 1999 and were not escalated.
. A discount rate of 10% was used to discount future net revenues
---------------
to present value at September 30, 1999.
The Reserve Value will not be adjusted to take into account any
changes in oil and gas prices or costs subsequent to the Effective Date. The
prices for gas used to compute the Reserve Value were based on average prices
for a one year period ending on March 31, 2000 in order to eliminate seasonal
variances. The prices for oil were based on average prices for the 8 years
ending December 31, 1999. In excess of 70% of the reserves of each of the
Combining Entities is gas and the Reserve Value is more sensitive to changes in
gas prices than oil prices. Further, the Reserve Value is being used to
calculate the relative ownership of Canaan by each Combining Entity and the
Reserve Value of each entity is affected similarly by changes in prices. In the
absence of a fundamental change in the market for gas, Canaan and the General
Partners believe these prices are fair for purposes of computing the Reserve
Value.
Information concerning the ownership interest owned by each Combining
Entity was provided to Netherland Sewell by the Coral Group or Indian. With
respect to proved undeveloped properties, the timing of planned development
expenditures was also provided by Canaan.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
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The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
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. Plus or minus other adjustments.
The Exchange Values do not take into consideration any other assets or
liabilities of the Combining Entities. In the case of Canaan, Indian and Canaan
Securities, other assets would include furniture and equipment which Canaan and
Indian consider to be immaterial for purposes of establishing their relative
values. The partnerships do not own any furniture and equipment. In the case of
Indian, additional assets also include approximately $7.8 million of net
operating loss carryforwards and $1.6 million of statutory depletion
carryforwards, the use of which by Canaan in future periods will be subject to
limitations under Section 382 of the Internal Revenue Code because the
acquisition of Indian by Canaan will constitute a change in control.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing rights to receive
such fee adjusted for any payments for such fee subsequent to the Effective Date
and before the closing date. This allocation will be made prior to the
allocation of the remaining Reserve Value to the limited partners and the
General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
The marketing arrangements entered into in connection with the sale of
interests in the partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these
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partnerships will be reduced to take into consideration the amount of the
Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock for the balance.
As discussed above, for the limited partners, the Additional
General Partners, Canaan Securities and the Placing Brokers, an adjustment to
their Reserve Values will be made for cash distributions from production
subsequent to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does
not produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in
the same manner as described above and will include an allocation to it
attributable to its rights to receive cash distributions from the partnerships
and the General Partners, less the Exchange Value allocated to Placing Brokers,
as described above under "Partnership Exchange Values and Allocation to
Partners, Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its
Reserve Value, bank debt and working capital in the same manner as other
entities as described above.
Canaan's Exchange Value will be further adjusted to take into
account its operating rights. Canaan serves as operator of 113 of the total 134
wells in which the partnerships own interests. As such, Canaan receives monthly
operating fees which represent a source of additional income to Canaan. For
purposes of calculation of Canaan's Exchange Value within the Coral Group, the
future cash flows attributable to these operating fees, based on existing
reimbursement rights without escalation, will be determined and the present
value thereof as of the Effective Date will be an additional component of its
Exchange Value. The amount of this adjustment is $5.0 million. Canaan's net
working capital adjustment will exclude any receivables attributable to these
fees.
For purposes of determining relative Exchange Values between
Indian and the Coral Group as a whole, the operating rights value allocated to
Canaan is disregarded because the
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combination of the Coral Group essentially results in the elimination of these
intercompany items. Further, Canaan and Indian have agreed that neither of them
will be allocated value for operating rights for purposes of determining the
Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the
Reserve Value, bank debt and working capital in the same manner as described
above.
In connection with the negotiation of the acquisition
agreement between Indian and the Coral Companies, Indian agreed that its
Exchange Value would be reduced by its production payment obligation to the 1996
and 1996-I partnerships, in consideration of such partnerships advancing to
Indian a total of $6 million in exchange for a "Contingent Production Payment"
from Indian to the partnerships payable at the rate of $56,250 per month until
paid in full. The Contingent Production Payment is $9 million if the combination
transactions are consummated and $6 million if they are not. Accordingly,
Indian's Exchange Value will be adjusted downward by the remaining amount of the
Contingent Production Payment obligation as of the Effective Date, $5,606,250,
plus the additional $3 million as a result of the combination transactions, and
the Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward
by the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
Summary of Allocation of Exchange Values
Summaries of the allocation of the estimated Exchange Values
for the partnerships, Canaan, Indian, the limited partners, the General
Partners, the Additional General Partners, Canaan Securities and Placing Brokers
are contained in the tables in the "Summary of Estimated Exchange Values"
beginning on page 14. More detailed information concerning the calculation of
the Exchange Value for each individual partnership is contained in the
individual partnership supplement for each partnership.
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RECOMMENDATION OF THE GENERAL PARTNER AND
FAIRNESS OF THE COMBINATION TRANSACTIONS
General
Canaan and the General Partners believe that the proposed
combination transactions are fair to the limited partners of each of the
partnerships and recommend that each of the limited partners vote in favor of
the combination transactions.
The principal structural element affecting the limited
partners and the other parties to the combination transactions is the
determination of the Exchange Values. As noted elsewhere, the Exchange Values
are based primarily on the Reserve Value based on Netherland Sewell's
independent valuations. See "Method of Determining Combination Exchange Values".
By using Reserve Values calculated in a consistent manner by a single engineer
based on the same price, cost and discount assumptions, Canaan and the General
Partners believe that the relative value of each of the Combining Entities has
been fairly determined for purposes of determining its relative ownership of
Canaan after the combination transactions. Further, Canaan and the General
Partners believe the following facts support the fairness of transaction to
limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited
partners who elect to receive cash, and the relative number
of shares to be received by the owners of each entity is
being calculated on a consistent basis for each Combining
Entity.
. All of the partnerships had similar investment objectives
and all own similar properties, principally non-operating
interests in proved developed producing gas properties
located primarily in Oklahoma in the Mid-Continent basin.
Therefore, Canaan and the General Partners do not believe
that there are material differences in the assets of the
partnerships that would cause their values to vary based on
quality of reserves or differences in commodity prices for
gas or oil.
. The use of Reserve Value to evaluate the Combining Entities
is a commonly used method in valuing oil and gas
properties.
. As between the General Partners and the limited partners,
the allocation of Exchange Value in each partnership is
based on the profit sharing percentages provided in the
partnership agreements and there is no additional
consideration being allocated to the General Partners or
Canaan which is not currently being received.
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. The actual market value of the Canaan common stock received
by limited partners may be more or less than their Exchange
Value, but the owners of Canaan, the General Partners and
Indian will all be similarly affected by any differences.
. The methodology for determining Exchange Values as between
Indian and the Coral Group was agreed to by the owners of
Indian in an arms length negotiated transaction between
Indian and Canaan.
. The combination transactions will not be approved unless
the holders of a majority of the interests in each
partnership approve the combination transactions. Further,
all partnerships are required to be included in the
combination transactions for it to be consummated so it is
not possible that any one partnership will be excluded.
. A limited partner of a partnership who votes in favor of
the combination transactions may elect to receive cash in
lieu of Canaan common stock in an amount equal to 75% of
the exchange value of such limited partner's interest. See
"The Combination Transactions - Limited Partner Cash
Election" on page 57. This cash election provides the
opportunity for limited partners who are unwilling to take
market risks with respect to Canaan common stock the
opportunity to receive cash in an amount which Canaan and
the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash
election does not represent the fair value of his
interests, he may vote against the combination transactions
and elect to exercise dissenters rights in those
partnerships receiving less than 75% approval and be paid
cash based on an independent appraisal of the partnership
assets.
. In each partnership, the General Partner is entitled to
receive a reimbursement for a portion of its overhead
expenses, including office rent and salaries for clerical
staff and appropriate production supervisory personnel and
any other overhead expenses which the General Partner deems
reasonable. The amount of the overhead reimbursement is
limited to 5% of the amount of distributable cash. This
overhead reimbursement amount is not being taken into
consideration in the calculation of the General Partner's
share of the Exchange Value. However, if the partnerships
were to continue to operate, the General Partner would
continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited
partners, if the partnerships were continued, based on the
same projections of future net revenues used to calculate
the Exchange Values would be less than the Exchange Value
allocated to limited partners.
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The Exchange Value was not intended to determine the absolute
fair market value of a partnership's oil and gas properties or the interest of a
limited partner. No firm offer has been made by any person during the preceding
18 months regarding the merger or consolidation of any of the partnerships, the
sale or transfer of all or any substantial part of the assets of any partnership
or securities of any partnership which would enable the holder thereof to
exercise control over a partnership.
For purposes of determining the relative Exchange Value of
Canaan within the Coral Group, Canaan's Exchange Value includes, in addition to
the valuation of its oil and gas properties, a value attributable to its
operating rights. The allocation of value to Canaan for its operating rights
recognizes that Canaan is entitled to receive fees for these activities from the
partnerships and other nonoperating owners which Canaan would be entitled to
continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the partnerships and
is not intended to allocate additional new economic benefits to Canaan.
For purposes of determining relative Exchange Values between
Indian and the Coral Group as a whole, the operating rights value allocated to
Canaan is disregarded because the combination of the Coral Group essentially
results in the elimination of these intercompany items. Further, Canaan and
Indian have agreed that neither of them will be allocated value for operating
rights for purposes of determining the Exchange Value.
The Reserve Value for each of the Combining Entities will not
be adjusted for any changes in oil and gas prices subsequent to the Effective
Date. The gas prices used to calculate the Reserve Value were based on an
average of 12 months of prices for a period ending on March 31, 2000 using 8
months of historical actual prices and 4 months of forward market prices in
effect at the Effective Date. The oil prices were based on an 8 year average
price ending December 31, 1999. The Reserve Value thus takes into effect
seasonal fluctuations in gas prices and historical volatility of oil prices.
Further, more than 70% of the Reserve Value of each Combining Entity is gas and
the Reserve Values are, therefore, more sensitive to gas price changes than oil
price changes. Canaan and the General Partners believe that the Reserve Value of
all of the Combining Entities would be affected similarly by changes in prices.
Canaan and the General Partners have also disregarded short term hedges of oil
and gas production by the partnerships and Indian in the calculation of Reserve
Values because these hedges expire on or before the end of 2000 and are not
expected to have a material effect on production revenues over the life of the
properties. However, because all of the partnerships and Indian have bank
indebtedness, the Exchange Value for such entities will be more than
proportionately benefited by increases in oil and gas prices and more than
proportionately disadvantaged by decreases in oil and gas prices. Because Indian
has more debt relative to Reserve Value than any other Combining Entity, its
Exchange Value is more dramatically affected by changes in prices. However,
because of the numerous uncertainties associated with the calculation of the
Reserve Value in addition to the price assumptions, Canaan and the General
Partner do not believe that a recalculation of the Reserve Value based on
temporary changes in product prices is appropriate.
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Consideration of Alternatives
In evaluating the fairness of the transaction, Canaan and the
General Partners also considered the possible value of the consideration to be
received in the combination transactions compared to the possible value that
would be received by the limited partners if the partnerships were continued or
liquidated. None of such values have been specifically determined by Canaan or
the General Partners, but for the reasons described under "Background and
Reasons for the Combination Transactions - Alternative to the Combination
Transactions" on page ______, Canaan and the General Partners believe the
combination transactions are more beneficial to the limited partners than these
other alternatives. However, there is no assurance that the General Partners
conclusion is correct.
Fiduciary Duties of General Partners
General. The General Partners' fiduciary duties to the limited
partners include legal responsibilities of loyalty, care and good faith. The
General Partners may not profit by any conduct or transaction in contravention
of its fiduciary obligations to limited partners. Rights of action by or on
behalf of the limited partners for any breach of these duties are provided under
Oklahoma partnership law. If a limited partner believes that the proposed Plan
of Combination or the consummation thereof would constitute a breach of his
General Partner's fiduciary duties, the limited partner could institute legal
action against the General Partner to enjoin the consummation transactions or to
recover damages resulting from the consummation of the transactions. In
appropriate circumstances, a limited partner may institute a class action
against his General Partner on behalf of himself and the other similarly
situated limited partners or a derivative action against his General Partner on
behalf of the partnership to recover damages for a breach of his General
Partner's fiduciary duties. This is a developing area of the law, and limited
partners who have questions concerning the General Partners' duties should
consult with their own legal counsel.
Limitations on Limited Partners' Remedies. The partnership
agreements for the partnerships provide that the General Partner and its
affiliates are not liable to the partnership or any partner for any losses
arising out of any action or inaction of the general partners if the general
partners, in good faith, determine that such course of conduct was in the best
interest of the partnership and such course of conduct did not constitute
negligence or misconduct of the general partners. In addition, the partnership
agreements provide that the partnerships will indemnify the general partners for
any losses, judgments and amounts paid in settlement of any claims sustained by
them in connection with the partnership provided that they were not the result
of negligence or misconduct on the part of the general partners. The partnership
agreements further provide for the advancement of legal expenses and other costs
incurred by the general partner in connection with any proceeding arising by
reason of the fact that it is or was a general partner of the partnership, but
such advancement of legal expenses and other costs is not available to a general
partner when an action is initiated by a limited partner.
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Access to Investor List
Under Oklahoma law and the partnership agreement of each
partnership, a limited partner may obtain a list of limited partners in his
partnership by making a written request to the General Partners at 119 N.
Robinson, Suite 600, Oklahoma City, Oklahoma 73102. Limited partners also have
the right under the partnership agreements to inspect the books and records of
his partnership at reasonable times and upon reasonable notice.
Conflicts of Interest
Canaan and the General Partners have conflicts of interest
with the limited partners with respect to the combination transactions arising
from, among other things:
. Canaan and the General Partners determined the structure
of the proposed combination transactions and the Exchange
Values without any independent third party representing
the limited partners of any partnership. As a result, the
determination of the Exchange Values and the relative
ownership of Canaan by limited partners may not reflect
the allocation of relative value that would result if the
combination transactions were negotiated with an
unaffiliated third party in an arms length transaction.
. Officers and directors of Canaan and the General Partners
will continue to serve as officers and directors of
Canaan. They may receive compensation and other benefits
associated with this employment as determined by the Board
of Directors and which may be higher than their current
compensation arrangements.
. Legal counsel engaged to assist with the preparation of
the documentation for the combination transactions,
including this prospectus/proxy statement was engaged by
Canaan and did not serve, or purport to serve, as legal
counsel for the limited partners.
. For purposes of the allocation of the Exchange Value
within the Coral Group, Canaan is being allocated
additional Exchange Value attributable to its rights to
operate partnership properties. Approximately 62% of
Canaan's ongoing operating fees come from the
partnerships. For purposes of determining the relative
value of the Coral Group as a whole and Indian, these
operating fees are disregarded because after giving effect
to the combination transactions, this intercompany item as
between Canaan and the partnerships is eliminated. Canaan
and the General Partner believe this allocation of value
is consistent with industry practices generally, but it
has not been established on an arms length basis and may
have the effect of allocating to Canaan a greater share of
the total Exchange Value.
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No Independent Representative
No independent representative of the limited partners was
engaged for purposes of negotiating the terms of the combination transactions,
nor was a fairness opinion obtained from an unaffiliated third party. The
absence of these protections was considered, but was not judged to be
significant by Canaan and the General Partners, in determining the fairness of
the proposed combination transaction to the limited partners. Because the
Exchange Values used in determining the shares of Canaan common stock to be
received by the limited partners in the partnerships in exchange for their
interest were primarily based on the Reserve Values determined by Netherland
Sewell with immaterial adjustment based on such variables as cash, short term
investments, liabilities and cash flow, Canaan and the General Partners
determined that the likelihood that such an unaffiliated representative of the
limited partners or a fairness opinion would add value to the process of
structuring the combination transactions was minimal and outweighed the costs of
retaining such a representative or fairness opinion. As a result, the Exchange
Values and other terms of the combination transactions may not be as favorable
as the terms that might have been obtained had an independent representative
been retained or a fairness opinion requested.
FAILURE TO APPROVE THE COMBINATION TRANSACTIONS
If one of the partnerships fails to approve the combination
transactions, the combination transactions will not be consummated for any of
the partnerships. If the combination transactions are not approved, each
partnership will continue in its business as previously conducted. However, it
is possible that a new transaction might be proposed by Canaan or the General
Partners, but no other terms have been discussed or considered. In addition,
Canaan and the General Partners may also explore other alternatives, such as
sale of the Coral Group to a third party, but there is no assurance that Canaan
or the General Partner could find a third party interested in purchasing the
assets or that the terms and conditions of any such purchase and sale agreement
would be as favorable as the terms offered pursuant to the combination
transactions.
If the combination transactions are not consummated, costs and
expenses incurred in connection with the combination transaction proposals will
be borne as described under "The Combination Transactions - Expenses and Fees"
on page 65.
If the combination transactions are not consummated, the
amount of the remaining balance of the Contingent Production Payment owing from
Indian to the 1996 and 1996-I partnerships will be reduced by $3 million. This
will result in no gain or return on the amount of these partnerships'
investments in the Contingent Production Payment. The payment of this obligation
is subordinate to Indian's obligations to its bank lenders and depending on the
amount of the liquidation proceeds, the Contingent Production Payment may not be
paid in full. These partnerships would also be entitled to share in 50% of the
remaining proceeds of liquidation otherwise distributable to Indian
shareholders, which is uncertain. The amount invested in the Contingent
Production Payment represented 33% and 43%, respectively, of the initial capital
of the
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1996 and 1996-I partnerships. Thus, the failure to approve the combination
transactions would adversely affect the returns to the limited partners in these
partnerships unless the Contingent Production Payment repayment proceeds are
successfully reinvested.
SPECIAL MEETING OF THE PARTNERSHIPS
General
A combined special meeting of the partnerships is being called
by the General Partners for limited partners to consider and vote to approve or
disapprove of the Plan of Combination relating to the combination transactions
and to transact such other business as may be properly presented at the special
meeting or any adjournments or postponements thereof.
The combined special meeting will be held on ______________,at
_________ p.m. at _______________________________, Oklahoma City, Oklahoma ____.
Voting Rights
Each limited partner appearing on the records of each of the
partnerships as of , 2000 is entitled to notice of the special meeting and is
entitled to vote his partnership interests at the meeting. Each partnership is
voting separately on the Plan of Combination. Accordingly, not all of the
partnerships may approve the Plan of Combination. Limited partners in each
partnership may vote "FOR" or "AGAINST" their respective partnership
participating in the Plan of Combination.
UMB Bank, n.a., Kansas City, Kansas has been appointed by the
General Partners to receive and tabulate all votes and dissents of limited
partners in each partnership. UMB Bank has no other relationship with the
Combining Entities other than being appointed to serve as exchange agent and
transfer agent for Canaan's common stock. UMB Bank will make the tabulation
available to the General Partners and any limited partner upon request at any
time during and after the voting occurs. Requests should be addressed to UMB
Bank, n.a., P. O. Box 410064, Kansas City, Kansas 64141-0064, Attention:
__________________.
Proxies and Cash Election Form
A sample of the form of proxy and cash election form is
attached to this prospectus/proxy statement. The actual proxy and cash election
form to be used to register your vote on the plan of combination involving your
partnership is the separate green sheet of paper included with this
prospectus/proxy statement. PLEASE USE THE GREEN PROXY AND CASH ELECTION FORM TO
CAST YOUR VOTE ON THE PLAN OF COMBINATION.
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If a proxy is properly signed and is not revoked by a limited
partner, the partnership interest it represents will be voted in accordance with
the instructions of the limited partner. If no specific instructions are given,
the partnership interest will be voted FOR the Plan of Combination involving
your partnership. A limited partner may revoke his proxy at any time before it
is voted at the special meeting. Any limited partner who attends the special
meeting and wishes to vote in person may revoke his proxy at that time.
Otherwise, a limited partner must advise the General Partner of revocation of
his proxy in writing, which revocation must be received by the General Partner
at 119 N. Robinson, Suite 600, Oklahoma City, Oklahoma 73102 prior to the time
the vote is taken.
The proxy and cash election form also includes methods by
which a limited partnership in each partnership can make an election to receive
cash as described under "The Combination Transactions - Cash Election".
Solicitation
The solicitations of proxies are being made by Canaan, the
General Partners of the partnerships and Canaan Securities. The costs of the
preparation of this prospectus/proxy statement and of the solicitation of
proxies and such costs for each partnership will be borne as described under
"The Combination Transactions - Expenses and Fees".
Voting Requirements
Approval of the Plan of Combination by each partnership
requires the approval of each General Partner, the Additional General Partners
and the approval of holders of more than fifty percent (50%) of the partnership
interests owned by limited partners calculated based on the limited partners'
share in the profits of the partnership.
If a partnership receives approval of the Plan of Combination
by holders of seventy- five percent (75%) or more of the partnership interests,
including the interests of the General Partner and the Additional General
Partners, there will be no dissenters rights of appraisal and all limited
partners in such partnership other than those electing to receive cash, will
receive shares of Canaan common stock as described herein. If a partnership
receives approval of the Plan of Combination by limited partners holding more
than fifty percent (50%) of the partnership interests owned by limited partners
but less than seventy-five percent (75%) of the holders of the partnership
interests, the limited partners in such a partnership will be entitled to
exercise dissenters rights of appraisal as described more fully below. If any
one partnership fails to receive approval of the Plan of Combination, the
combination transactions will not be consummated.
For purposes of determining the requisite percentage of
partnership interests, votes will be tabulated based on the percentage interests
each partner, including the General Partner and the Additional General Partner,
has in the profits of the applicable partnership as of the record date. The
table below sets forth information concerning the percentage interest in each
partnership as of the record date:
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The table below sets forth information concerning the percentage interest in
each partnership as of the record date:
Voting Percentages
--------------------------------------------------------
General and Additional General
Partnership Partners Combined Limited Partners
----------- ----------------- ----------------
1990 25.00% 75.00%
1991 25.00% 75.00%
1992 14.18% 85.82%
1993 10.34% 89.66%
1993-I 12.50% 87.50%
1995 10.00% 90.00%
1996 10.00% 90.00%
1996-I 12.50% 87.50%
The General Partners and the Additional General Partners intend to
vote in favor of the Plan of Combination.
Procedure for Exercise of Dissenters Rights of Appraisal
If a partnership receives approval of the Plan of Combination by
holders of less than seventy-five percent (75%) of the holders of the
partnership interests, including the interests of the General Partner and the
Additional General Partners, and the combination transactions are consummated,
the limited partners in that partnership will be entitled to exercise dissenters
rights of appraisal and be paid cash for their interest based on an appraisal of
the partnership's assets.
In order to exercise his right to dissent a limited partner must not
vote in favor of the Plan of Combination and must deliver to the General Partner
prior to the special meeting a written notice stating his name and that he
demands appraisal rights. A proxy or vote against the Plan of Combination will
not be a sufficient demand for appraisal.
A dissenting limited partner will be entitled to receive a cash
payment for the value of his partnership interest in the partnership determined
as provided below:
. Within ten (10) days after closing of the combination
transactions, Canaan will notify any partners who have properly
perfected their dissenter's rights of this fact.
. For a period of thirty (30) days after the date of the notice,
either Canaan or any dissenting limited partner can propose and
thereafter negotiate a price that will be paid for the dissenting
partners interest in the partnership, provided that in no event
shall the price paid to partners in the same partnership be
computed in a different manner.
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. If Canaan and any dissenting limited partners are unable to reach
an agreement within such thirty (30) day period, Madison Energy
Advisors (or such other independent party as Canaan may select if
Madison Energy Advisors is unwilling or unable to serve) (the
"Appraiser") will determine the value of a dissenting limited
partner's interest in the partnership based on an appraisal of
the partnership assets which will value the partnership assets as
if sold in an orderly manner in a reasonable period of time and
in a manner consistent with appropriate industry practice.
. The Appraiser shall have ninety (90) days to determine the value
of the dissenting limited partners' partnership interests.
. The determination of the Appraiser shall be final. The
partnership shall pay the dissenting limited partners the amount
determined by the Appraiser within fifteen (15) days of such
determination, with interest from the closing date to the payment
date at the "prime rate" as published in the Wall Street Journal
from time to time between the closing date and the payment date.
Madison Energy Advisors provides oil and gas reserve acquisition,
divestment and valuation advisory services to the upstream oil and gas industry,
including fair market value assessments of oil and gas properties. Madison
Energy has offices in Houston, Texas and Denver, Colorado and has a staff of
professionals with significant experience in advising both buyers and sellers of
oil and gas properties. It is one of the recognized valuation experts in the
industry. None of the Combining Entities has had any prior relationship with
Madison Energy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
This section summarizes certain Federal income tax consequences of
general application that should be considered by holders of interests in the
partnerships and holders of common stock of Indian and the Coral Companies,
resulting from their participation in the proposed combination transactions.
This section does not, however, comment on all tax matters that may affect the
partnerships, the Coral Companies, Indian, Canaan Securities or holders of
interests in the partnerships, holders of Coral Companies common stock, holders
of Indian common stock and holders of Canaan Securities common stock, and this
section does not consider various facts or limitations applicable to any
particular participant that may modify or alter the results described herein. It
may not be applicable to certain classes of taxpayers, including, without
limitation, insurance companies, tax-exempt organizations, financial
institutions, securities dealers, broker-dealers, and foreign persons.
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Except as otherwise indicated, statements of legal conclusion
regarding tax treatments, tax effects or tax consequences reflect the opinions
of Crowe & Dunlevy, A Professional Corporation, counsel for Canaan and the Coral
Companies, based on laws, regulations, rulings, practice and judicial decisions
in effect at the date of this prospectus/proxy statement. However, legislative,
judicial or administrative changes or interpretations may be forthcoming that
could repeal, overrule or modify any of these authorities. Any such change could
be retroactive and, accordingly, could alter or modify the statements and
conclusions set forth herein. No rulings have been requested from the Internal
Revenue Service with respect to any aspect of the proposed combination
transactions. The IRS has announced generally that it will not issue rulings
regarding the tax consequences of transactions similar to the combination
transactions. Furthermore, there can be no assurance that the IRS or the courts
would agree with the conclusions set forth in this discussion below.
A copy of the tax opinion of Crowe & Dunlevy has been filed as an
exhibit to the registration statement of which this prospectus/proxy statement
is a part. Crowe & Dunlevy's tax opinion is based, in part, on various
assumptions of fact and certificates of certain of the parties to the proposed
combination transactions. Upon receipt of a written request by a limited partner
or his representative designated in writing, a copy of the opinion and related
certificates will be provided promptly, without charge, by Canaan. Please make
any written request to Canaan Energy Corporation, 119 North Robinson, Suite 600,
Oklahoma City, Oklahoma, 73102.
ALL PERSONS AFFECTED BY PROPOSED COMBINATION TRANSACTIONS ARE URGED TO CONSULT
THEIR OWN TAX ADVISOR AS TO THE PARTICULAR FEDERAL INCOME AND OTHER TAX
CONSEQUENCES OF THE COMBINATION TRANSACTIONS.
Limited Partners
In the combination transactions, a Canaan subsidiary acquisition
corporation will merge with and into each separate partnership. The limited
partners of each merging partnership will receive Canaan common stock based on
their share of the partnership's Exchange Value. Because the merging partnership
survives the merger transaction, each merger will be treated for Federal income
tax purposes as if the limited partners transferred their interests in each
respective merging limited partnership to Canaan in exchange for common stock of
Canaan or for cash (or, in the case where the $5 million cash limit applies, for
a combination of common stock and cash) in a transaction described in Section
351(a) of the Code. Each merging partnership will not recognize any gain or loss
as a result of each respective partnership merger.
A limited partner who receives only Canaan common stock in the
combination transactions should not recognize gain or loss as a result of the
receipt of the stock.
A limited partner who elects to receive cash or exercises dissenter's
rights will recognize gain or loss equal to the difference between the cash
received and his adjusted tax basis in his partnership interest on the date of
the merger.
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A limited partner who receives Canaan common stock and cash (which may
only occur in the event the dissenting limited partners' claims and cash
electing limited partners' cash elections exceed the $5 million cash limit) will
recognize gain (but not loss) in an amount equal to the fair market value of the
Canaan common stock and cash received less his adjusted tax basis in his
partnership interest on the date of the merger, but not in excess of the cash
received.
Gain, if any, recognized by a limited partner will be treated as gain
from the sale or exchange of his interest in the partnership. Therefore, gain
recognized by a limited partner generally will be capital except to the extent
of the cash received in exchange for his share of the partnership's ordinary
income assets, i.e. unrealized receivables and any inventory items. Unrealized
receivables include some types of recapture items, including depreciation,
depletion and intangible drilling costs with respect to deductions previously
taken by the limited partnership.
A limited partner's basis in Canaan common stock received will be
equal to his aggregate basis in his partnership interest transferred, decreased
by any cash received and increased by any gain to the limited partner which was
recognized in the combination transaction. Such basis will be prorated among all
of the shares of Canaan common stock received.
The holding period required for long-term capital gain treatment is
one year. In tax-free and partially tax-free exchanges where the relinquished
property is a capital or Section 1231 asset, the Code generally provides that
the holding period of the property received in the exchange includes the holding
period of the property relinquished. However, the IRS has published authority
providing that the holding period of common stock received in a tax-free
exchange for a partnership interest does not include the holding period of the
partnership interest to the extent the value of the common stock received is
attributable to unrealized receivables of the partnership that are neither
capital assets nor Section 1231 assets. If the IRS ruling position applies, the
holding period of a portion of the Canaan common stock received by each limited
partner for the value of the partnership's ordinary income assets will begin on
the day following the date of the exchange, and the holding period for the
remaining portion of the Canaan common stock will include each respective
limited partner's holding period for the partnership interest exchanged
therefor. The IRS cites no authority for its ruling position and, accordingly,
it is questionable whether the IRS ruling position is valid. If a limited
partner takes the position that the general tacking principles apply, the IRS
may assert its ruling position on the examination of a limited partner's federal
income tax return.
The Code provides special rules suspending a partners' ability to
deduct his allocable share of partnership losses when the partner lacks tax
basis in his partnership interest, the losses are generated by "passive
activities", or by activities with respect to which the partner is not "at
risk." Following the combination transactions, any prior partnership loss
allocated to a limited partner that was suspended by the at risk rules or by a
lack of basis will continue to be suspended and effectively will be lost. Losses
suspended by the at risk rules, however, should be available to offset any
taxable gain recognized as a result of the combination transactions (as
described above). Any prior partnership loss allocated to a limited partner that
was suspended by the passive activity
-84-
<PAGE>
loss rules should be available to offset any gain recognized as a result of the
combination transactions, because that income should be passive income, but will
not be available to offset nonpassive income, including dividends receive on
Canaan common stock, until such limited partner has sold all of his Canaan
common stock to any unrelated party in a fully taxable transaction.
Holders of Common Stock of Coral Companies and Indian
The contribution by the holders of all of the outstanding capital
stock of the Coral Companies and Indian to Canaan in exchange for Canaan common
stock should be treated for Federal income tax purposes as a transaction
described in Section 351(a) of the Code.
No gain or loss should be recognized by the shareholders of the Coral
Companies and Indian as a result of the proposed combination transactions.
A shareholder of the Coral Companies or Indian will have an aggregate
income tax basis in all of the Canaan common stock received in the proposed
combination transactions equal to the Federal income tax basis of the Coral
Companies and Indian common stock surrendered in exchange therefor.
The holding period of the Canaan common stock received by the
shareholders of the Coral Companies and Indian will include the period for which
the common stock exchanged therefor was held, provided the exchanged common
stock was held as a capital asset by such shareholder on the date of the
exchange.
Canaan Securities
Crowe & Dunlevy expresses no opinion regarding the Federal income tax
consequences of the proposed combination transaction to Canaan Securities and
its shareholder.
Placing Brokers
The receipt of cash and shares of Canaan common stock by the Placing
Brokers will be treated as ordinary income to the Placing Brokers in the amount
equal to the amount of cash and the fair market value of the Canaan common stock
received.
Canaan
Canaan will not recognize any gain or loss upon the issuance of the
Canaan common stock to the shareholders of the Coral Companies, the shareholders
of Indian, the shareholder of Canaan Securities or the limited partners.
-85-
<PAGE>
Reporting Requirements of Limited Partners and Shareholders of Corporate
Combining Entities
Under the United States Treasury regulations, each limited partner and
each shareholder of the corporate Combining Entities who receives shares of
Canaan common stock must provide a statement concerning the exchange with his
federal income tax return for the year in which the combination transactions
occur. The partnerships and the corporate Combining Entities will provide their
respective limited partners or shareholders with information to assist them in
preparing such statement.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been
prepared to assist in the analysis of the financial effects of the combination
transactions involving Canaan, Indian, the Coral Companies, the partnerships,
and Canaan Securities. This pro forma information is based on the historical
financial statements of Canaan, Indian and the partnerships. The historical
financial statements of the Coral Companies and Canaan Securities have not been
included separately in this prospectus/proxy statement as the assets,
liabilities and results of operations of the Coral Companies or Canaan
Securities are not significant to the combination transactions.
The information was prepared based on the following:
. After completion of the combination transactions, 5,000,000 Canaan
common shares are assumed to be outstanding without the partial cash
offering to limited partners. Assuming the full $5 million is paid
to electing limited partners, there will be approximately 4,509,800
shares outstanding after completion of the combination transactions.
. Canaan utilizes the full cost method of accounting for its oil and
gas activities.
. The combination transactions are accounted for as a reorganization
of interests under common control in a manner similar to a pooling
of interests for the partnerships and as purchases of Indian and
Canaan Securities.
. The unaudited pro forma balance sheet has been prepared as if the
combination transactions occurred on September 30, 1999. The
unaudited pro forma statements of operations have been prepared as
if the combination transactions occurred on January 1, 1998.
. Targeted annual general and administrative expense savings from the
combination have not been reflected as an adjustment to the
historical data.
-86-
<PAGE>
. As of September 30, 1999, the purchase of Indian by Canaan did not
cause a pro forma reduction of the carrying value of oil and gas
properties under the full cost accounting "ceiling test." The fair
value of Indian's oil and gas properties was determined to be less
than the present value of future net cash flows from its oil and gas
properties determined pursuant to the ceiling test guidelines as
prescribed by the Securities and Exchange Commission.
. Costs of the combination transactions are estimated to be $750,000
with $100,000 attributable to the acquisition of Indian and $650,000
attributable to the combination of Canaan, the partnerships and the
Coral Companies. Through September 30, 1999, Canaan has expensed
$17,000 of the reorganization costs and will expense the additional
reorganization costs as such costs are incurred.
The unaudited pro forma financial statements and related notes are
presented for illustrative purposes only. If the combination transactions
had occurred in the past, Canaan's financial position or operating
results might have been different from those presented in the unaudited
pro forma information. The unaudited pro forma information should not be
relied on as an indication of the financial position or operating results
that Canaan would have achieved if the combination transactions had
occurred as of September 30, 1999 or January 1, 1998. The unaudited pro
forma information also should not be relied on as an indication of the
future results that Canaan will achieve after the completion of the
combination transactions.
-87-
<PAGE>
Unaudited Pro Forma Balance Sheet
September 30, 1999
<TABLE>
<CAPTION>
Canaan Energy
Pro Forma
----------------------------
Without With
Canaan Combined Indian partial cash partial cash
Energy Canaan Oil offer to offer to
Corporation Partnerships Company Pro Forma limited limited
Historical Historical Historical Adjustments partners partners
------------ -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets $ 929,899 3,014,602 4,403,619 (89,205) (a) 7,514,807 7,514,807
(98,538) (d)
(166,000) (e)
(479,570) (c)
Property and equipment, net 356,635 20,326,230 28,126,675 4,023,325 (a) 58,326,865 58,326,865
2,700,000 (b)
2,794,000 (c)
Notes receivable -- 5,606,250 -- (5,606,250) (d) -- --
Debt issuance costs, net -- -- 83,618 (83,618) (a) -- --
Deferred tax asset -- -- 1,520,000 (1,520,000) (a) -- --
Other assets 28,358 1,533 30,000 (28,358) (a) 31,533 31,533
------------ -------------- ------------- -------------- ---------- --------------
Total assets $ 1,314,892 28,948,615 34,163,912 1,445,786 65,873,205 65,873,205
============ ============== ============= ============== ========== ==============
Liabilities and Equity
Current liabilities $ 445,008 464,909 7,391,978 (84,778) (a) 7,515,221 7,515,221
71,642 (a)
(675,000) (a)
(98,538) (d)
Long-term debt, less current
portion -- 6,896,489 30,141,041 (3,601,791) (a) 28,504,489 33,504,489
(4,931,250) (d)
Other non-current liabilities -- -- 70,649 (70,649) (a) -- --
Deferred income taxes 84,000 -- -- 2,700,000 (b) 4,528,000 4,528,000
1,250,000 (f)
494,000 (c)
Stockholders' equity:
Common stock 632 -- 312 (312) (a) 50,000 45,098
499,368 (g)
Additional paid-in capital 545,756 -- 1,332,603 2,547,964 (a) 26,451,999 21,456,901
(1,332,603) (a)
21,087,849 (g)
1,820,430 (c)
Stock subscription receivable (8,755) -- -- -- (8,755) (8,755)
Retained earnings (deficit) 248,251 -- (4,772,671) 4,772,671 (a) (1,167,749) (1,167,749)
(166,000) (e)
(1,250,000) (f)
Partners' equity:
General partners' equity -- 60,486 -- (60,486) (g) -- --
Limited partners' equity -- 21,526,731 -- (21,526,731) (g) -- --
------------ -------------- ------------- -------------- ------------- --------------
Total equity 785,884 21,587,217 (3,439,756) 6,392,150 25,325,495 20,325,495
------------ -------------- ------------- -------------- ------------- --------------
Total liabilities and
equity $ 1,314,892 28,948,615 34,163,912 1,445,786 65,873,205 65,873,205
============ ============== ============= ============== ============= ==============
Book value per share $ 1,243 5.07 4.51
============ ============= ==============
</TABLE>
See accompanying notes to pro forma financial statements.
-88-
<PAGE>
Unaudited Pro Forma Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Canaan Energy
Pro Forma
------------------------------
Without With
Canaan Combined Indian partial cash partial cash
Energy Canaan Oil offer to offer to
Corporation Partnerships Company Pro Forma limited limited
Historical Historical Historical Adjustments partners partners
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales $ 83,652 9,434,916 10,014,808 -- 19,533,376 19,533,376
Other income 72,883 277,821 234,599 -- 585,303 585,303
------------- ------------- ------------- ------------- ------------ ------------
Total revenues 156,535 9,712,737 10,249,407 -- 20,118,679 20,118,679
------------- ------------- ------------- ------------- ------------ ------------
Costs and expenses:
Lease operating expenses 27,593 1,860,266 2,971,006 (325,069) (h) 4,533,796 4,533,796
Production taxes 5,577 782,894 504,833 -- 1,293,304 1,293,304
Depreciation, depletion and
amortization 48,350 3,189,944 4,029,243 271,637 (k) 7,539,174 7,539,174
General and administrative, net (33,780) 577,885 1,659,255 970,500 (i) 3,498,929 3,498,929
325,069 (h)
Interest expense -- 203,604 3,119,786 (384,000) (j) 2,939,390 3,364,390
Reduction in carrying value
of oil and gas properties -- 1,881,000 4,000,000 (4,000,000) (k) 1,881,000 1,881,000
------------- ------------- ------------- ------------- ------------ ------------
Total costs and expenses 47,740 8,495,593 16,284,123 (3,141,863) 21,685,593 22,110,593
------------- ------------- ------------- ------------- ------------ ------------
Other income, principally interest 41,544 -- -- -- 41,544 41,544
------------- ------------- ------------- ------------- ------------ ------------
Earnings (loss) before income taxes 150,339 1,217,144 (6,034,716) 3,141,863 (1,525,370) (1,950,370)
Income tax expense (benefit) 46,000 -- (2,195,000) 1,569,360 (l) (579,640) (741,141)
------------- ------------- ------------- ------------- ------------ ------------
Net earnings (loss) $ 104,339 1,217,144 (3,839,716) 1,572,503 (945,730) (1,209,229)
============= ============= ============= ============= ============ ============
Net earnings (loss) per average
common share outstanding -
basic and diluted $ 173 (0.19) (0.27)
============= ============ ============
Net earnings (loss) after
transaction expenses
and payments (1,595,730) (1,595,730)
============ ============
Net earnings (loss) after
transaction expenses and
payments per average
common share outstanding -
basic and diluted (0.32) (0.35)
============ ============
Weighted average common shares
outstanding-basic and diluted 603 5,000,000 4,509,804
============= ============ ============
</TABLE>
See accompanying notes to pro forma financial information.
-89-
<PAGE>
Pro Forma Statement of Operations
Nine months ended September 30, 1999
<TABLE>
<CAPTION>
Canaan Energy
Pro Forma
----------------------------
Without With
Canaan Combined Indian partial cash partial cash
Energy Canaan Oil offer to offer to
Corporation Partnerships Company Pro Forma limited limited
Historical Historical Historical Adjustments partners partners
------------ ------------ ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales $ 91,672 7,290,766 6,730,705 -- 14,113,143 14,113,143
Other income 48,241 66,425 212,038 -- 326,704 326,704
------------ ------------ ------------- ------------ -------------- --------------
Total revenues 139,913 7,357,191 6,942,743 -- 14,439,847 14,439,847
------------ ------------ ------------- ------------ -------------- --------------
Costs and expenses:
Lease operating expenses 10,678 1,426,542 2,023,529 (294,025) (h) 3,166,724 3,166,724
Production taxes 6,598 530,666 362,316 -- 899,580 899,580
Depreciation, depletion and
amortization 50,482 2,322,261 2,578,023 428,221 (k) 5,378,987 5,378,987
General and administrative, net (148,944) 454,510 1,264,969 620,000 (i) 2,484,560 2,484,560
294,025 (h)
Interest expense -- 347,236 2,049,248 (279,000) (j) 2,117,484 2,436,234
------------ ------------ ------------- ------------ -------------- --------------
Total costs and expenses (81,186) 5,081,215 8,278,085 769,221 14,047,335 14,366,085
------------ ------------ ------------- ------------ -------------- --------------
Other income, principally interest 26,303 -- -- -- 26,303 26,303
------------ ------------ ------------- ------------ -------------- --------------
Earnings (loss) before income taxes 247,402 2,275,976 (1,335,342) (769,221) 418,815 100,065
Income tax expense (benefit) 79,000 -- -- 80,150 (l) 159,150 38,025
------------ ------------ ------------- ------------ -------------- --------------
Net earnings (loss) $ 168,402 2,275,976 (1,335,342) (849,371) 259,665 62,040
============ ============ ============= ============ ============== ==============
Net earnings (loss) per average
common share outstanding -
basic and diluted $ 266 0.05 0.01
============ ============== ==============
Weighted average common shares
outstanding-basic and diluted 632 5,000,000 4,509,804
============ ============== ==============
</TABLE>
See accompanying notes to pro forma financial information.
-90-
<PAGE>
Notes to Unaudited Pro Forma Financial Information
December 31, 1998 and September 30, 1999
1. Method of Accounting for the Combination Transactions
In presentation of the accompanying pro forma financial information, Canaan
accounted for the combination transactions as:
A reorganization of entities under common control for the partnerships in a
manner similar to a pooling of interests. As a result, the historical recorded
amounts for the assets and liabilities of the partnerships were not adjusted to
fair value and the operating results of the partnerships have been included
since formation.
A purchase of Indian by Canaan. Accordingly, the assets acquired and the
liabilities assumed by Canaan were revalued and recorded at their estimated
"fair values" and the results of operations of Indian have been included only
since January 1, 1998.
A purchase of Canaan Securities by Canaan. Accordingly, the assets acquired
by Canaan were revalued and recorded at their estimated "fair values." The
operations of Canaan Securities before the combination transactions will not
continue after the combination transactions and Canaan Securities has no
significant assets, liabilities or operations separate from its right to receive
cash distributions from the partnerships.
The purchase price of the acquired net assets of Indian was based on the
risk-adjusted, present value (using 15% discount rate) of estimated future net
revenues from oil and gas reserves, less the fair value of liabilities to be
assumed by Canaan plus the fair value of non-oil and gas assets and working
capital of Indian as of September 30, 1999.
The purchase price of the acquired net assets of Canaan Securities was
based on the fair value of the right to receive cash distributions from
production revenues of the partnerships. The fair value was determined using the
same assumptions to value the oil and gas assets of Indian.
2. Pro Forma Adjustments Related to the Combination Transactions
The unaudited pro forma balance sheet includes the following adjustments:
(a) This entry adjusts the historical book values of Indian's assets and
liabilities to their estimated fair values as of September 30, 1999 and
eliminates Indian's historical financial equity and shareholder debt which
is not being assumed by Canaan. The calculation of the total purchase price
and the preliminary allocation to assets and liabilities are as follows:
-91-
<PAGE>
<TABLE>
Calculation and preliminary allocation of purchase price:
<S> <C>
Fair value of assets acquired:
Oil and gas properties $ 32,000,000
Non-oil and gas properties 50,000
Current assets 4,314,414
Other assets 30,000
Less fair value of liabilities assumed:
Current liabilities, excluding current maturities of long-term debt (3,704,200)
Bank debt (24,536,000)
Production payment debt (5,606,250)
-------------
Purchase price before transaction costs 2,547,964
Estimated transaction costs 100,000
-------------
Total purchase price for Indian $ 2,647,964
=============
Allocated to:
Property and equipment $ 32,150,000
Current assets 4,314,414
Other assets 30,000
Current liabilities, excluding current maturities of long-term debt (3,704,200)
Current maturities of long-term debt (3,603,000)
Long-term debt (26,539,250)
-------------
$ 2,647,964
=============
</TABLE>
(b) This adjustment increases the cost of Indian's oil and gas properties
acquired and increases deferred income taxes by $2.7 million. This
adjustment equals the deferred income tax effect of the difference between
the fair value assigned to Indian's assets and liabilities and their
estimated income tax basis for income tax purposes. Due to the tax-free
nature of the combination transactions to the shareholders of Indian,
Canaan's tax basis in those assets and liabilities is the same as Indian's
tax basis.
(c) This adjustment increases Canaan's oil and gas properties by $2.3 million
for the fair value of the future fees for services based on the
partnerships' ongoing cash distributions from oil and gas properties to be
received by Canaan Securities and the Placing Brokers. The fair value of
the future fees also represents the fair value of Canaan Securities since
it has no significant assets, liabilities, or operations separate from the
services it provides to the partnerships. Canaan is acquiring the common
stock of Canaan Securities in exchange for Canaan common stock. Canaan is
acquiring the rights to receive cash distributions from the partnerships
from the Placing Brokers in exchange for Canaan common stock and cash. The
Placing Brokers will receive 40% of the exchange value in cash which
approximates $479,570.
This adjustment also increases the cost of Canaan's oil and gas properties
and increases deferred income taxes by $494,000. This adjustment equals
the deferred income tax effect
-92-
<PAGE>
of the difference between the fair value assigned to Canaan Securities's
assets and their estimated tax basis for income tax purposes. Due to the
tax-free nature of the combination transactions to the shareholder of
Canaan Securities, Canaan's tax basis in those assets is the same as Canaan
Securities's tax basis.
(d) This adjustment eliminates receivables and payables between Canaan and the
partnerships and the monetary production payment receivable and payable
between the partnerships and Indian.
(e) This adjustment eliminates Canaan's receivables due from the General
Partners of the partnerships. The financial statements of the general
partners are not presented separately herein as the General Partners have
no significant assets or liabilities other than their interests in the
partnerships or through inter-company transactions with Canaan.
(f) This adjustment increases Canaan's deferred income taxes for the tax effect
of the differences between the financial carrying amounts and the tax bases
of the partnership's assets and liabilities. The partnerships have not
recorded deferred income taxes since any tax liabilities are the
responsibility of the individual partners. The $1.25 million has been
excluded from the unaudited pro forma statements of operations as the
amount will not recur and is directly attributable to the combination
transactions. The deferred income taxes will be recorded as part of
operations in the period in which the combination transactions are
completed.
(g) This adjustment records the par value ($.01) of the 5,000,000 common shares
of Canaan which will be outstanding after completing the combination
transactions and reclassifies the limited and General Partners' equity to
equity of Canaan.
The unaudited pro forma statements of operations include the following
adjustments:
(h) These adjustments eliminate oil and natural gas well overhead charged to
the partnerships as working interests owners in wells operated by Canaan.
The overhead charges are recorded by Canaan as a reduction in general and
administrative expenses.
(i) These adjustments increase general and administrative expenses for
partnership distributions made to the general partners for management fees.
(j) These adjustments eliminate interest expense applicable to debt of Indian
payable to Indian shareholders. The Indian shareholder debt is not being
assumed by Canaan.
(k) These adjustments eliminate the reduction in carrying value of oil and
natural gas properties of Indian in 1998 and record depreciation,
depletion, and amortization on a consolidated basis assuming the
combination transactions were completed on January 1, 1998.
-93-
<PAGE>
(l) These adjustments record the net tax effect of all pro forma adjustments at
a tax rate which results in the combined tax rate approximating 38%. The
adjustments include income taxes for the applicable period for the
partnerships for which no income taxes have been previously recorded.
3. Pro Forma Effect of Partial Cash Offer to Limited Partners
The limited partners may elect to receive cash equal to 75% of their
exchange values. The cash offer is limited to an aggregate of $5 million. The
amounts included in the column "With Partial Cash Offer to Limited Partners"
include the effects of $5 million of additional bank borrowings, the proceeds of
which may be distributed to the limited partners. The pro forma balance sheet
assumes the additional borrowings occurred on September 30, 1999 while the
unaudited pro forma statements of operations assume the borrowings occurred on
January 1, 1998. Any cash distributed will be accounted for as a decrease in
equity similar to acquisition of treasury stock. Based on an aggregate exchange
value of $27,148,000 applicable to the limited partners, cash payments
aggregating $5,000,0000 will result in the issuance of 4,509,804 shares.
Additionally, a $5,000,000 increase in bank borrowings would increase interest
expense by $425,000 for the year ended December 31, 1998 and $318,750 for the
nine months ended September 30, 1999.
4. Pro Forma Information - Quantities of Oil and Gas Reserves
The pro forma reserve information set forth below assumes the combination
transactions were completed on January 1, 1998. There are many uncertainties
inherent in estimating reserve quantities, and in projecting future production
rates and the timing of future development expenditures. In addition, reserve
estimates of new discoveries are more imprecise than those of properties with a
production history. Accordingly, estimates are subject to change as additional
information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions. Proved
developed oil and natural gas reserves are those reserves expected to be
recovered through existing equipment and operating methods.
All reserves are located in the United States.
-94-
<PAGE>
Changes in Pro Forma Proved Reserves
Oil Natural Gas
(Bbls) (MCF)
----------- -----------
Proved reserves, December 31, 1997 956,000 32,218,000
Sale of reserves (31,000) (187,000)
Extensions and discoveries 6,000 329,000
Purchase of reserves 235,000 10,177,000
Production (157,000) (4,168,000)
Proved reserves, December 31, 1998 1,009,000 38,369,000
=========== ===========
Proved developed reserves 909,000 33,063,000
=========== ===========
Pro Forma Information - Cash Flows
Summarized pro forma cash flow information assuming the combination
transactions occurred on January 1, 1998 is as follows:
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 8,752,861 5,007,764
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (7,602,526) (1,743,567)
Proceeds from sale of property and equipment 596,735 570,222
------------ -------------
Net cash used in investing activities (7,005,791) (1,173,345)
------------ -------------
Cash flows from financing activities:
Borrowings of long-term debt 582,400 4,281,000
Repayments of long-term debt (3,206,000) (7,464,000)
Debt issuance costs (198,713) (120,400)
Distributions to owners (6,248,198) (3,850,448)
Cost of capital (10,862) --
Cash of business acquired 2,735,321 --
----------- -----------
Net cash used in financing activities (6,346,052) (7,153,848)
Cash at beginning of period 10,524,813 5,925,831
----------- -----------
Cash at end of period $ 5,925,831 2,606,402
=========== ===========
</TABLE>
-95-
<PAGE>
INFORMATION CONCERNING CANAAN
General
Canaan, formerly known as Coral Reserves Group, Ltd., is an
independent oil and gas company headquartered in Oklahoma City, Oklahoma. Canaan
was formed in March, 1987, as an Oklahoma corporation, by Leo E. Woodard and
John K. Penton, who continue to serve the company as Chief Executive Officer and
President, respectively.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of September 30,
1999, Canaan operated 113 of the 134 wells in which it or the partnerships own
an interest. Operations are located entirely within the state of Oklahoma and
are concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. As of September 30, 1999, the
estimated value of Canaan's proved oil and gas reserves was less than $500,000.
Since 1990, when the Coral companies began sponsoring partnerships,
Canaan has provided management services to the General Partners of the
partnerships.
Costs Incurred and Drilling Results
The following table shows certain information regarding the costs
incurred by Canaan from acquisition and development activities during the
periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
Year ended December 31, September 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition costs.......... $ - $ 16,000 $18,000 $ - $ -
Development costs.......... 21,025 139,433 50,816 22,127 101,609
------- -------- ------- -------- --------
Total...................... $21,025 $155,433 $68,816 $ 22,127 $101,609
======= ======== ======= ======== ========
</TABLE>
Canaan has acquired or drilled or participated in the drilling of
wells as set out in the table below for the periods indicated. These acquisition
and drilling activities do not include drilling activities of the partnerships.
-96-
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
----------------------------------------------------- ----------------
1996 1997 1998 1999
--------------- --------------- --------------- ----------------
Gross Net Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas....................... 1 .001 7 .579 12 .088 - -
Oil....................... 1 .001 11 .836 5 .035 - -
Dry....................... - - - - - - - -
----- ----- ----- ----- ---- ----- ----- -----
Total..................... 2 .002 18 1.415 17 .123 - -
===== ===== ===== ===== ==== ===== ===== =====
Development well drilling:
Gas....................... - - - - - - 2 .063
Oil....................... - - 1 .023 1 .053 - -
Dry....................... - - 1 .050 1 .001 - -
----- ----- ----- ----- ---- ----- ----- -----
Total..................... 2 - 2 .073 2 .054 2 .063
===== ===== ===== ===== ==== ===== ===== =====
</TABLE>
As of September 30, 1999, Canaan was not involved in the drilling,
testing or completing of any wells.
Acreage
The following table shows the developed and undeveloped oil and gas
lease and mineral acreage as of September 30, 1999 owned by Canaan. It does not
include acreage owned by the partnerships. Also excluded is acreage in which an
interest is limited to royalty, overriding royalty and other similar interests.
<TABLE>
<CAPTION>
Developed Undeveloped
------------------- ------------------
Gross Net Gross Net
------- ------- ------- -------
<S> <C> <C> <C> <C>
Oklahoma............................. 18,006 186 640 232
Other................................ 362 1 - -
------- ----- ------ ----
Total................................ 18,368 187 640 232
======= ===== ====== ====
</TABLE>
Productive Well Summary
The following table shows the ownership of Canaan in productive wells
at September 30, 1999. It does not include wells owned by the partnerships.
Gross oil and gas wells include 1 well with multiple completions. Wells with
multiple completions are counted only once for purposes of the following table.
Productive Wells
------------------
Gross Net
------- -------
Gas................................................. 61 0.49
Oil................................................. 73 0.74
----- -------
Total............................................... 134 1.23
===== =======
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<PAGE>
Selected Historical Financial and Operating Data
The following table presents a summary of selected financial
information and operating data for Canaan for the periods indicated. It should
be read in conjunction with the financial statements and related notes and the
section "Information Concerning Canaan - Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
prospectus. The summary financial information as of December 31, 1994, 1995 and
1996 and September 30, 1999 and for the years ended December 31, 1994 and 1995
and for the nine months ended September 30, 1998 and 1999, is unaudited. The
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
-98-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ----------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales...................... $ 130,607 $ 114,523 $ 95,675 $ 112,412 $ 83,652
Salt water disposal services................... - 43,920 57,000 49,000 51,000
Other.......................................... 31,192 19,808 27,574 16,409 21,883
--------- --------- ----------- ---------- ----------
Total revenues............................. 161,799 178,251 180,249 177,821 156,535
--------- --------- ----------- ---------- ----------
Expenses:
Operating costs................................ 35,180 26,454 15,845 25,005 33,170
Depreciation, depletion, and amortization...... 49,647 48,434 53,952 59,304 48,350
General and administrative costs............... 699,474 848,042 1,188,039 1,281,143 936,720
Less: Partnership management fees.............. (566,811) (777,754) (1,072,000) (1,373,000) (970,500)
Interest....................................... - 2,645 - - -
--------- --------- ----------- ---------- ----------
Total expenses............................. 217,490 147,821 185,836 (7,548) 47,740
--------- --------- ----------- ---------- ----------
Other income, principally interest................ 2,878 7,454 28,938 38,059 41,544
Earnings (loss) before income taxes............... (52,813) 37,884 23,351 223,428 150,339
Income taxes...................................... 5,000 (3,000) (2,000) (68,000) (46,000)
--------- --------- ----------- ---------- ----------
Net earnings (loss)............................... $ (47,813) $ 34,884 $ 21,351 $ 155,428 $ 104,339
========= ========= =========== ========== ==========
Earnings (loss) per average common
share oustanding - basic and diluted......... $ (79.69) $ 58.14 $ 35.59 $ 259.05 $ 173.03
========= ========= =========== ========== ==========
Weighted average common shares
outstanding - basic and diluted............. 600 600 600 600 603
========= ========= =========== ========== ==========
Statement of Cash Flows Data:
Net cash provided by (used in) operating
activities.................................. $ (10,675) $ 269,689 $ 10,707 $ 258,000 $ 416,062
Net cash provided by (used in) investing
activities.................................. (72,088) (22,749) 4,319 (204,490) (26,796)
Net cash provided by (used in) financing
activities.................................. 30,000 (30,000) - - -
Net increase (decrease) in cash and cash
equivalents.................................... (52,763) 216,941 15,026 53,510 389,266
EBITDA*........................................... 8,922 74,055 48,365 244,673 154,145
Balance Sheet Data (as of period end):
Cash and cash equivalents......................... $ 74,796 $ 291,737 $ 306,762 $ 360,272 $ 749,538
Oil and natural gas properties, net............... 281,415 191,751 152,384 278,733 284,934
Total assets...................................... 428,514 661,800 677,321 939,883 1,312,444
Total liabilities................................. 155,850 338,501 332,671 439,805 700,754
Stockholders' equity.............................. 272,664 323,299 344,650 500,078 611,690
Production:
Oil production (Bbls)............................. 1,204 1,515 1,036 1,570 1,903
Natural gas production (Mcf)...................... 66,828 63,098 35,102 31,828 29,263
Equivalent production (Mcfe)................... 74,052 72,187 41,318 41,248 40,681
Average sales price:
Oil price (per/Bbl) .............................. $ 15.11 $ 16.87 $ 17.40 $ 22.08 $ 13.52
Natural gas price (per/Mcf)....................... 1.68 1.41 2.21 2.44 1.98
Average sales price (per Mcfe)................. 1.76 1.59 2.32 2.73 2.06
Estimated Net Proved Reserves (as of period end)
(unaudited):
Natural gas (Mcf)................................. 656,666 593,568 512,344 514,890 510,998
Oil (Bbls)........................................ 10,738 9,223 9,868 11,130 10,127
Total (Mcfe)...................................... 721,095 648,909 571,555 581,673 571,760
Estimated Future Net Cash Flows before Income
Taxes($)*...................................... $1,037,000 $ 933,000 $1,569,000 $ 759,000 $ 646,000
Present Value ($)*.................................... $ 490,000 $ 441,000 $ 742,000 $ $359,000 $ 307,000
<CAPTION>
Nine Months
Ended September 30,
------------------------
1998 1999
----------- ----------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales...................... $ 66,052 $ 91,672
Salt water disposal services................... 43,000 38,000
Other.......................................... 12,653 10,241
---------- ----------
Total revenues............................. 121,705 139,913
---------- ----------
Expenses:
Operating costs................................ 25,558 17,276
Depreciation, depletion, and amortization...... 37,477 50,482
General and administrative costs............... 483,581 471,056
Less: Partnership management fees.............. (766,000) (620,000)
Interest....................................... - -
---------- ----------
Total expenses............................. (219,384) (81,186)
---------- ----------
Other income, principally interest................ 28,902 26,303
Earnings (loss) before income taxes............... 369,991 247,402
Income taxes...................................... (115,000) (79,000)
---------- ----------
Net earnings (loss)............................... $ 254,991 $ 168,402
========== ==========
Earnings (loss) per average common
share oustanding - basic and diluted......... $ 424.99 $ 266.46
========== ==========
Weighted average common shares
outstanding - basic and diluted............. 600 632
========== ==========
Statement of Cash Flows Data:
Net cash provided by (used in) operating
activities.................................. $ 344,335 $ (173,435)
Net cash provided by (used in) investing
activities.................................. (2,711) (109,715)
Net cash provided by (used in) financing
activities.................................. - -
Net increase (decrease) in cash and cash
equivalents.................................... 341,624 (283,150)
EBITDA*........................................... 378,566 271,581
Balance Sheet Data (as of period end):
Cash and cash equivalents......................... $ 701,896 $ 466,388
Oil and natural gas properties, net............... 277,370 321,689
Total assets...................................... 1,323,178 1,314,892
Total liabilities................................. 568,109 529,008
Shareholders' equity.............................. 755,069 785,884
Production:
Oil production (Bbls)............................. 1,547 1,210
Natural gas production (Mcf)...................... 22,247 34,209
Equivalent production (Mcfe)................... 31,529 41,469
Average sales price:
Oil price (per/Bbl) .............................. $ 14.02 $ 16.33
Natural gas price (per/Mcf)....................... 1.99 2.10
Average sales price (per Mcfe)................. 2.09 2.21
Estimated Net Proved Reserves (as of period end)
(unaudited):
Natural gas (Mcf)................................. NA NA
Oil (Bbls)........................................ NA NA
Total (Mcfe)...................................... NA NA
Estimated Future Net Cash Flows before Income
Taxes($)*...................................... NA NA
Present Value ($)*.................................... NA NA
</TABLE>
________________________
*See Definitions
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<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is intended to assist in an understanding of
Canaan's financial position as of December 31, 1997, and 1998 and September 30,
1999 and its results of operations for each year in the three-year period ended
December 31, 1998 and for the nine months ended September 30, 1998 and 1999. The
financial statements and notes thereto included elsewhere in this
prospectus/proxy statement contain additional information and should be referred
to in conjunction with this discussion.
General
Canaan is an Oklahoma corporation formerly known as Coral Reserves Group,
Ltd., organized in March of 1987 for the purpose of originating, evaluating,
engineering, negotiating, closing and managing producing oil and gas property
acquisitions on a contract basis for several limited partnerships sponsored by
others. Since 1990, its primary activities have consisted of acquiring,
developing, producing and operating oil and natural gas properties. Also, since
1990, when the Coral Companies began sponsoring partnerships, Canaan has managed
the limited partnerships on behalf of the General Partners. In February 1999, as
a result of the Agreement and Plan of Merger with Indian, Canaan has and will
continue to manage Indian's operations until completion of the merger.
As a result of the combination transactions, Canaan will acquire all of the
assets of the other parties to the combination transactions while the equity
owners of the other parties to the combination transactions will become
shareholders of Canaan. Canaan will continue the combined businesses of the
partnerships, the Coral Companies and Indian after the completion of the
combination transactions in a manner similar to the business activities of such
entities prior to the merger.
Canaan has been continuously engaged in the acquisition, production,
development and operation of oil and natural gas properties. As of September 30,
1999, Canaan operated 113 of the 134 wells in which it owns an interest.
Operations are located entirely within the state of Oklahoma and are
concentrated in Kingfisher County in north central Oklahoma and Garvin and
McClain counties in south central Oklahoma. Canaan's net production during the
nine months ended September 30, 1999 was approximately 153 Mcfe per day, of
which 82% was natural gas. Canaan's production is located entirely within
Oklahoma, except for one lease in Texas. As of September 30, 1999, the total
value of Canaan's proved oil and gas reserves was less than $500,000.
Historically, Canaan has utilized cash flows from operations and debt to
fund its capital expenditure programs. Management intends to fund future capital
expenditures through cash flows from operations and other various capital
markets made possible by the combination transactions.
-100-
<PAGE>
Canaan believes that once the combination transactions are complete, it will be
better positioned to pursue many of the prospects resulting from the
combination, as well as projects that are likely to arise as a result of
Canaan's ongoing activities.
The markets for oil and gas have been volatile and are likely to remain so
in the future. Prices for oil and gas are subject to wide fluctuations in
response to relatively minor changes in the supply and demand for oil and gas,
market uncertainty and a variety of additional factors that are beyond Canaan's
control. In the future, lower oil and gas prices may reduce (i) the
attractiveness or viability of exploration prospects and the amount of oil and
gas reserves that may be produced economically, (ii) Canaan's cash flow from
operations, and (iii) Canaan's net income and capital expenditures.
Canaan may from time to time enter into certain swap or hedge transactions
in an attempt to mitigate such price volatility on production that is subject to
market sensitive pricing. To the extent Canaan is unable to effect such
transactions, continued fluctuations in oil and gas prices could have an effect
on Canaan's operating results. Canaan has entered into future contracts to fix
the sales price of certain of its oil and gas production during 2000. Canaan and
the combined entities have entered into price swap contracts to fix the sales
price of certain of its oil and gas production for the remainder of 1999 through
September 2000.
Canaan uses the full cost method of accounting for its investment in oil
and natural gas properties. Under the full cost method of accounting, all costs
of acquisition, exploration and development of oil and gas reserves are
capitalized into a "full cost pool" as incurred, and properties in the pool are
depleted and charged to operations using the units-of-production method based on
the ratio of current production to total proved oil and gas reserves. To the
extent that such capitalized costs, net of depreciation, depletion and
amortization, exceed the present value of estimated future net revenues,
discounted at 10%, from proved oil and gas reserves, after income tax effects,
such excess costs are charged to operations. Once incurred, a write down of oil
and gas properties is not reversible at a later date, even if oil or gas prices
increase.
Results of Operations
Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Revenues. Total revenues for the year ended December 31, 1997 were
$177,821, a slight decrease of $2,428 from revenues of $180,249 for the year
ended 1996. Revenues from oil and natural gas sales increased $16,737 to
$112,412 in 1997 from $95,675 in 1996. The primary reason for the increase in
oil and natural gas sales in 1997 is the result of an increase of $4.68 per
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<PAGE>
barrel in the average price received for oil in 1997 when compared to 1996, and
an increase of $.23 per Mcf in the average price received for natural gas in
1997 when compared to 1996. Production of oil and natural gas was 1,570 Bbls and
31,828 Mcf, respectively, in 1997, as compared to 1,036 Bbls and 35,102 Mcf,
respectively, in 1996. On an equivalent basis, production remained relatively
constant in 1997 as compared to 1996 resulting from the acquisition of producing
properties (the Boswell Acquisition), and the development of reserves, offset by
sales of reserves in place in October 1996.
Revenues from salt water disposal services decreased $8,000 to $49,000 in
1997 from $57,000 in 1996 primarily as a result of differences in salt water
production levels from year to year. Other revenues decreased $11,000 in 1997
from 1996, resulting in such service not being performed subsequent to 1996.
Lease operating expense. Lease operating expense increased $9,235 to
$17,892 for the year ended 1997 as compared to $8,557 in 1996. In November 1997,
as a result of the Boswell Acquisition, Canaan assumed operations of several
marginal wells with high lease operating costs which accounted for the increase
in operating costs. Canaan's working interest in such wells approximated 40% of
the total working interest, whereas most of Canaan's working interest is less
than 5%. These wells were subsequently plugged in April 1998. On a Mcfe basis,
lease operating expense increased 105% in 1997 to $0.43 per Mcfe from $0.21 per
Mcfe in 1996 due to the increase in operating costs discussed above.
Gross Production Taxes. Gross production taxes for the year ended 1997 were
$7,213 as compared to $7,288 for the year ended 1996. Although oil and gas
revenues increased, gross production taxes remained relatively flat as a result
of tax rebates received on marginal wells in 1997.
Depreciation, depletion and amortization expense. DD&A expense increased
$5,352 to $59,304 in 1997 from $53,952 in 1996. DD&A expense from oil and gas
properties increased $8,543 to $29,084 in 1997 as compared to $20,541 in 1996.
The DD&A expense rate from oil and natural gas properties increased to $0.71 per
Mcfe for 1997, from $0.50 per Mcfe for 1996. The 42% increase in DD&A per Mcfe
resulted primarily from an increased level of capital expenditures for proved
reserves in 1997 as compared to 1996.
General and administrative expense. Net general and administrative expense
decreased $207,896 to $(91,857) in 1997 as compared to $116,039 in 1996. Gross
general and administrative expense increased 8% to $1,281,169 in 1997 from
$1,188,039 in 1996. Gross general and administrative expense increased primarily
as a result of increased salaries and bonuses of $105,000 in 1997 compared to
1996. This increase was offset by various changes to other expense items
including an increase of $20,000 in general and administrative costs recovered
from other working interest owners in 1997 compared to 1996. This increase
resulted from an increase in the reimbursement rates Canaan was able to charge
to the other interest owners in 1997 compared to 1996. The increase in gross
general and administrative expenses were more than offset by a
-102-
<PAGE>
$301,000 or 28% increase in the management fees Canaan earns from the
partnerships' it manages on behalf of the General Partners. The management fees
are based primarily on the General Partners' net distributable cash flows from
the limited partnerships. Therefore, the increase in the 1997 management fees is
attributable to the increase in the net distributable cash flows from the
limited partnerships.
Interest income. Interest income increased $9,121 to $38,059 in 1997 from
$28,938 in 1996. The increase is a result of an increase in average cash
balances in 1997 compared to 1996.
Income taxes. Income tax expense increased to $68,000 in 1997 from $2,000
in 1996. Canaan's effective tax rate was 30% in 1997 as compared to 9% in 1996.
This difference is due to a $200,077 increase in earnings before income taxes to
$223,428 in 1997 from $23,351 in 1996 and the effect of U.S. federal graduated
tax rates.
Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 were
$156,535, a decrease of $21,286 from revenues of $177,821 for the year ended
1997. Revenues from oil and natural gas sales decreased $28,760 to $83,652 in
1998 from $112,412 in 1997. The primary reason for the decrease in oil and
natural gas sales in 1998 is a result of a significant decrease of $8.56 per
barrel in the average price received for oil in 1998 when compared to 1997, and
a significant decrease of $.46 per Mcf in the average price received for gas in
1998 when compared to 1997. The average price per barrel of oil and Mcf of gas
received in 1998 and 1997 was $13.52 and $1.98, and $22.08 and $2.44,
respectively. Production of oil and natural gas was 1,903 Bbls and 29,263 Mcf,
respectively, in 1998, as compared to 1,570 Bbls and 31,828 Mcf, respectively,
in 1997. On an equivalent basis, there was only a slight decrease in production
in 1998 as compared to 1997, resulting from the late 1997 Boswell Acquisition of
producing properties and development activities adding production, offset by
normal declines in production rates, and the sale of marginal wells in 1998.
Canaan acquired producing properties in December 1998 (the Marathon Acquisition)
which did not significantly impact 1998 production.
Lease operating expense. Lease operating expense increased $9,801 to
$27,593 in 1998 as compared to $17,792 in 1997 as a result of the continued
operation of the marginal wells acquired in the late 1997 Boswell Acquisition
which were plugged in mid-1998. On a Mcfe basis, lease operating expense
increased 58% in 1998 to $0.68 per Mcfe from $0.43 per Mcfe in 1997 due to the
reason discussed above.
Gross Production Taxes. Gross production taxes decreased 23% to $5,577 in
1998 as compared to $7,213 in 1997. This decrease was a result of a 26% decrease
in oil and natural gas revenues in 1998 as compared to 1997.
Depreciation, depletion and amortization expense. DD&A expense decreased
$10,954 to $48,350 in 1998 from $59,304 in 1997. DD&A expense from oil and
natural gas properties
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<PAGE>
increased only slightly to $29,700 in 1998 as compared to $29,084 in 1997. The
DD&A expense rate increased to $0.73 per Mcfe for 1998, from $0.71 per Mcfe for
1997 as net oil and natural gas properties costs changed only slightly and
production rates compared to proved reserves were consistent with 1997. DD&A
expense resulting from non-oil and natural gas properties decreased $11,654 as a
result of assets being fully depreciated in 1996 and 1997.
General and administrative expense. Net general and administrative expense
increased $58,077 to $(33,780) in 1998 as compared to $(91,857) in 1997. Gross
general and administrative expense decreased 27% to $936,720 in 1998 from
$1,281,169 in 1997. Gross general and administrative expense decreased primarily
as a result of decreased salaries and bonuses of $260,000 in 1998 compared to
1997, due to lower levels of earnings in 1998. Also impacting the decrease was a
$122,000 increase in general and administrative costs recovered from the other
working interest owners in 1998 compared to 1997. This increase resulted from an
increase in the reimbursement rates Canaan was able to charge to the other
interest owners in 1998 compared to 1997 and an increase in the number of
operated properties in 1998 compared to 1997. The decrease in gross general and
administrative expenses were offset by a $402,500, or 29% decrease in the
management fees Canaan earns from the partnerships it manages on behalf of the
General Partners. The management fees are based primarily on the General
Partners' net distributable cash flows from the limited partnerships. Therefore,
the decrease in the 1998 management fees is attributable to the decrease in the
net distributable cash flows from the limited partnerships.
Income taxes. Income tax expense decreased $22,000 to $46,000 in 1998 from
$68,000 in 1997. The change in tax expense was due to a $73,089 decrease in
earnings before income taxes in 1998 compared to 1997. Canaan's effective tax
rate was 31% and 30% in 1998 and 1997, respectively.
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
Revenues. Total revenues for the nine months ended September 30, 1999 were
$139,913, a 15% increase as compared to revenues of $121,705 for the nine months
ended September 30, 1998. Revenues from oil and natural gas sales increased
$25,620 to $91,672 for the nine months ended 1999 from $66,052 for the nine
months ended September 30, 1998. Gas production increased 11,962 Mcf to 34,209
Mcf for the nine months ended September 30, 1999 from 22,247 Mcf for the same
period in 1998. Gas production increased as a result of the development and
completion of a significant gas well in April 1999. $25,102 of the increase in
revenues for the nine months ended September 30, 1999 is attributable to the
increased gas production. $6,020 of the increase is related to a $2.31 and $.11
increase in average oil and natural gas prices, respectively, received for the
nine months ended September 30, 1999, compared to the average prices received
for the same period in 1998. These increases were reduced by a decrease in oil
production of 337 barrels for the nine months ended September 30, 1999 when
compared to the same period in 1998.
-104-
<PAGE>
Revenues from salt water disposal services decreased $5,000 to $38,000 for
the nine months ended September 30, 1999 from $43,000 for the same period in
1998. The decrease is as a result of differences in salt water production levels
from period to period.
Lease operating expense. Lease operating expense decreased $10,622 to
$10,678 for the nine months ended September 30, 1999 as compared to $21,300 for
the nine months ended September 30, 1998 as a result of the cessation of
operations of the marginal wells acquired in the 1997 Boswell Acquisition which
were plugged in mid-1998. On a Mcfe basis, lease operating expense decreased 62%
to $0.26 for the nine months ended September 30, 1999 as compared to $0.68 per
Mcfe during the same period in 1998 due to the reasons discussed above.
Gross Production Taxes. Gross production taxes increased 55% to $6,598 for
the nine months ended September 30, 1999 as compared to $4,258 for the nine
months ended September 30, 1998. This increase was a result of increased oil and
natural gas revenues for the nine months ended September 30, 1999 as compared to
the same period in 1998.
Depreciation, depletion and amortization expense. DD&A expense increased
$13,005 to $50,482 for the nine months ended September 30, 1999 from $37,477 for
the same period in 1998. DD&A expense from oil and natural gas properties
increased $13,005 to $36,495 for the nine months ended September 30, 1999 as
compared to $23,490 for the nine months ended September 30, 1998. This increase
was a result of increased oil and natural gas property costs and an increase in
production rates compared to proved reserves in 1999 compared to the same period
in 1998. The DD&A rate increased to $0.88 per Mcfe for the nine months ended
September 30, 1999 as compared to $0.75 for the same period in 1998 as a result
of the above discussion.
General and administrative expense. Net general and administrative expense
increased $133,475 to $(148,944) for the nine months ended September 30, 1999 as
compared to $(282,419) for the nine months ended September 30, 1998. Gross
general and administrative expense decreased slightly to $471,056 for the nine
months ended September 30, 1999 from $483,581 for the same period in 1998. This
slight decrease was significantly impacted by a $146,000 or 19% decrease in the
management fees Canaan earns from the partnerships' it manages on behalf of the
General Partners. The management fees are based primarily on the General
Partners' net distributable cash flows from the limited partnerships. Therefore,
the decrease in the 1999 management fees is attributable to the decrease in the
net distributable cash flows from the limited partnerships.
Income taxes. Income tax expense decreased $36,000 to $79,000 for the nine
months ended September 30, 1999 from $115,000 for the same period in 1998. The
change in tax expense is due to a $122,589 decrease in earnings before income
taxes for the nine months ended September 30, 1999 compared to the same period
in 1998. Canaan's effective tax rate approximated 31% for the nine months ended
September 30, 1999 and 1998.
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<PAGE>
Capital Expenditures, Capital Resources and Liquidity
As of December 31, 1996, Canaan had cash balances of $306,762 and working
capital of $196,522. The increase in working capital to $246,764 as of December
31, 1997, from $196,522 as of December 31, 1996, reflects increased levels of
cash related to higher product prices received for oil and natural gas sales and
an increase in management fees received from the partnerships during 1997,
offset by an increase of approximately $168,000 of capital expenditures in 1997
compared to 1996. The increase in working capital to $369,930 as of December 31,
1998, from $246,764 as of December 1997, relates primarily to a reduction of
approximately $144,000 in capital expenditures in 1998 from 1997. For 1997, net
cash provided by operating activities was $258,000, as compared to $10,707 in
1996. The increase in net cash provided by operating activities in 1997 as
compared to 1996 relates primarily to higher product prices received for oil and
natural gas sales, an increase in management fees received from the partnerships
and the timing of receipts and disbursements relating to working capital. For
1998, net cash provided by operating activities was $416,062, as compared to
$258,000 in 1997. This increase was related to the timing of receipts and
disbursements relating to working capital. As of September 31, 1999, Canaan had
cash balances of $466,388 and working capital of $484,891. The increase in
working capital of $115,061 as of September 30, 1999 as compared to $369,830 at
December 31, 1998 reflects mainly an increased level of accounts receivable.
Such receivables are due from the General Partners for several months of
unfunded partnership management fees.
Net cash used in investing activities was $(4,319) in 1996 as compared to
$204,490 in 1997. This increase of $208,809 in 1997 was primarily related to the
development of oil and natural gas properties and the acquisition of producing
oil and natural gas properties. Net cash used in investing activities was
$26,796 in 1998 as compared to $204,490 in 1997 a decrease of $177,694. Such
decrease is related to lower levels of oil and natural gas acquisition and
development activities as well as an increase of approximately $33,000 from
proceeds received from the disposal of marginal properties. Net cash used in
investing activities for the nine months ended September 30, 1999 was $109,715
as compared to $2,711 for the same period in 1998. This was a result of the
development of oil and natural gas properties.
Capital expenditures. Canaan's capital expenditures to date have focused
primarily on the development of oil and natural gas properties in Oklahoma and
to a lessor extent on acquisitions of proved developed producing oil and natural
gas properties located in Oklahoma.
Canaan's capital expenditures to date have been financed with cash flow
provided by operations. On a pro forma basis, Canaan has budgeted for certain
capital expenditures in 2000. For a discussion of the total amount budgeted, see
"Business of Canaan After Completion of the Combination Transactions". The
aggregate level of capital expenditures in 2000 for activities and the
allocation thereof is highly dependent upon Canaan's success rate on its
activities and prevailing conditions in the oil and gas industry. Accordingly,
the actual level of capital expenditures and the allocation of such expenditures
may vary materially from the estimates
-106-
<PAGE>
included in the "Business of Canaan After Completion of the Combination
Transactions" section included elsewhere in this prospectus/proxy statement.
Capital Resources. Canaan's cash requirements have been met primarily in
the past through cash generated from operations. See "Business of Canaan After
Completion of the Combination Transactions" elsewhere in this prospectus/proxy
statement for a discussion of Canaan's anticipated future capital resources.
Liquidity. Canaan does not currently have significant capital requirement
obligations but those that expect will be satisfied primarily from existing cash
balances, cash flow from operations. Subsequent to the combination transactions,
Canaan will fund its drilling and acquisition activities with cash flow from
operations and with funding under a credit facility. Canaan's cash flow from
operations will be dependent upon its future performance, which will be subject
to prevailing economic conditions and to financial and business conditions and
other factors, many of which are beyond its control. At some point, Canaan also
intends to seek additional capital through offerings of equity securities. There
can be no assurance, however, that the lenders will extend or increase the
borrowing limits under the credit facility or that such offerings can be
successfully completed. Should sufficient financing not be available from these
or other sources, implementation of the Canaan's growth objective would be
delayed.
Canaan does not intend to pay dividends on its common stock in the near
future. Earnings generated will be redeployed by the Canaan as it continues its
growth strategies.
INFORMATION CONCERNING THE CORAL COMPANIES
General
Coral, Inc. and Coral Corp. were organized in 1989 and 1991, respectively,
for the sole purpose of acting as a general partner of the partnerships. Coral,
Inc. serves as managing general partner of the 1990, 1993-I and 1996-I
partnerships. Coral Corp. serves as managing general partner of all of the
remaining partnerships. The sole assets of the Coral Companies consists of their
respective interests in the partnerships for which they serve as managing
general partner. All of the revenues received by Coral, Inc. and Coral Corp.
from the partnerships are paid either to Canaan to reimburse Canaan for costs
incurred in providing management services relating to the partnerships or to
Canaan Securities for services rendered by Canaan Securities in connection with
the organization of the partnerships.
-107-
<PAGE>
No separate selected financial data is presented for the Coral
Companies because it consists solely of their respective share of the
partnerships activities and selected financial and operating data is presented
separately for each partnership.
INFORMATION CONCERNING PARTNERSHIPS
1990 Partnership
General
The 1990 partnership was formed in April, 1990 and raised $3.9 million
of limited partner capital contributions. As of September 30, 1999, the 1990
partnership had returned to limited partners 138% of their original investment.
The 1990 partnership owns an interest in 51 oil and gas wells, with 48
located in Oklahoma and 3 in Texas. Total net production from properties is 95%
gas consisting of 692 Mcf/day of gas and 7 Bbls/day of oil as of September 30,
1999. Approximately 28% of the 1990 partnership's total reserve value as of
September 30, 1999 is concentrated in 3 wells. The largest property (10.4%) is
the Sewell #1-36, a 15,000 feet deep Atoka gas well located in western
Oklahoma's Custer County. The Hussey #1-10, a 14,300 feet deep Sycamore/
Woodford/ Hunton/ Viola gas well located in southern Oklahoma's Stephens County,
and the Cathie Ruth #1-12, an 8,400 feet deep Sycamore gas well located in
southern Oklahoma's Garvin County, represent 9.9% and 7.7% of total reserve
value, respectively.
Proved developed producing and proved developed non-producing reserves
account for over 87% of the 1990 partnership's total proved reserves at
September 30, 1999 and 96% of total proved reserves at such date is gas. The
partnership has two well locations with proved undeveloped reserves, one
offsetting the Hussey #1-10 in Stephens County, Oklahoma and one Redfork
development well in Roger Mills County in western Oklahoma.
Acquisition and Drilling Activity
The 1990 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1990 partnership has not participated in the drilling of any exploratory wells.
-108-
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended
------------------------------------------------------------------------------ September 30,
1996 1997 1998 1999
------------------------ ------------------------- ------------------------- --------------------------
Gross Net Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... 1 0.003 -- -- -- -- -- --
Oil................... -- -- -- -- -- -- -- --
Dry................... -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- --------- ---------- -----------
Total................. 1 0.003 -- -- -- -- -- --
========== ========== ========== ========== =========== ========= ========== ===========
Development well
drilling:
Gas................... 3 0.175 2 -- 1 .027 1 0.010
Oil................... -- -- -- -- -- -- -- --
Dry................... -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- --------- ---------- -----------
Total................. 3 0.175 2 0.070 1 .027 1 0.010
========== ========== ========== ========== =========== ========= ========== ===========
</TABLE>
1991 Partnership
General
The 1991 partnership was formed in April, 1991 and raised $4.5 million
of limited partner capital contributions. As of September 30, 1999, the 1991
partnership had returned to limited partners 139% of their original investment.
The 1991 partnership owns an interest in 55 oil and gas wells, with 48
located in Oklahoma and 7 in Texas. Total net production from properties is 89%
gas, consisting of 905 Mcf/day of gas and 19 Bbls/day of oil as of September 30,
1999. The 1991 partnership's reserve value is broadly diversified, with the
largest single well accounting for only 6.6% of total reserve value as of
September 30, 1999. The largest well is the Lucky 7 #1, a 9,500 feet deep Davis
Sand well located in Grayson County in North Texas.
Proved developed producing and proved developed non-producing reserves
account for over 90% of the 1991 partnership's total proved reserves at
September 30, 1999 and 89% of total proved reserves is gas. The partnership has
three additional development well locations with proved undeveloped reserves,
none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1991 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1991 partnership has not participated in the drilling of any exploratory wells.
-109-
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended
---------------------------------------------------------------------------------- September 30,
1996 1997 1998 1999
----------------------- ------------------------- ------------------------- -------------------------
Gross Net Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... 1 0.003 1 0.034 -- -- 1 0.007
Oil................... -- -- -- -- -- -- -- --
Dry................... -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total................. 1 0.003 1 0.034 -- -- 1 0.007
========== ========== ========== ========== ========== ========== ========== ==========
Development well
drilling:
Gas................... 4 0.175 3 0.166 2 0.166 -- --
Oil................... -- -- 1 0.044 1 0.056 -- --
Dry................... -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total................. 4 0.175 4 0.210 3 0.222 -- --
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
1992 Partnership
General
The 1992 partnership was formed in June 1992 and raised $7.5 million
of limited partner capital contributions. As of September 30, 1999, the 1992
partnership had returned to limited partners 92% of their original investment.
The 1992 partnership owns an interest in 103 oil and gas wells, with
87 located in Oklahoma, 4 in Nebraska, 3 in Texas and 9 in Wyoming. Total net
production from the properties is 78% gas, consisting of 1,248 Mcf/day of gas
and 58 Bbls/day of oil as of September 30, 1999. The 1992 partnership's reserve
value is broadly diversified, with the largest single property accounting for
only 6.6% of total reserve value. The largest property is the Lucky Ditch Unit,
a 15,000 feet deep Dakota sand producer located in southwestern Wyoming.
Proved developed producing and proved developed non-producing reserves
account for over 84% of the 1992 partnership's total proved reserves at
September 30, 1999 and 83% of total proved reserves is gas. The partnership has
10 well locations with proved undeveloped reserves, all located in western
Oklahoma. The largest proved undeveloped reserve value is a Redfork development
well location in Custer County, Oklahoma.
Acquisition and Drilling Activity
The 1992 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1992 partnership has not participated in the drilling of any exploratory wells.
-110-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------- --------------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... 7 0.071 1 0.047 -- --
Oil................... -- -- -- -- -- --
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. 7 0.071 1 0.047 -- --
========== ========== ========== ========== =========== ==========
Development well
drilling:
Gas................... 4 0.118 3 0.149 1 0.005
Oil................... -- -- 1 0.029 -- --
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. 4 0.118 4 0.178 1 0.005
========== ========== ========== ========== =========== ==========
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------------------
Gross Net
---------- ----------
<S> <C> <C>
Acquired wells:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
Development well
drilling:
Gas................... 1 0.042
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. 1 0.04
========== ==========
</TABLE>
1993 Partnership
General
The 1993 partnership was formed in July 1993 and raised $6.5 million
of limited partner capital contributions. As of September 30, 1999, the 1993
partnership had returned to limited partners 85% of their original investment.
The 1993 partnership owns an interest in 149 oil and gas wells, with
120 located in Oklahoma, 4 in Nebraska, 16 in Colorado and 9 in Wyoming. Total
net production from the properties is 70% gas, consisting of 1,230 Mcf/day of
gas and 79 Bbls/day of oil as of September 30, 1999. The 1993 partnership's
reserve value as of September 30, 1999 is broadly diversified, with the largest
single property accounting for only 6.5% of total reserve value. The largest
property is the Lucky Ditch Unit, a 15,000 feet deep Dakota sand producer
located in southwestern Wyoming.
Proved developed producing and proved developed non-producing reserves
account for over 91% of the 1993 partnership's total proved reserves at
September 30, 1999 and 70% of total proved reserves is gas. The partnership has
nine additional development well locations with proved undeveloped reserves,
none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1993 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1993 partnership has not participated in the drilling of any exploratory wells.
-111-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------- --------------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... -- -- -- -- -- --
Oil................... -- -- -- -- -- --
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. -- -- -- -- -- --
========== ========== ========== ========== =========== ==========
Development well
drilling:
Gas................... 1 0.041 8 0.456 1 0.050
Oil................... -- -- -- -- -- --
Dry................... 1 0.059 -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. 2 0.100 8 0.456 1 0.050
========== ========== ========== ========== =========== ==========
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------------------
Gross Net
---------- ----------
<S> <C> <C>
Acquired wells:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
Development well
drilling:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
</TABLE>
As of September 30, 1999, the 1993 partnership was involved in the drilling
of 1 gross (.03 net) development well.
1993-I Partnership
General
The 1993-I partnership was formed in September 1993 and raised $2.4
million of limited partner capital contributions. As of September 30, 1999 the
1993-I partnership had returned to limited partners 104% of their original
investment.
The 1993-I partnership owns an interest in 62 oil and gas wells, with
43 located in Oklahoma, 4 in Nebraska, 6 in New Mexico and 9 in Wyoming. Total
net production from the properties is 78% gas, consisting of 534 Mcf/day of gas
and 25 Bbls/day of oil as of September 30, 1999. The 1993-I partnership's
reserve value is broadly diversified, with the largest single well accounting
for only 7.5% of total reserve value. The largest well is the Harrell C #1-3, an
8,100 feet deep Sycamore producer located in southern Oklahoma's Stephens
County.
Proved developed producing and proved developed non-producing reserves
account for over 93% of the 1993-I partnership's total proved reserves at
September 30, 1999 and 72% of total proved reserves is gas. The partnership has
four additional development well locations with proved undeveloped reserves,
none of which represent significant reserve value.
Acquisition and Drilling Activity
The 1993-I partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1993-I partnership has not participated in the drilling of any exploratory
wells.
-112-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------- --------------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... -- -- -- -- 1 0.048
Oil................... -- -- -- -- -- --
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. -- -- -- -- 1 0.048
========== ========== ========== ========== =========== ==========
Development well
drilling:
Gas................... -- -- 4 0.144 2 0.114
Oil................... -- -- -- -- -- --
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. -- -- 4 0.144 2 0.114
========== ========== ========== ========== =========== ==========
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------------------
Gross Net
---------- ----------
<S> <C> <C>
Acquired wells:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
Development well
drilling:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
</TABLE>
As of September 30, 1999, the 1993-I partnership was involved in the
drilling of 1 gross (.03 net) development well.
1995 Partnership
General
The 1995 partnership was formed in December 1994 and raised $6.8
million of limited partner capital contributions. As of September 30, 1999, the
1995 partnership had returned to limited partners 68% of their original
investment.
The 1995 partnership owns an interest in 127 oil and gas wells, with
95 located in Oklahoma, 23 in Arkansas and 9 in Wyoming. Total net production
from the properties is 82% gas, consisting of 1660 mcf/day of gas and 62
Bbls/day of oil as of September 30, 1999. The 1995 partnership's reserve value
is broadly diversified, with the largest single property accounting for only
5.0% of total reserve value. The largest property is the Lucky Ditch Unit, a
15,000 feet deep Dakota sand producer located in southwestern Wyoming.
Proved developed producing and proved developed non-producing reserve
account for over 85% of the 1995 partnership's total proved reserves at
September 30, 1999 and 80% of total proved reserves is gas. The partnership has
nine well locations with proved undeveloped reserves in the Anadarko Basin of
western Oklahoma, and two well locations in southern Oklahoma.
-113-
<PAGE>
Acquisition and Drilling Activity
The 1995 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated. The
1995 partnership has not participated in the drilling of any exploratory wells.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------- --------------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................... 9 0.088 -- -- -- --
Oil................... 4 0.127 -- -- -- --
Dry................... -- -- -- -- 1 0.094
---------- ---------- ---------- ---------- ----------- ----------
Total................. 13 1.014 -- -- 1 0.094
========== ========== ========== ========== =========== ==========
Development well
drilling:
Gas................... -- -- 4 0.213 -- --
Oil................... -- -- 1 0.022 1 0.043
Dry................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total................. -- -- 5 0.235 1 0.043
========== ========== ========== ========== =========== ==========
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------------------
Gross Net
---------- ----------
<S> <C> <C>
Acquired wells:
Gas................... -- --
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. -- --
========== ==========
Development well
drilling:
Gas................... 1 0.147
Oil................... -- --
Dry................... -- --
---------- ----------
Total................. 1 0.147
========== ==========
</TABLE>
As of September 30, 1999, the 1995 partnership was involved in the
drilling of 1 gross (.02 net) development well.
1996 Partnership
General
The 1996 partnership was formed in May 1996 and raised $9.6 million of
limited partner capital contributions. As of September 30, 1999, the 1996
partnership had returned to limited partners 25% of their original investment.
The 1996 partnership owns an interest in 129 oil and gas wells, with
127 located in Oklahoma and two in Texas. Total net production from the
properties is 82% gas, consisting of 1,975 Mcf/day of gas and 73 Bbls/day of oil
as of September 30, 1999. The 1996 partnership's reserve value is broadly
diversified, with the largest single property accounting for only 6.1% of total
reserve value. The largest property is the Ehlers #1-15, a 7,000 feet deep Viola
oil well located in Garfield County, Oklahoma.
In addition to oil and gas reserves, the 1996 partnership owns 53% of
a Contingent Production Payment purchased from Indian. This Contingent
Production Payment has a balance of $5,606,250 as of September 30, 1999, of
which the partnership's share is $2,971,313. If the combination transactions are
consummated the Contingent Production Payment will be increased
-114-
<PAGE>
by $3 million of which $1.6 million would be payable to the 1996 partnership.
Please see "Failure to Approve the Combination Transactions" on page _____.
Proved developed producing and proved developed non-producing reserves
account for over 88% of the 1996 partnership's total proved reserves at
September 30, 1999 and 86% of total proved reserves is gas. The partnership has
eleven additional development well locations with proved undeveloped reserves,
one of which represents significant reserve value. The Ehlers #3-15, a 7,000
feet deep Viola test well offsetting the Ehlers #1-15, represents almost half of
the proved undeveloped reserve value. Wells with proved undeveloped reserves
include seven locations in the Anadarko Basin of Western Oklahoma and four
locations in southern Oklahoma.
Acquisition and Drilling Activity
The 1996 partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
1996 1997 1998
------------------------ ----------------------- --------------------------
Gross Net Gross Net Gross Net
---------- --------- --------- --------- ---------- -----------
Acquired wells:
Gas........................ 23 2.73 29 3.44 74 20.320
Oil........................ 2 0.02 14 2.84 11 2.600
Dry........................ -- -- -- -- -- --
---------- --------- --------- --------- ---------- -----------
Total...................... 25 2.75 43 6.28 85 22.920
========== ========= ========= ========= ========== ===========
Development well drilling:
Gas........................ -- -- 3 0.40 -- --
Oil........................ -- -- 2 0.12 1 0.043
Dry........................ -- -- -- -- 1 0.094
---------- --------- --------- --------- ---------- -----------
Total...................... -- -- 5 0.53 2 0.137
========== ========= ========= ========= ========== ===========
Exploratory well drilling:
Gas........................ -- -- -- -- -- --
Oil........................ -- -- 1 0.07 -- --
Dry........................ -- -- -- -- -- --
---------- --------- --------- --------- ---------- -----------
Total...................... -- -- 1 0.07 -- --
========== ========= ========= ========= ========== ===========
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------------------
Gross Net
---------- ----------
<S> <C> <C>
Acquired wells:
Gas........................ -- --
Oil........................ -- --
Dry........................ -- --
---------- ----------
Total...................... -- --
========== ==========
Development well drilling:
Gas........................ 2 0.183
Oil........................ -- --
Dry........................ 1 0.073
---------- ----------
Total...................... 3 0.256
========== ==========
Exploratory well drilling:
Gas........................ -- --
Oil........................ -- --
Dry........................ -- --
---------- ----------
Total...................... -- --
========== ==========
</TABLE>
1996-I Partnership
General
The 1996-I partnership was formed in December 1995 and raised $6.5
million of limited partner capital contributions. As of September 30, 1999 the
1996-I partnership had returned to limited partners 38% of their original
investment.
The 1996-I partnership owns an interest in 94 oil and gas wells, all
located in Oklahoma. Total net production from the properties is 78% gas,
consisting of 1,481 Mcf/day of gas and 65 Bbls/day of oil as of September 30,
1999. The 1996-I partnership reserve value is
-115-
<PAGE>
broadly diversified, with the largest single property accounting for only 9.6%
of total reserve value. The largest property is the Ehlers #1-15, a 7,000 feet
deep Viola oil well located in Garfield County, Oklahoma.
In addition to oil and gas reserves, the 1996-I partnership owns 47%
of a $9,000,000 Contingent Production Payment purchased from Indian. This
Contingent Production Payment has a balance of $5,606,250 as of September 30,
1999, of which the partnership's share is $2,634,937. If the combination
transactions are consummated, the Contingent Production Payment will be
increased by $3 million of which $1.4 million would be payable to the 1996-I
partnership. Please see "Failure to Approve the Combination Transactions" on
page _____.
Proved developed producing and proved developed non-producing reserves
account for over 85% of the 1996-I partnership's total proved reserves and 81%
of proved reserves is gas. The partnership has eleven additional development
well locations with proved undeveloped reserves, one of which represents
significant reserve value. The Ehlers #3-15, a 7,000 feet deep Viola test well
offsetting the Ehlers #1-15, represents more than half of the proved undeveloped
reserve value. Wells with proved undeveloped reserves include eight locations to
be drilled in the Anadarko Basin of western Oklahoma and three locations in
southern Oklahoma.
Acquisition and Drilling Activity
The 1996-I partnership has acquired and drilled or participated in the
drilling of wells as set out in the table below for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
1996 1997 1998
------------------------- -------------------------- ------------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ----------- ---------- ---------
Acquired wells:
Gas...................... 9 0.422 18 2.285 30 4.45
Oil...................... 4 0.106 2 0.663 5 1.26
Dry...................... -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ---------
Total.................... 13 0.528 20 2.948 35 5.71
========== ========== ========== =========== ========== =========
Development well drilling:
Gas...................... -- -- 10 1.034 2 0.05
Oil...................... -- -- 1 0.011 1 0.04
Dry...................... -- -- 1 0.020 1 0.09
---------- ---------- ---------- ----------- ---------- ---------
Total.................... -- -- 12 1.065 4 0.19
========== ========== ========== =========== ========== =========
Exploratory well drilling:
Gas...................... -- -- -- -- -- --
Oil...................... 1 0.050 1 0.070 -- --
Dry...................... -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ---------
Total.................... 1 0.050 1 0.070 -- --
========== ========== ========== =========== ========== =========
<CAPTION>
Nine Months
Ended
September 30,
1999
--------------------------
Gross Net
---------- -----------
<S> <C> <C>
Acquired wells:
Gas...................... 1 0.059
Oil...................... 3 0.296
Dry...................... -- --
---------- -----------
Total.................... 4 0.355
========== ===========
Development well drilling:
Gas...................... 2 0.035
Oil...................... -- --
Dry...................... -- --
---------- -----------
Total.................... 2 0.035
========== ===========
Exploratory well drilling:
Gas...................... -- --
Oil...................... -- --
Dry...................... -- --
---------- -----------
Total.................... -- --
========== ===========
</TABLE>
As of September 30, 1999, the 1996-I partnership was involved in the
drilling of 1 gross (.02 net) development well.
-116-
<PAGE>
Acreage and Productive Wells for All Partnerships
The following table shows the developed and undeveloped oil and gas
lease and mineral acreage as of September 30, 1999 owned by each partnership.
The table does not include acreage in which an interest is limited to a royalty,
overriding royalty or other similar interest.
<TABLE>
<CAPTION>
Developed Undeveloped
------------------------------ ----------------------------
Partnership Gross Net Gross Net
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1990................................. 15,724 927 - -
1991................................. 15,117 1,451 - -
1992................................. 48,904 3,933 - -
1993................................. 38,343 3,679 - -
1993-I............................... 27,132 865 - -
1995................................. 26,447 3,712 - -
1996................................. 37,086 6,016 - -
1996-I............................... 26,246 3,004 - -
------------- ----------- ------------ -----------
Total.................................... 234,999 23,587 - -
============= =========== ============ ===========
</TABLE>
The following table shows the ownership of each partnership in
productive wells at September 30, 1999. Gross oil and gas wells include 6 wells
with multiple completions. Wells with multiple completions are counted only once
for purposes of the table.
-117-
<PAGE>
<TABLE>
<CAPTION>
Productive Wells
-------------------------------------------------------------
Gas Oil
----------------------------- ---------------------------
Partnership Gross Net Gross Net
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
1990..................................... 46 2.891 5 0.548
1991..................................... 41 3.905 14 1.937
1992..................................... 70 5.354 33 3.056
1993..................................... 83 10.725 66 16.326
1993-I................................... 39 2.228 23 1.382
1995..................................... 59 10.200 68 15.724
1996..................................... 106 19.059 23 4.845
1996-I................................... 78 9.630 16 2.437
------------ ------------ ---------- ------------
Total........................................ 522 63.990 248 46.255
============ ============ ========== ============
</TABLE>
Beneficial Owners of Partnerships
Information concerning the percentage ownership of each partnership is
set forth on page _____ under "Background and Reasons for Combination
Transactions - Background of the Partnerships" and on page _____ under "Special
Meeting of the Partnerships - Voting Requirements". No limited partner in any
partnership owns more than 5% of a partnership based on revenue sharing
percentages except as set forth below:
<TABLE>
<CAPTION>
Name and Address of
Partnership Limited Partner Percent Ownership
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1993-I Partnership Ralph T. Corelli 5.26%
154 Cross Ridge Road
New Canaan, CT 06840
John M. Pratt, Jr. 7.37%
P. O. Box 206
Thomaston, CT 06787
Estate of Robert H. Krieble 10.53%
One Gold St., Apt 24H
Hartford, CT 06103
</TABLE>
-118-
<PAGE>
<TABLE>
<CAPTION>
Name and Address of
Partnership Limited Partner Percent Ownership
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
John P. Caval 21.05%
2971 S.E. St Lucie Blvd.
Stuart, FL 34997
1996-I Partnership John P. Caval 7.67%
2971 S.E. St Lucie Blvd.
Stuart, FL 34997
Shanghai Pacific Credit 5.37%
Corporation
13th Floor, Gloucester Tower
The Landmark, 11 Peddler St
Central, Hong Kong
</TABLE>
Selected Historical Financial and Operating Data For Individual Partnerships
The following tables present summary selected financial information
and operating data for each individual partnership for the periods indicated. It
should be read in conjunction with the financial statements and related notes
for the partnerships included elsewhere in this prospectus. The summary
financial information as of December 31, 1994, 1995 and 1996 and September 30,
1999 and for the nine months ended September 30, 1998 and 1999 is unaudited. The
results from the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
-119-
<PAGE>
1990 PARTNERSHIP
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
Years ended December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- --------- --------- ---------- ----------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales.............. $ 949 $ 804 $ 1,144 $ 1,014 $ 700
Interest and other..................... 4 6 5 6 6
---------- --------- --------- ---------- ----------
Total revenues....................... 953 810 1,149 1,020 706
---------- --------- --------- ---------- ----------
Expenses:
Operating costs........................ 180 187 204 149 158
General and administrative costs....... 50 46 51 55 53
Depreciation, depletion, and
amortization........................... 375 344 301 257 234
Interest............................... 8 21 49 50 48
---------- --------- --------- ---------- ----------
Total expenses....................... 613 598 605 511 493
---------- --------- --------- ---------- ----------
Net income (loss)...................... $ 340 $ 212 $ 544 $ 509 $ 213
========== ========= ========= ========== ==========
Statement of Cash Flows Data:
Net cash provided by operating
activities.............................. $ 715 $ 555 $ 704 $ 822 $ 589
Net cash used in investing activities... (81) (319) (46) (198) (48)
Net cash provided by (used in)
financing activities.................... (604) (272) (653) (625) (582)
Net increase (decrease) in
cash and cash equivalents............ 30 (36) 5 0 (40)
EBITDA*................................. 722 576 894 816 495
Cash distributions...................... 692 601 670 762 612
Limited partner's cash distributions
per $1000 investment................. 160 138 142 147 118
Balance Sheet Data:
Cash and cash equivalents............... $ 145 $ 109 $ 114 $ 114 $ 74
Oil and gas properties, net at book
value................................... 1,911 1,886 1,631 1,572 1,385
Total assets............................ 2,229 2,212 2,068 1,970 1,582
Total liabilities....................... 201 521 503 657 669
Limited partners' equity................ 2,008 1,702 1,545 1,292 934
General partners' equity................ 20 (11) 20 21 (21)
Limited partner's book value per
$1000 investment..................... 516 438 398 332 240
Production:
Oil production (MBbls).................. 8 7 7 5 3
Natural gas production (MMcf)........... 474 441 417 344 313
Equivalent production (MMcfe)........ 519 486 460 373 333
Average sales price:
Oil price (per/Bbl) .................... $ 15.31 $ 16.82 $ 21.27 $ 20.11 $ 13.45
Natural gas price (per/Mcf)............. 1.76 1.54 2.38 2.66 2.09
Average sales price (per Mcfe)....... 1.83 1.66 2.49 2.72 2.10
Operating and Overhead
Costs (per.Mcfe):
Lease operating expense ................ 0.21 0.26 0.27 0.28 0.32
Production taxes........................ 0.14 0.12 0.18 0.12 0.16
General and administrative
expense................................ 0.10 0.10 0.11 0.15 0.16
---------- --------- --------- ---------- ----------
Total................................ 0.45 0.48 0.56 0.55 0.64
---------- --------- --------- ---------- ----------
Cash Operating Margin (per Mcfe)......... $ 1.38 $ 1.18 $ 1.93 $ 2.17 $ 1.46
========== ========= ========= ========== ==========
Other:
Depreciation, depletion and amortization--
oil and gas properties (per Mcfe)..... 0.72 0.71 0.65 0.69 0.7
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)..................... 3,245 2,804 2,724 2,524 2,217
Oil (MBbls)............................ 24 17 21 17 14
Total (MMcfe)........................ 3,390 2,904 2,853 2,628 2,301
Estimated Future Net Revenues ($MM)*..... $ 5,515 $ 4,725 $ 9,415 $ 4,865 $ 2,510
Present Value ($MM)*..................... 3,481 2,982 5,942 3,071 1,584
<CAPTION>
Nine Months
Ended Sept 30,
1998 1999
---------- -----------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales.............. $ 547 $ 460
Interest and other..................... 4 3
---------- -----------
Total revenues....................... 551 463
---------- -----------
Expenses:
Operating costs........................ 112 102
General and administrative costs....... 38 33
Depreciation, depletion, and
amortization........................... 181 159
Interest............................... 40 42
---------- -----------
Total expenses....................... 371 336
---------- -----------
Net income (loss)...................... $ 180 $ 127
========== ===========
Statement of Cash Flows Data:
Net cash provided by operating
activities.............................. $ 423 $ 294
Net cash used in investing activities... (58) (30)
Net cash provided by (used in)
financing activities.................... (423) (262)
Net increase (decrease) in
cash and cash equivalents............ (58) 2
EBITDA*................................. 401 328
Cash distributions...................... 450 289
Limited partner's cash distributions
per $1000 investment................. 87 56
Balance Sheet Data:
Cash and cash equivalents............... $ 56 $ 76
Oil and gas properties, net at book
value................................... 1,449 1,257
Total assets............................ 1,705 1,451
Total liabilities....................... 662 699
Limited partners' equity................ 1,044 773
General partners' equity................ (1) (21)
Limited partner's book value per
$1000 investment..................... 269 199
Production:
Oil production (MBbls).................. 3 2
Natural gas production (MMcf)........... 240 208
Equivalent production (MMcfe)........ 255 221
Average sales price:
Oil price (per/Bbl) .................... $ 13.93 $ 16.05
Natural gas price (per/Mcf)............. 2.13 2.04
Average sales price (per Mcfe)....... 2.14 2.08
Operating and Overhead
Costs (per.Mcfe):
Lease operating expense ................ 0.28 0.31
Production taxes........................ 0.16 0.15
General and administrative
expense.............................. 0.15 0.15
---------- -----------
Total................................ 0.59 0.61
---------- -----------
Cash Operating Margin (per Mcfe)......... $ 1.55 $ 1.47
========== ===========
Other:
Depreciation, depletion and amortization--
oil and gas properties (per Mcfe)..... 0.71 0.72
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)..................... N/A N/A
Oil (MBbls)............................ N/A N/A
Total (MMcfe)........................ N/A N/A
Estimated Future Net Revenues ($MM)*..... N/A N/A
Present Value ($MM)*..................... N/A N/A
</TABLE>
______________
*See Definitions
-120-
<PAGE>
1991 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------- ---------- -----------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales........................ $1,410 $1,427 $ 1,454 $ 1,145 $ 1,088
Interest and other............................... 3 6 5 5 10
------ ------ ------- ------- -------
Total revenues................................. 1,413 1,433 1,459 1,150 1,098
------ ------ ------- ------- -------
Expenses:
Operating costs.................................. 326 349 298 234 241
General and administrative costs................. 71 75 71 61 67
Depreciation, depletion, and amortization........ 402 466 362 249 304
Interest......................................... 8 47 62 51 48
------ ------ ------- ------- -------
Total expenses................................. 807 937 793 595 660
------ ------ ------- ------- -------
Net income (loss)................................... $ 606 $ 496 $ 666 $ 555 $ 438
====== ====== ======= ======= =======
Statement of Cash Flows Data:
Net cash provided by operating activities........... $1,008 $ 963 $ 1,013 $ 832 $ 772
Net cash used in investing activities............... (280) (94) (61) 12 (196)
Net cash provided by (used in)
financing activities............................... (715) (893) (942) (831) (613)
Net increase (decrease) in cash and cash
equivalents...................................... 14 (24) 9 13 (38)
EBITDA*............................................. 1,016 1,010 1,089 856 791
Cash distributions.................................. 977 1,004 956 808 788
Limited partner's cash distributions per
$1000 investment................................. $ 196 $ 202 $ 183 $ 137 $ 132
Balance Sheet Data:
Cash and cash equivalents........................... $ 124 $ 100 $ 109 $ 122 $ 84
Oil and gas properties, net at book value........... 2,586 2,214 1,914 1,653 1,545
Total assets........................................ 2,926 2,535 2,291 1,999 1,822
Total liabilities................................... 316 582 628 589 762
Limited partners' equity............................ 2,595 1,957 1,657 1,405 1,054
General partners' equity............................ 15 (4) 6 5 6
Limited partner's book value per $1000
investment....................................... 580 437 370 314 235
Production:
Oil production (MBbls).............................. 19 20 13 9 11
Natural gas production (MMcf)....................... 653 681 489 362 429
Equivalent production (MMcfe).................... 768 803 569 414 497
Average sales price:
Oil price (per/Bbl)................................. $14.03 $16.91 $ 20.86 $ 19.18 $ 12.42
Natural gas price (per/Mcf)......................... 1.75 1.59 2.41 2.71 2.21
Average sales price (per Mcfe)................... 1.84 1.78 2.56 2.77 2.19
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................. 0.29 0.31 0.35 0.37 0.31
Production taxes.................................... 0.13 0.13 0.18 0.19 0.18
General and administrative expense.................. 0.09 0.09 0.13 0.15 0.13
------ ------ ------- ------- -------
Total............................................ 0.51 0.53 0.66 0.71 0.62
------ ------ ------- ------- -------
Cash Operating Margin (per Mcfe)....................... $ 1.33 $ 1.25 $ 1.90 $ 2.06 $ 1.57
====== ====== ======= =======
Other:
Depreciation, depletion and
amortization--oil
and gas properties............................... 0.52 0.58 0.64 0.6 0.61
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf).................................. 5,035 4,354 3,570 2,862 2,673
Oil (MBbls)......................................... 114 93 73 47 42
Total (MMcfe)....................................... 5,718 4,915 4,010 3,147 2,925
Estimated Future Net Revenues ($MM)*................... $9,426 $8,102 $12,699 $ 6,226 $ 3,146
Present Value ($MM)*................................... 6,031 5,184 8,126 3,984 2,013
<CAPTION>
Nine Months
Ended Sept 30,
------------------------
1998 1999
----------- ----------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales........................ $ 783 $ 731
Interest and other............................... 9 3
-------- -------
Total revenues................................. 792 734
-------- -------
Expenses:
Operating costs.................................. 179 155
General and administrative costs................. 48 48
Depreciation, depletion, and amortization........ 212 214
Interest......................................... 39 51
-------- -------
Total expenses................................. 478 468
-------- -------
Net income (loss)................................... $ 314 $ 266
======== =======
Statement of Cash Flows Data:
Net cash provided by operating activities........... $ 550 $ 468
Net cash used in investing activities............... (198) (33)
Net cash provided by (used in)
financing activities............................... (380) (440)
Net increase (decrease) in cash and cash
equivalents...................................... (27) (5)
EBITDA*............................................. 565 532
Cash distributions.................................. 548 487
Limited partner's cash distributions per
$1000 investment................................. $ 92 $ 82
Balance Sheet Data:
Cash and cash equivalents........................... $ 94 $ 79
Oil and gas properties, net at book value........... 1,638 1,364
Total assets........................................ 1,951 1,649
Total liabilities................................... 775 809
Limited partners' equity............................ 1,177 836
General partners' equity............................ (1) 4
Limited partner's book value per $1000
investment....................................... 263 187
Production:
Oil production (MBbls).............................. 8 7
Natural gas production (MMcf)....................... 297 305
Equivalent production (MMcfe).................... 347 345
Average sales price:
Oil price (per/Bbl)................................. $ 12.81 $ 15.18
Natural gas price (per/Mcf)......................... 2.28 2.07
Average sales price (per Mcfe)................... 2.26 2.12
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................. 0.33 0.30
Production taxes.................................... 0.18 0.15
General and administrative expense.................. 0.14 0.14
-------- -------
Total............................................ 0.65 0.59
-------- -------
Cash Operating Margin (per Mcfe)....................... $ 1.61 $ 1.53
======== =======
Other:
Depreciation, depletion and
amortization--oil
and gas properties............................... 0.61 0.62
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf).................................. N/A N/A
Oil (MBbls)......................................... N/A N/A
Total (MMcfe)....................................... N/A N/A
Estimated Future Net Revenues ($MM)*................... N/A N/A
Present Value ($MM)*................................... N/A N/A
</TABLE>
________________
*See Definitions
-121-
<PAGE>
1992 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------ ------------- ------------- -------------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales.............. $1,226 $1,366 $2,038 $1,865 $1,383
Interest and other..................... 71 30 7 11 11
------------- ------------ ------------- ------------- -------------
Total revenues....................... 1,297 1,396 2,045 1,876 1,394
------------- ------------ ------------- ------------- -------------
Expenses:
Operating costs........................ 267 397 432 384 382
General and administrative costs....... 68 75 103 106 95
Depreciation, depletion, and........... 468 518 521 455 456
Interest............................... 0 0 4 25 39
------------- ------------ ------------- ------------- -------------
Total expenses....................... 803 990 1,060 970 972
------------- ------------ ------------- ------------ -------------
Net income (loss)......................... $494 $406 $985 $906 $422
============= ============ ============= ============= =============
Statement of Cash Flows Data:
Net cash provided by operating............ $962 $923 $1,434 $1,389 $963
Net cash used in investing activities..... (1,666) (1,297) (107) (226) (118)
Net cash provided by (used in)
financing activities................... (958) (796) (1,269) (1,237) (903)
Net increase (decrease) in cash and cash
equivalents............................ (1,662) (1,169) 58 (74) (58)
EBITDA*................................... 962 923 1,511 1,386 916
Cash distributions........................ 951 1,030 1,371 1,410 1,028
Limited partner's cash distributions per
$1000 investment....................... $114 $124 $165 $169 $123
Balance Sheet Data:
Cash and cash equivalents................. $1,313 $144 $202 $128 $70
Oil and gas properties, net at book
value..................................... 3,539 4,318 3,905 3,676 3,338
Total assets.............................. 5,151 4,743 4,485 4,149 3,613
Total liabilities......................... 52 192 319 487 557
Limited partners' equity.................. 5,068 4,545 4,146 3,647 3,052
General partners' equity.................. 31 6 20 15 4
Limited partner's book value per $1000
investment............................. 676 606 553 486 407
Production:
Oil production (MBbls).................... 13 3 29 25 25
Natural gas production (MMcf)............. 626 607 670 564 553
Equivalent production (MMcfe).......... 702 796 842 714 701
Average sales price:
Oil price (per/Bbl)....................... $14.08 $16.58 $20.52 $19.13 $12.68
Natural gas price (per/Mcf)............... 1.68 1.39 2.16 2.46 1.94
Average sales price (per Mcfe)......... 1.75 1.72 2.42 2.61 1.97
Operating and Overhead Costs (per Mcfe):
Lease operating expense................... 0.25 0.37 0.33 0.35 0.39
Production taxes.......................... 0.13 0.13 0.18 0.18 0.16
General and administrative expense........ 0.10 0.09 0.12 0.15 0.14
------------- ------------ ------------- ------------- -------------
Total.................................. 0.48 0.59 0.63 0.68 0.69
------------- ------------ ------------- ------------- -------------
Cash Operating Margin (per Mcfe)............. $1.27 $1.13 $1.79 $1.93 $1.28
============= ============ ============= ============= =============
Other:
Depreciation, depletion and amortization--oil
and gas properties..................... 0.67 0.65 0.62 0.64 0.65
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)........................ 5,333 6,508 6,832 6,389 5,850
Oil (MBbls)............................. 172 210 182 157 132
Total (MMcfe)............................ 6,366 7,768 7,927 7,334 6,647
Estimated Future Net Revenues................ $9,030 $11,019 $23,561 $11,999 $6,557
Present Value ($MM)*......................... 4,729 5,770 12,337 6,283 3,433
- ------------------
*See Definitions
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended Sept 30,
-----------------------
1998 1999
----------- ---------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales....................... $1,040 $882
Interest and other.............................. 9 3
----------- ---------
Total revenues................................ 1,049 885
----------- ---------
Expenses:
Operating costs................................. 269 234
General and administrative costs................ 76 61
Depreciation, depletion, and.................... 333 300
Interest........................................ 31 38
----------- ---------
Total expenses................................ 709 633
----------- ---------
Net income (loss).................................. $340 $252
=========== =========
Statement of Cash Flows Data:
Net cash provided by operating..................... $780 $528
Net cash used in investing activities.............. (110) (43)
Net cash provided by (used in)
financing activities............................... (676) (449)
Net increase (decrease) in cash and cash...........
equivalents..................................... (6) 37
EBITDA*............................................ 704 590
Cash distributions................................. 840 518
Limited partner's cash distributions per
$1000 investment................................ $101 $62
Balance Sheet Data:
Cash and cash equivalents.......................... $123 $107
Oil and gas properties, net at book................ 3,454 3,081
Total assets....................................... 3,754 3,436
Total liabilities.................................. 593 646
Limited partners' equity........................... 3,162 2,783
General partners' equity........................... (1) 7
Limited partner's book value per $1000
investment...................................... 422 371
Production:
Oil production (MBbls)............................. 19 16
Natural gas production (MMcf)...................... 399 360
Equivalent production (MMcfe)................... 512 456
Average sales price:..................................
Oil price (per/Bbl)................................ $13.22 $15.06
Natural gas price (per/Mcf)........................ 1.98 1.78
Average sales price (per Mcfe).................. 2.03 1.93
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................ 0.39 0.38
Production taxes................................... 0.14 0.13
General and administrative expense................. 0.15 0.13
----------- ---------
Total........................................... 0.68 0.64
----------- ---------
Cash Operating Margin (per Mcfe) $1.35 $1.29
=========== =========
Other:
Depreciation, depletion and amortization--oil
and gas properties.............................. 0.65 0.66
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)................................. N/A N/A
Oil (MBbls)...................................... N/A N/A
Total (MMcfe)..................................... N/A N/A
Estimated Future Net Revenues ($MM)* N/A N/A
Present Value ($MM)*.................................. N/A N/A
</TABLE>
-122-
<PAGE>
1993 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------ ------------- ------------- -------------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales..................... $ 629 $ 1,454 $ 2,471 $ 2,368 $ 1,514
Interest and other............................ 69 45 6 9 9
--------- ---------- ----------- ----------- -----------
Total revenues.............................. 698 1,499 2,477 2,377 1,523
--------- ---------- ----------- ----------- -----------
Expenses:
Operating costs............................... 144 451 698 689 584
General and administrative costs.............. 34 69 116 119 95
Depreciation, depletion, and
amortization............................... 209 481 645 540 518
Reduction of carrying value of oil and
gas properties............................. 0 0 0 0 245
Interest...................................... 0 0 38 32 43
--------- ---------- ----------- ----------- -----------
Total expenses.............................. 387 1,001 1,497 1,380 1,485
--------- ---------- ----------- ----------- -----------
Net income (loss)................................ $ 311 $ 498 $ 980 $ 997 $ 38
========= ========== =========== =========== ===========
Statement of Cash Flows Data:
Net cash provided by operating
activities.................................... $ 520 $ 979 $ 1,824 $ 1,549 $ 1,003
Net cash used in investing activities............ (1,279) (2,828) (62) (372) 82
Net cash provided by (used in)
financing activities.......................... 2,250 (1,085) (1,709) (1,188) (1,115)
Net increase (decrease) in cash and cash
equivalents................................... 1,491 (2,933) 53 (12) (29)
EBITDA*.......................................... 520 979 1,663 1,569 599
Cash distributions............................... 442 973 1,530 1,545 1,051
Limited partner's cash distributions per
$1000 investment.............................. $ 61 $ 134 $ 211 $ 213 $ 145
Balance Sheet Data:
Cash and cash equivalents........................ $ 3,005 $ 71 $ 124 $ 112 $ 83
Oil and gas properties, net at book
value......................................... 1,958 4,305 3,723 3,556 2,712
Total assets..................................... 5,080 5,012 4,311 4,114 3,018
Total liabilities................................ 27 452 301 651 569
Limited partners' equity......................... 5,047 4,552 3,993 3,446 2,453
General partners' equity......................... 6 8 17 17 (4)
Limited partner's book value per $1000
investment.................................... 773 698 612 528 376
Production:
Oil production (MBbls)........................... 6 4 50 44 33
Natural gas production (MMcf).................... 345 549 775 573 591
Equivalent production (MMcfe)................. 379 803 1,075 836 788
Average sales price:
Oil price (per/Bbl).............................. $ 14.42 $ 16.97 $ 20.74 $ 19.82 $ 12.86
Natural gas price (per/Mcf)...................... 1.58 1.34 1.85 2.61 1.85
Average sales price (per Mcfe)................ 1.66 1.81 2.30 2.83 1.92
Operating and Overhead Costs (per Mcfe):
Lease operating expense.......................... 0.25 0.44 0.49 0.60 0.59
Production taxes................................. 0.13 0.13 0.16 0.22 0.15
General and administrative expense............... 0.09 0.09 0.11 0.14 0.12
--------- ---------- ----------- ----------- -----------
Total......................................... 0.47 0.66 0.76 0.96 0.86
--------- ---------- ----------- ----------- -----------
Cash Operating Margin (per Mcfe).................... $ 1.19 $ 1.15 $ 1.54 $ 1.87 $ 1.06
========= ========== =========== =========== ===========
Other:
Depreciation, depletion and amortization--oil
and gas properties............................ 0.55 0.6 0.6 0.64 0.66
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)............................... 2,799 6,152 5,249 4,763 4,072
Oil (MBbls)...................................... 138 303 251 210 154
Total (MMcfe).................................... 3,626 7,971 6,759 6,029 5,004
Estimated Future Net Revenues ($MM)*................ $ 4,718 $ 10,370 $ 17,852 $ 9,038 $ 4,754
Present Value ($MM)*................................ 2,691 5,915 10,182 5,155 2,712
<CAPTION>
Nine Months
Ended Sept 30,
--------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales..................... $ 1,204 $ 1,028
Interest and other............................ 7 4
----------- ------------
Total revenues.............................. 1,211 1,032
----------- ------------
Expenses:
Operating costs............................... 441 373
General and administrative costs.............. 78 60
Depreciation, depletion, and
amortization.................................. 371 303
Reduction in carrying value of oil & gas
properties.................................... 0 0
Interest...................................... 36 30
----------- ------------
Total expenses.............................. 926 766
----------- ------------
Net income (loss)................................ $ 285 $ 266
=========== ============
Statement of Cash Flows Data:
Net cash provided by operating
activities....................................... $ 788 $ 501
Net cash used in investing activities............ 83 (27)
Net cash provided by (used in)
financing activities............................. (786) (454)
Net increase (decrease) in cash and cash
equivalents................................... 84 21
EBITDA*.......................................... 692 600
Cash distributions............................... 847 478
Limited partner's cash distributions per
$1000 investment.............................. $ 117 $ 66
Balance Sheet Data:
Cash and cash equivalents........................ $ 196 $ 103
Oil and gas properties, net at book
value............................................ 3,103 2,435
Total assets..................................... 3,560 2,808
Total liabilities................................ 661 570
Limited partners' equity......................... 2,902 2,233
General partners' equity......................... (3) 5
Limited partner's book value per $1000
investment.................................... 445 342
Production:
Oil production (MBbls)........................... 25 24
Natural gas production (MMcf).................... 462 350
Equivalent production (MMcfe)................. 613 495
Average sales price:
Oil price (per/Bbl).............................. $ 13.51 $ 15.47
Natural gas price (per/Mcf)...................... 1.87 1.87
Average sales price (per Mcfe)................ 1.96 2.08
Operating and Overhead Costs (per Mcfe):
Lease operating expense.......................... 0.58 0.60
Production taxes................................. 0.14 0.15
General and administrative expense............... 0.13 0.12
----------- ------------
Total......................................... 0.85 0.87
----------- ------------
Cash Operating Margin (per Mcfe).................... $ 1.11 $ 1.21
=========== ============
Other:
Depreciation, depletion and amortization--oil
and gas properties............................ 0.6 0.61
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)............................... N/A N/A
Oil (MBbls)...................................... N/A N/A
Total (MMcfe).................................... N/A N/A
Estimated Future Net Revenues ($MM)*................ N/A N/A
Present Value ($MM)*................................ N/A N/A
</TABLE>
___________________
*See Definitions
-123-
<PAGE>
1993-I PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------ ------------- ------------ -------------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales.................... $ 188 $ 589 $ 952 $ 938 $ 691
Interest and other........................... 26 27 2 3 3
------------- ------------ ------------- ------------ -------------
Total revenues............................. 214 616 954 941 694
------------- ------------ ------------- ------------ -------------
Expenses:
Operating costs.............................. 38 130 213 197 189
General and administrative costs............. 4 13 24 23 22
Depreciation, depletion, and
amortization.............................. 47 198 255 229 249
Reduction of carrying value of oil
and gas properties........................ 0 0 0 0 100
Interest..................................... 0 0 15 20 25
------------- ------------ ------------- ------------ -------------
Total expenses............................. 89 341 507 469 585
------------- ------------ ------------- ------------ -------------
Net income (loss)............................... $ 125 $ 275 $ 447 $ 472 $ 109
============= ============ ============= ============ =============
Statement of Cash Flows Data:
Net cash provided by operating
activities................................... $ 172 $ 473 $ 725 $ 684 $ 426
Net cash used in investing activities........... (512) (1,431) (74) (99) (82)
Net cash provided by (used in)
financing activities......................... 1,489 (464) (617) (604) (363)
Net increase (decrease) in cash and cash
equivalents.................................. 1,150 (1,422) 34 (19) (19)
EBITDA*......................................... 172 473 717 721 384
Cash distributions.............................. 141 445 689 681 474
Limited partner's cash distributions per
$1000 investment............................. $ 52 $ 165 $ 255 $ 252 $ 175
Balance Sheet Data:
Cash and cash equivalents....................... $ 1,450 $ 29 $ 63 $ 44 $ 25
Oil and gas properties, net at book
value........................................ 692 1,925 1,743 1,614 1,346
Total assets.................................... 2,184 2,148 1,948 1,820 1,550
Total liabilities............................... 6 152 193 274 368
Limited partners' equity........................ 2,175 1,989 1,745 1,534 1,171
General partners' equity........................ 3 7 10 12 11
Limited partner's book value per $1000
investment................................... 920 841 738 649 496
Production:
Oil production (MBbls).......................... 4 15 16 14 11
Natural gas production (MMcf)................... 70 216 276 260 278
Equivalent production (MMcfe)................ 92 303 372 342 344
Average sales price:
Oil price (per/Bbl)............................. $ 13.27 $ 16.88 $ 21.19 $ 19.40 $ 12.05
Natural gas price (per/Mcf)..................... 2.00 1.59 2.22 2.59 2.01
Average sales price (per Mcfe)............... 2.05 1.94 2.56 2.74 2.01
Operating and Overhead Costs (per Mcfe):
Lease operating expense......................... 0.28 0.30 0.38 0.36 0.35
Production taxes................................ 0.13 0.13 0.19 0.22 0.20
General and administrative expense.............. 0.05 0.04 0.06 0.07 0.06
------------- ------------ ------------- ------------ -------------
Total........................................ 0.46 0.47 0.63 0.65 0.61
------------- ------------ ------------- ------------ -------------
Cash Operating Margin (per Mcfe).................... $ 1.59 $ 1.47 $ 1.93 $ 2.09 $ 1.40
============= ============ ============= ============ =============
Other:
Depreciation, depletion and amortization--oil
and gas properties........................... 0.51 0.65 0.69 0.67 0.72
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).............................. 885 2,462 2,150 2,106 1,789
Oil (MBbls)..................................... 39 108 90 76 57
Total (MMcfe)................................... 1,118 3,111 2,690 2,565 2,136
Estimated Future Net Revenues ($MM)*................ $ 1,754 $ 4,882 $ 8,458 $ 4,602 $ 2,278
Present Value ($MM)*................................ 1,036 2,884 4,996 2,718 1,346
<CAPTION>
Nine Months
Ended Sept 30,
--------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales.................... $ 528 $ 433
Interest and other........................... 2 2
----------- ------------
Total revenues............................. 530 435
----------- ------------
Expenses:
Operating costs.............................. 140 111
General and administrative costs............. 17 18
Depreciation, depletion, and
amortization................................. 188 147
Reduction in carrying value of oil & gas
properties................................... 0 0
Interest..................................... 20 23
----------- ------------
Total expenses............................. 365 299
----------- ------------
$ 165 $ 136
Net income (loss)............................... =========== ============
Statement of Cash Flows Data:
Net cash provided by operating
activities...................................... $ 343 $ 338
Net cash used in investing activities........... (86) (28)
Net cash provided by (used in)
financing activities............................ (246) (243)
Net increase (decrease) in cash and cash
equivalents.................................. 11 66
EBITDA*......................................... 373 305
Cash distributions.............................. 386 243
Limited partner's cash distributions per
$1000 investment............................. $ 143 $ 90
Balance Sheet Data:
Cash and cash equivalents....................... $ 55 $ 92
Oil and gas properties, net at book
value........................................... 1,512 1,228
Total assets.................................... 1,707 1,432
Total liabilities............................... 382 358
Limited partners' equity........................ 1,317 1,059
General partners' equity........................ 8 15
Limited partner's book value per $1000
investment................................... 558 448
Production:
Oil production (MBbls).......................... 8 7
Natural gas production (MMcf)................... 209 170
Equivalent production (MMcfe)................ 258 212
Average sales price:
Oil price (per/Bbl)............................. $ 12.89 $ 14.97
Natural gas price (per/Mcf)..................... 2.02 1.93
Average sales price (per Mcfe)............... 2.04 2.04
Operating and Overhead Costs (per Mcfe):
Lease operating expense......................... 0.37 0.38
Production taxes................................ 0.18 0.15
General and administrative expense.............. 0.07 0.09
----------- ------------
Total........................................ 0.62 0.62
----------- ------------
Cash Operating Margin (per Mcfe).................... $ 1.42 $ 1.42
=========== ============
Other:
Depreciation, depletion and amortization--oil
and gas properties........................... 0.73 0.69
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).............................. N/A N/A
Oil (MBbls)..................................... N/A N/A
Total (MMcfe)................................... N/A N/A
Estimated Future Net Revenues ($MM)*................ N/A N/A
Present Value ($MM)*................................ N/A N/A
</TABLE>
___________________
*See Definitions
-124-
<PAGE>
1995 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ----------- ---------- ----------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales......................... $ 0 $ 771 $ 1,919 $ 2,143 $ 1,553
Interest and other................................ 1 46 51 47 31
--------- --------- ----------- ---------- ----------
Total revenues .................................. 1 817 1,970 2,190 1,584
--------- --------- ----------- ---------- ----------
Expenses:
Operating costs................................... 0 273 478 525 454
General and administrative costs.................. 0 36 94 109 101
Depreciation, depletion, and
amortization...................................... 0 260 435 469 474
--------- --------- ----------- ---------- ----------
Total expenses................................... 0 569 1,007 1,103 1,029
--------- --------- ----------- ---------- ----------
Net income (loss)................................... $ 1 $ 248 $ 963 $ 1,087 $ 555
========= ========= =========== ========== ==========
Statement of Cash Flows Data:
Net cash provided by operating...................... $ 1 $ 508 $ 1,123 $ 1,603 $ 1,186
Net cash used in investing activities............... (585) (2,519) (1,075) (534) (135)
Net cash provided by (used in)
financing activities............................... 591 4,264 (1,210) (1,502) (1,193)
Net increase (decrease) in cash and cash
equivalents........................................ 7 2,253 (1,163) (433) (142)
EBITDA*............................................. 1 508 1,398 1,556 1,030
Cash distributions.................................. 0 452 1,210 1,502 1,193
Limited partner's cash distributions per
$1000 investment................................... $ 0 $ 60 $ 160 $ 199 $ 158
Balance Sheet Data:
Cash and cash equivalents........................... $ 7 $ 2,260 $ 1,098 $ 664 $ 523
Oil and gas properties, net at book value........... 585 2,844 3,485 3,551 3,212
Total assets........................................ 671 5,373 5,054 4,659 4,011
Total liabilities................................... 10 125 54 74 64
Limited partners' equity............................ 661 5,242 4,976 4,555 3,933
General partners' equity............................ 0 6 24 30 14
Limited partner's book value per $1000
investment......................................... 97 770 731 669 578
Production:
Oil production (MBbls).............................. 0 21 26 28 26
Natural gas production (MMcf)....................... 0 314 676 655 654
Equivalent production (MMcfe)..................... 0 443 833 824 810
Average sales price:
Oil price (per/Bbl)................................. N/A $ 16.80 $ 21.17 $ 20.29 $ 13.33
Natural gas price (per/Mcf)......................... N/A 1.31 2.02 2.40 1.85
Average sales price (per Mcfe).................... N/A 1.74 2.30 2.60 1.92
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................. N/A 0.52 0.42 0.45 0.42
Production taxes.................................... N/A 0.09 0.16 0.19 0.14
General and administrative expense.................. N/A 0.08 0.11 0.13 0.12
--------- --------- ----------- ---------- ----------
Total............................................ 0 0.69 0.69 0.77 0.68
--------- --------- ----------- ---------- ----------
Cash Operating Margin (per Mcfe)...................... N/A $ 1.05 $ 1.61 $ 1.83 $ 1.24
========= ========= =========== ========== ==========
Other:
Depreciation, depletion and amortization--oil
and gas properties................................. N/A 0.59 0.52 0.57 0.59
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).................................. 1,104 5,368 7,079 6,556 5,902
Oil (MBbls)......................................... 38 183 232 222 196
Total (MMcfe)....................................... 1,330 6,466 8,471 7,885 7,075
Estimated Future Net Revenues ($MM)*.................. $ 1,655 $ 8,045 $ 23,767 $ 12,354 $ 6,389
Present Value ($MM)*.................................. 937 4,556 13,460 6,996 3,618
<CAPTION>
Nine Months
Ended Sept 30,
----------------------
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales......................... $ 1,209 $ 1,244
Interest and other................................ 23 18
--------- ---------
Total revenues................................... 1,232 1,262
--------- ---------
Expenses:
Operating costs................................... 333 346
General and administrative costs.................. 80 79
Depreciation, depletion, and
amortization...................................... 361 360
Interest.......................................... 0 0
--------- ---------
Total expenses................................... 774 785
--------- ---------
Net income (loss)................................... $ 458 $ 477
========= =========
Statement of Cash Flows Data:
Net cash provided by operating...................... $ 937 $ 736
Net cash used in investing activities............... (117) (167)
Net cash provided by (used in)
financing activities................................ (979) (703)
Net increase (decrease) in cash and cash
equivalents........................................ (159) (134)
EBITDA*............................................. 819 837
Cash distributions.................................. 979 703
Limited partner's cash distributions per
$1000 investment.................................... $ 129 $ 93
Balance Sheet Data:
Cash and cash equivalents........................... $ 505 $ 388
Oil and gas properties, net at book value........... 3,307 3,018
Total assets........................................ 4,096 3,780
Total liabilities................................... 32 60
Limited partners' equity............................ 4,050 3,693
General partners' equity............................ 14 27
Limited partner's book value per $1000
investment......................................... 595 543
Production:
Oil production (MBbls).............................. 20 20
Natural gas production (MMcf)....................... 499 473
Equivalent production (MMcfe)..................... 618 591
Average sales price:
Oil price (per/Bbl)................................. $ 13.95 $ 16.47
Natural gas price (per/Mcf) ........................ 1.87 1.95
Average sales price (per Mcfe).................... 1.96 2.11
Operating and Overhead Costs (per Mcfe):
Lease operating expense............................. 0.41 0.43
Production taxes.................................... 0.13 0.16
General and administrative expense.................. 0.13 0.13
--------- ---------
Total............................................ 0.67 0.72
--------- ---------
Cash Operating Margin (per Mcfe)...................... $ 1.29 $ 1.39
========= =========
Other:
Depreciation, depletion and amortization--oil
and gas properties................................ 0.58 0.61
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).................................. N/A N/A
Oil (MBbls)......................................... N/A N/A
Total (MMcfe)....................................... N/A N/A
Estimated Future Net Revenues ($MM)*.................. N/A N/A
Present Value ($MM)*.................................. N/A N/A
</TABLE>
_________________________
*See Definitions
-125-
<PAGE>
1996 PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Nine Months
Years ended December 31, Ended Sept 30,
--------------------------------------- ------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(in thousands, except per investment amounts
and as otherwise) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales............. $ 122 $ 642 $ 1,292 $ 980 $ 1,329
Interest and other.................... 32 147 111 93 18
-------- -------- -------- ------- --------
Total revenues.................... 154 789 1,403 1,073 1,347
-------- -------- -------- ------- --------
Expenses:
Operating costs....................... 21 133 378 247 369
General and administrative costs...... 11 33 99 87 106
Depreciation, depletion, and
amortization......................... 26 166 510 335 412
Reduction of carrying value of oil &
gas properties....................... 0 0 887 0 0
Interest.............................. 0 0 0 0 86
-------- -------- -------- ------- --------
Total expenses.................... 58 332 1,874 669 973
-------- -------- -------- ------- --------
Net income (loss)....................... $ 96 $ 457 ($471) $ 404 $ 374
======== ======== ======== ======= ========
Statement of Cash Flows Data:
Net cash provided by operating
activities............................. $ 46 $ 458 $ 968 $ 738 $ 700
Net cash used in investing
activities............................. (707) (1,967) (3,685) (2,515) (3,233)
Net cash provided by (used in)
financing activities................... 3,058 4,149 (1,046) (789) 1,297
Net increase (decrease) in cash and
cash equivalents....................... 2,398 2,639 (3,762) (2,566) (1,237)
EBITDA*................................. 122 623 39 739 872
Cash distributions...................... 88 417 1,035 789 917
Limited partner's cash distributions
per $1000 investment................... $ 8 $ 39 $ 97 $ 74 $ 86
Balance Sheet Data:
Cash and cash equivalents............... $ 2,398 $ 5,037 $ 1,275 $ 2,471 $ 38
Oil and gas properties, net at book
value.................................. 677 2,479 4,767 4,660 4,599
Total assets............................ 3,159 7,875 6,316 7,439 7,958
Total liabilities....................... 5 115 72 64 2,258
Limited partners' equity................ 3,151 7,736 6,231 7,356 5,700
General partners' equity................ 3 24 13 19 0
Limited partner's book value per
$1000 investment........................ 327 803 647 764 592
Production:
Oil production (MBbls).................. 1 9 21 17 20
Natural gas production (MMcf)........... 53 183 537 414 515
Equivalent production (MMcfe)......... 59 236 661 518 633
Average sales price:
Oil price (per/Bbl)..................... $ 23.22 $ 19.59 $ 13.23 $ 13.17 $ 16.00
Natural gas price (per/Mcf)............. 1.86 2.56 1.90 1.81 1.97
Average sales price (per Mcfe)........ 2.06 2.72 1.95 1.89 2.10
Operating and Overhead Costs (per Mcfe):
Lease operating expense................. 0.15 0.36 0.38 0.31 0.42
Production taxes........................ 0.19 0.21 0.19 0.17 0.16
General and administrative expense...... 0.19 0.14 0.15 0.17 0.17
-------- -------- -------- ------- --------
Total................................. 0.53 0.71 0.72 0.65 0.75
-------- -------- -------- ------- --------
Cash Operating Margin (per Mcfe)............. $ 1.53 $ 2.01 $ 1.23 $ 1.24 $ 1.35
-------- -------- -------- ------- --------
Other:
Depreciation, depletion and
amortization--oil
and gas properties.................... 0.43 0.7 0.77 0.65 0.65
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf)...................... 2,412 3,879 7,628 N/A N/A
Oil (MBbls)........................... 22 141 182 N/A N/A
Total (MMcfe).......................... 2,541 4,722 8,719 N/A N/A
Estimated Future Net Revenues ($MM)*......... $ 7,536 $ 7,642 $ 8,297 N/A N/A
Present Value ($MM)*......................... 4,331 4,392 4,768 N/A N/A
</TABLE>
_________________________
* See Definitions
-126-
<PAGE>
1996-I PARTNERSHIP
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Nine Months
Years ended December 31, Ended Sept 30,
------------------------
1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
(in thousands, except per investment amounts and as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas sales....................... $ 0 $ 379 $ 784 $ 1,214 $ 922 $ 1,184
Interest and other.............................. 0 43 84 97 80 16
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............................. - 422 868 1,311 1,002 1,200
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Operating costs................................. 0 61 133 257 166 268
General and administrative costs................ 0 9 19 47 37 50
Depreciation, depletion, and amortization....... 0 94 226 444 253 428
Reduction of carrying value of oil & gas
properties..................................... 0 0 0 649 0 0
Interest........................................ 0 0 0 0 0 77
----------- ----------- ----------- ----------- ----------- -----------
Total expenses.............................. - 164 378 1,397 456 823
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ 0 $ 258 $ 490 ($86) $ 546 $ 377
=========== =========== =========== =========== =========== ===========
Statement of Cash Flows Data:
Net cash provided by operating activities......... $ 0 $ 287 $ 652 $ 1,005 $ 757 $ 661
Net cash used in investing activities............. (420) (557) (1,284) (2,858) (1,652) (2,681)
Net cash provided by (used in) financing
activities...................................... 691 1,774 2,799 (1,038) (815) 1,065
Net increase (decrease) in cash and cash
equivalents..................................... 272 1,504 2,168 (2,891) (1,709) (955)
EBITDA*........................................... 0 352 716 357 800 882
Cash distributions................................ 19 270 533 1,038 815 835
Limited partner's cash distributions per $1000
investment...................................... $ 3 $ 36 $ 72 $ 139 $ 109 $ 112
Balance Sheet Data:
Cash and cash equivalents......................... $ 272 $ 1,775 $ 3,943 $ 1,052 $ 2,233 $ 97
Oil and gas properties, net at book value......... 420 883 1,942 3,707 3,340 3,343
Total assets...................................... 740 2,779 6,100 4,981 5,820 6,435
Total liabilities................................. 6 13 44 50 33 1,962
Limited partners' equity.......................... 736 2,758 6,025 4,904 5,758 4,450
General partners' equity.......................... (2) 8 31 27 29 23
Limited partner's book value per $1000 investment. 113 423 924 752 883 683
Production:
Oil production (MBbls)............................ 0 2 11 22 17 19
Natural gas production (MMcf)..................... 0 169 238 471 342 428
Equivalent production (MMcfe)................... 0 183 302 603 443 543
Average sales price:
Oil price (per/Bbl)............................... $ 0.00 $ 18.96 $ 20.09 $ 13.65 $ 14.29 $ 16.54
Natural gas price (per/Mcf)....................... 0.00 1.98 2.39 1.94 1.99 2.03
Average sales price (per Mcfe).................. 0.00 2.07 2.60 2.01 2.08 2.18
Operating and Overhead Costs (per Mcfe):
Lease operating expense........................... 0.00 0.17 0.24 0.26 0.23 0.34
Production taxes.................................. 0.00 0.16 0.19 0.17 0.15 0.15
General and administrative expense................ 0.00 0.05 0.06 0.08 0.08 0.09
----------- ----------- ----------- ----------- ----------- -----------
Total.......................................... 0.00 0.38 0.49 0.51 0.46 0.58
----------- ----------- ----------- ----------- ----------- -----------
Cash Operating Margin (per Mcfe).................... $ 0.00 $ 1.69 $ 2.11 $ 1.50 $ 1.62 $ 1.60
=========== =========== =========== =========== =========== ===========
Other:
Depreciation, depletion and amortization--oil
and gas properties.............................. 0 0.51 0.75 0.74 0.57 0.79
Estimated Net Proved Reserves (as of period end):
Natural gas (MMcf)............................. 1,021 2,077 2,624 5,510 N/A N/A
Oil (MBbls).................................... 10 55 74 207 N/A N/A
Total (MMcfe).................................. 1,084 2,408 3,073 6,759 N/A N/A
Estimated Future Net Revenues ($MM)*................ $ 1,748 $ 7,319 $ 5,557 $ 6,243 N/A N/A
Present Value ($MM)*................................ 1,038 4,346 3,300 3,707 N/A N/A
</TABLE>
________________________
*See Definitions
-127-
<PAGE>
INFORMATION CONCERNING INDIAN
General
Indian is an Oklahoma corporation founded in 1981 and engaged in the
exploration, development and production of natural gas, and to a lessor extent,
crude oil. In addition to the above activities, Indian has made significant
acquisitions of producing oil and natural gas properties during the last 19
years. The most significant acquisition was in December 1997. For approximately
$30.2 million, Indian acquired certain producing Oklahoma and western Arkansas
properties. Indian funded the purchase through borrowings under a line of credit
and term note.
As of September 30, 1999, Indian operated 86 of the 453 wells in which
it owns a working interest. Operations are concentrated in Oklahoma and
Arkansas. Total net production is 10,903 Mcf/day of natural gas and 156 Bbls/day
of oil and condensate. The company's production is located primarily in Oklahoma
and western Arkansas, with minor amounts of production in Kansas and Texas.
Total net proved reserves are 60.1 Bcfe (93% natural gas), with proved developed
reserves representing 66% of the total and proved undeveloped reserves
accounting for 34% of the total. The total Reserve Value of Indian's proved
reserves has been estimated at $45.5 million.
Indian has an inventory of 69 proved undeveloped locations to be
drilled. Of these locations, 63 are located in Oklahoma, primarily in the Strong
City field in the Anadarko Basin of western Oklahoma. The remaining six
locations are in the Massard field of western Arkansas, but they represent 44%
of the total proved undeveloped reserve value.
Prior to consummation of the combination transaction, Indian expects
to dispose of minor properties consisting of nonoperated interests in
approximately 173 gross (23.93 net) wells with an aggregate Reserve Value of
approximately $1.5 million. If consummated, appropriate adjustments to Indian's
Exchange Value will be made to reflect this sale.
-128-
<PAGE>
Costs Incurred and Drilling Results
The following table shows certain information regarding the costs
incurred by Indian in acquisition, exploration and development activities during
the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30
---------------------------------------------- ---------------
1996 1997 1998 1999
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Property acquisition costs:
Proved......................... $ 451,500 $ 30,622,885 ----- ----
Development costs.............. 935,995 1,681,672 1,298,316 1,056,228
------------- -------------- ------------ ---------------
Total.......................... $ 1,387,495 $ 32,304,557 $ 1,298,316 $ 1,056,228
============= ============== ============ ===============
</TABLE>
Indian has acquired or drilled or participated in the drilling of
wells as set out in the table below for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
-------------------------------------------------------------------------
1996 1997 1998 1999
----------------------- ---------------------- --------------------- -------------------
Gross Net Gross Net Gross Net Gross Net
---------- ---------- -------- ---------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas................. 2 0.439 374 64.702 1 0.008 -- --
Oil................. 7 1.988 8 2.379 -- -- -- --
Dry................. -- -- -- -- -- -- -- --
---------- ---------- -------- ---------- --------- --------- --------- -------
Total............... 9 2.427 382 67.081 1 0.008 -- --
========== ========== ======== ========== ========= ========= ========= =======
Development wells:
Gas................. 5 0.605 3 0.118 12 1.267 5 0.82
Oil................. -- -- -- -- -- -- -- --
Dry................. 1 0.305 -- -- -- -- -- --
---------- ---------- -------- ---------- --------- --------- --------- -------
Total............... 6 0.910 3 0.118 12 1.267 5 0.82
========== ========== ======== ========== ========= ========= ========= =======
Exploratory wells:
Gas................. 4 0.726 3 0.344 2 0.392 -- --
Oil................. -- -- -- -- 1 0.254 -- --
Dry................. 7 1.043 4 0.847 3 0.475 -- --
---------- ---------- -------- ---------- --------- --------- --------- -------
Total............... 11 1.769 7 1.190 6 1.121 -- --
========== ========== ======== ========== ========= ========= ========= =======
</TABLE>
As of September 30, 1999, Indian was involved in the drilling,
testing or completing of 1 gross (.03 net) development well and no exploratory
wells.
-129-
<PAGE>
Acreage
The following table shows the developed and undeveloped oil and
gas lease and mineral acreage as of September 30, 1999 owned by Indian. Excluded
is acreage in which an interest is limited to royalty, overriding royalty and
other similar interests.
<TABLE>
<CAPTION>
Developed Undeveloped
-------------------------- ------------------------
Gross Net Gross Net
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Oklahoma................................ 147,622 24,417 15,813 2,653
Arkansas................................ 24,960 7,626 - -
Other................................... 4,000 1,838 - -
------------ ---------- ----------- ----------
Total................................... 176,582 33,881 15,813 2,653
============ ========== =========== ==========
</TABLE>
Productive Well Summary
The following table shows the ownership of Indian in productive
wells at September 30, 1999. Gross oil and gas wells include 4 wells with
multiple completions. Wells with multiple completions are counted only once for
purposes of the following table.
<TABLE>
<CAPTION>
Productive Wells
-----------------------------------
Gross Net
--------------- ----------------
<S> <C> <C>
Gas......................................... 387 66.88
Oil......................................... 66 12.38
--------------- ----------------
Total....................................... 453 79.26
=============== ================
</TABLE>
Selected Historical Financial and Operating Information
The following table presents a summary of selected financial
information and operating data for Indian for the periods indicated. It should
be read in conjunction with the financial statements and related notes included
elsewhere in this prospectus. The summary financial information as of and for
the nine months ended September 30, 1999 and 1998, is unaudited. The results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
-130-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- ----------- ----------- -----------
(in thousands, except as otherwise indicated) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Gas sales........................ $ 1,696 $ 1,312 $ 1,984 $ 2,358 $ 9,232 $ 7,079 $ 6,100
Oil sales........................ 584 709 1,114 998 783 582 631
Other income..................... 127 154 144 313 235 179 212
----------- ---------- ----------- ----------- ----------- ----------- -----------
Total revenues................ 2,407 2,175 3,243 3,669 10,249 7,840 6,943
----------- ---------- ----------- ----------- ----------- ----------- -----------
Operating costs.................. 889 875 1,175 1,259 3,476 2,616 2,386
General and administrative costs. 677 541 826 1,139 1,659 1,119 1,265
Depreciation, depletion and
amortization.................. 632 591 533 739 4,029 2,973 2,578
Interest......................... 376 461 477 509 3,120 2,349 2,049
Reduction of carrying cost
of oil and natural gas
properties.................... - - - - 4,000 - -
----------- ---------- ----------- ----------- ----------- ----------- -----------
Total expenses................ 2,574 2,468 3,011 3,647 16,284 9,057 8,278
----------- ---------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes......................... (167) (293) 233 22 (6,035) (1,217) (1,335)
Income taxes..................... 65 125 (50) - 2,195 444 -
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss).............. $ (102) $ (168) $ 183 $ 22 $ (3,840) $ (773) $ (1,335)
=========== ========== =========== =========== =========== =========== ===========
Statement of Cash Flows
Data:
Net cash provided by operating
activities.................... $ 510 $ 741 $ 244 $ 1,451 $ 2,395 $ 1,538 $ 1,575
Net cash used in investing
activities.................... (724) (238) (671) (33,492) 59 400 (428)
Net cash provided by (used in)
financing activities.......... 75 325 498 33,070 (3,199) (199) (1,978)
EBITDA........................... 841 759 1,243 1,270 1,114 4,105 3,292
Balance Sheet Data (at end of
period):
Oil and natural gas properties,
net........................... $ 5,723 $ 5,395 $ 5,527 $ 36,938 $ 29,912 $ 34,616 $ 27,969
Total assets..................... 7,262 7,748 9,035 42,818 36,704 43,689 34,163
Long-term debt, including
current portion............... 3,905 4,260 4,765 37,950 35,334 38,229 33,744
Total liabilities................ 5,587 6,241 7,323 41,083 38,809 42,727 37,604
Stockholders' equity (deficit)... 1,675 1,507 1,712 1,735 (2,105) 962 (3,441)
Production:
Gas production (MMcf)............ 993 875 894 953 4,552 3,543 3,310
Oil production (MBbls)........... 38 42 53 51 59 43 41
Equivalent production (MMcfe).... 1,223 1,129 1,215 1,258 4,904 3,802 3,553
Average Sales Price:
Gas price (per Mcf):............. $ 1.71 $ 1.50 $ 2.22 $ 2.48 $ 2.03 $ 2.00 $ 1.84
Oil price (per Bbl):............. 15.21 16.77 20.88 19.65 13.33 13.47 15.57
Average sales price (per Mcfe)... 1.86 1.79 2.55 2.67 2.04 2.01 1.89
Operating and Overhead
Costs (per Mcfe):
Lease operating expense.......... $ 0.60 $ 0.65 $ 0.80 $ 0.83 $ 0.61 $ 0.59 $ 0.57
Production taxes................. 0.13 0.12 0.17 0.18 0.10 0.10 0.10
General and administrative....... 0.55 0.48 0.68 0.91 0.34 0.29 0.36
----------- ---------- ----------- ----------- ----------- ----------- -----------
Total............................ $ 1.28 $ 1.25 $ 1.65 $ 1.91 $ 1.05 $ 0.98 $ 1.03
=========== ========== =========== =========== =========== =========== ===========
Cash Operating Margin (per
Mcfe)......................... $ 0.58 $ 0.54 $ 0.90 $ 0.76 $ 1.00 $ 1.03 $ 0.87
</TABLE>
-131-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- ----------- ----------- ------------
(in thousands, except as otherwise indicated) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Other per (Mcfe):
Depreciation, depletion and $ 0.41 $ 0.47 $ 0.39 $ 0.52 $ 0.80 $ 0.76 $ 0.70
amortization - oil and ga
properties..................
Estimated Net Proved Reserves
(as of period end):
Natural gas (MMcf).............. 9,104 8,229 8,141 55,994 50,783 N/A N/A
Oil (MBbls)..................... 237 195 264 387 330 N/A N/A
Total (MMcfe)................... 10,527 9,399 9,725 57,316 52,763 N/A N/A
Estimated Future Net
Revenues*................... 10,377 $ 10,452 $ 26,828 $ 79,823 $ 54,328 N/A N/A
Present Value*.................. 5,560 5,599 $ 14,373 $ 42,266 $ 29,107 N/A N/A
</TABLE>
* See "Certain Definitions."
Security Ownership
The following table sets forth certain information regarding the
record ownership of Indian Common Stock as of January 1, 2000 by (i) each
director, (ii) each of the named executive officers, (iii) all executive
officers and directors of Indian as a group, and (iv) all those known by Indian
to be beneficial owners of more than five percent of Indian's Common Stock. The
shareholders of Indian are engaged in negotiations to settle disagreements among
themselves and a former employee relating to their beneficial ownership of
Indian common stock. These disagreements should be resolved before the closing
of the combination transactions.
Beneficial Ownership
----------------------------------
Number of Percentage
Beneficial Owner Shares of Total
---------------- ----------------------------------
Dunning Family Limited Partnership... 31,140 47.44%
Larry D. Hartzog..................... 12,475 19.00%
Michael C. Black, Trustee of the
Michael C. Black Revocable
Trust............................. 9,385 14.30%
Roger Graham......................... 9,360 14.26%
Anthony Lasuzzo...................... 3,283 5.00%
All executive officers and directors
as a group (5 persons)............... 65,643 100.00%
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<PAGE>
INFORMATION CONCERNING CANAAN SECURITIES
General
Canaan Securities was incorporated in 1989 by its sole owner Tom
Henson. Canaan Securities is an SEC registered broker dealer and a member of the
National Association of Securities Dealers. It is also currently licensed as a
broker dealer in Connecticut. Canaan Securities' sole business activity consists
of serving as dealer manager for the private placement of the partnership
offerings sponsored by the Coral Companies and providing ongoing reporting
services to the partnerships for which it receives fee income from the
partnerships or Canaan. In connection with the original sale of interests in the
partnerships, Canaan Securities entered into agreements with Placing Brokers and
agreed that these Placing Brokers would receive a portion of the compensation
payable to Canaan Securities. Please see "Summary - The Parties - The
Partnerships" for information concerning the share of cash distributions from
the partnerships that Canaan Securities and the Placing Brokers are entitled to
receive.
BUSINESS OF CANAAN AFTER COMPLETION OF THE
COMBINATION TRANSACTIONS
General
Canaan will become an independent publicly held oil and gas company
after the completion of the combination transactions.
Canaan will seek growth through an active development drilling
program, identification and development of extension prospects and impact
acquisitions. The company will utilize in-house geological and engineering
expertise to identify and evaluate prospective locations, whether proved or
unproved. Aggressive land strategies will be employed to increase ownership in
existing properties with development potential and to obtain acreage in areas of
interest through acquisitions, leases or farm-ins. Canaan will concentrate its
efforts in the Mid-Continent area, with a preference for natural gas producing
properties, and will seek operations whenever possible.
On a pro forma basis as of September 30, 1999, Canaan operates 199 of
the 927 wells in which it owns a working interest, and these wells represent 38%
of total net production. Pro forma total net production is 20,643 Mcf/day of
natural gas and 546 Bbls/day of oil and condensate as of September 30, 1999. As
indicated below, total net reserves are 107.7 Bcfe (88% natural gas), with
proved developed reserves representing 75% of the total and proved undeveloped
reserves accounting for 25% of the total as indicated below:
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<PAGE>
Pro Forma Reserve Information All
Combining Entities
--------------------------------------
September 30, 1999
------------------
Proved developed:
Gas (Mmcf)................ 70,098
Oil (MBbls)............... 1,824
Total (Mmcfe) 81,042
Proved undeveloped:
Gas (MMcf)................ 24,741
Oil (MBbls)............... 320
Total (Mmcfe) 26,661
Total proved:
Gas (MMcf)................ 94,839
Oil (MBbls)............... 2,144
Total (Mmcfe) 107,703
Estimated future net cash
flows before income taxes
($000s)......................... $164,149
Reserve Value
($000s)........................ $ 86,994
Netherland, Sewell & Associates, Inc., our independent reserve
engineers, prepared the estimates of the proved reserves and the future net cash
flows and Reserve Value attributable to such proved reserves using the prior,
cost and discount rate assumptions as described under "Method of Determining
Combination Exchange Values".
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control or the control of the
reserve engineers. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner, and the accuracy of any reserve or cash flow estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Estimates by different engineers often vary, sometimes
significantly. In addition, physical factors, such as the results of drilling,
testing and production subsequent to the date of an estimate, as well as
economic factors, such as an increase or decrease in product prices that renders
production of such reserves more or less economic, may justify revision to such
estimates. Accordingly, reserve estimates are different from the quantities of
oil and gas that are ultimately recovered.
Neither Canaan nor any other Combining Entity has filed any reports
with other federal agencies which contain an estimate of their net proved oil
and gas reserves.
Independent engineering has confirmed an inventory of 112 proved
undeveloped locations. The greatest areas of interest are 80 locations in the
Strong City field, located in the Anadarko Basin of western Oklahoma, and six
high-value locations in the Massard field, located in the Arkoma Basin of
western Arkansas. The Golden Trend in south central Oklahoma will also be an
area of interest.
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<PAGE>
Canaan has no plans to sell any of the properties acquired in the
combination transactions and has not identified any specific properties to
acquire.
Costs Incurred and Drilling Results
The following table shows the pro forma combined results of the costs
incurred by all of the Combining Entities in acquisition and exploration and
development activities during the periods indicated.
<TABLE>
<CAPTION>
Pro Forma All Combining Entities
-----------------------------------------------------------------
Nine Months
Ended
As of December 31, September 30
------------------------------------------ --------------------
1996 1997 1998 1999
----------- ----------- -------------- --------------------
<S> <C> <C> <C> <C>
Property acquisition costs:
Proved..................................... $ 2,843,102 $31,998,923 $ 6,195,938 $ -
Development costs.......................... 1,439,513 4,969,291 2,159,133 1,599,841
</TABLE>
The following table shows the pro forma combined results of acquisition and
drilling activities by all of the Combining Entities. You should not consider
the results of prior acquisition and drilling activities as necessarily
indicative of future performance, nor should you assume that there is
necessarily any correlation between the number of productive wells drilled and
the oil and gas reserves generated by those wells.
<TABLE>
<CAPTION>
Pro Forma All Combining Entities
---------------------------------------------------------------------------------------
Nine Months
Ended
Years Ended December 31, September 30,
--------------------------------------------------------------- ---------------------
1996 1997 1998 1999
----------------- ------------------- ------------------- ---------------------
Gross Net Gross Net Gross Net Gross Net
-------- ------ ------- -------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired wells:
Gas............................ 52 4.84 399 71.476 75 24.949 2 0.066
Oil............................ 14 2.24 23 6.721 11 3.892 3 0.296
Dry............................
-------- ------ ------- -------- ------- -------- --------- ---------
Total.......................... 66 7.09 422 78.197 86 28.842 5 0.363
======== ====== ======= ======== ======= ======== ========= =========
Development well drilling:
Gas............................ 16 1.00 22 2.709 18 1.733 5 0.819
Oil............................ 4 0.252 2 0.185
Dry............................ 1 0.31 1 0.094 1 0.073
-------- ------ ------- -------- ------- -------- --------- ---------
Total.......................... 17 1.30 26 2.960 21 2.012 6 0.892
======== ====== ======= ======== ======= ======== ========= =========
Exploratory well drilling:
Gas............................ 4 0.73 3 0.344 2 0.392
Oil............................ 1 0.05 3 0.201 2 0.274
Dry............................ 7 1.04 4 0.847 3 0.475
-------- ------ ------- -------- ------- -------- --------- ---------
Total.......................... 12 1.82 10 1.340 7 1.141 0 0.000
======== ====== ======= ======== ======= ======== ========= =========
</TABLE>
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<PAGE>
Acreage
The following table shows the pro forma combined developed and undeveloped
oil and gas lease and mineral acreage as of September 30, 1999, owned by Canaan
assuming completion of the combination transactions at that date. Excluded is
acreage in which an interest is limited to royalty, overriding royalty and other
similar interests.
<TABLE>
<CAPTION>
Pro Forma All Combining Entities
-----------------------------------------------------
Developed Undeveloped
-------------------------- -----------------------
Gross Net Gross Net
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma........ 289,378 289,378 16,453 2,885
Other........... 58,585 58,585 - -
------------ ---------- ----------- ---------
Total........... 347,963 347,963 16,453 2,885
============ ========== =========== =========
</TABLE>
Productive Well Summary
The following table shows the pro forma combined ownership of Canaan in
productive wells at September 30, 1999, assuming the completion of the
combination transactions as of such date. Gross oil and gas wells include 8
wells with multiple completions. Wells with multiple completions are counted
only once for purposes of the following table.
<TABLE>
<CAPTION>
Pro Forma All Combining Entities
-----------------------------------
Productive Wells
-----------------------------------
Gross Net
--------------- ----------------
<S> <C> <C>
Gas............................. 740 132
Oil............................. 187 58
--------------- ----------------
Total........................... 927 190
=============== ================
</TABLE>
Production Summary and Prices
The following table sets forth the pro forma combined production and prices
for all of the Combining Entities for the periods indicated.
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<PAGE>
<TABLE>
<CAPTION>
Pro Forma All Combining Entities
------------------------------------------------------------------
Nine Months Ended
Years Ended December 31, September 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ---------- ---------- ----------- ----------
(in thousands, except as otherwise indicated)
<S> <C> <C> <C> <C> <C>
Production:
Gas production (MMcf).............................. 4,453 4,162 8,406 6,427 6,152
Oil production (Mbbls)............................. 199 197 213 162 157
Equivalent production (Mmcfe)...................... 5,648 5,341 9,680 7,398 7,091
Average Sales Price:
Gas price (per Mcf):............................... $2.14 $2.52 $1.99 $1.99 $1.89
Oil price (per Bbl):............................... 20.84 19.73 13.08 13.51 15.76
Average sales price (per Mcfe)..................... 2.42 2.69 2.02 2.02 1.99
Operating and Overhead Costs (per Mcfe):...........
Lease operating expenses........................... .42 .46 .47 .46 .45
Production taxes................................... .17 .19 .13 .12 .13
General and administrative......................... .49 .61 .36 .31 .31
------------ ---------- ---------- ----------- ----------
Total.............................................. 1.08 1.26 .96 .89 .89
------------ ---------- ---------- ----------- ----------
Cash Operating Margin (per Mcfe)...................
Other: 1.34 1.43 1.06 1.13 1.10
============ ========== ========== =========== ==========
Depreciation, depletion and amortization
- oil and gas properties (per Mcfe)................ .57 .63 .78 .71 .76
</TABLE>
Marketing
The ability of Canaan to market oil and gas often depends on factors
beyond its control. The potential effects of governmental regulation and market
factors, including alternative domestic and imported energy sources, available
pipeline capacity, and general market conditions are not entirely predictable.
Natural Gas. Natural gas is generally sold pursuant to individually
negotiated gas purchase contracts, which vary in length from spot market sales
of a single day to term agreements that may extend several years. Customers who
purchase natural gas include marketing affiliates of the major pipeline
companies, natural gas marketing companies, and a variety of commercial and
public authorities, industrial, and institutional end-users who ultimately
consume the gas. Gas purchase contracts define the terms and conditions unique
to each of these sales. The price received for natural gas sold on the spot
market may vary daily, reflecting changing market conditions. The deliverability
and price of natural gas are subject to both governmental regulation and supply
and demand forces. During the past several years, regional surpluses and
shortages of natural gas have occurred, resulting in wide fluctuations in prices
achieved. During the first nine months of 1999, the average monthly gas prices
received by the Combining Entities ranged from $1.61 to $2.87 per mcf.
The lengths of the contracts vary widely. Substantially all of
Canaan's gas will be sold under contracts providing for market sensitive terms.
-137-
<PAGE>
During the past several years, an overabundance of natural gas
supplies and the promulgation of state and federal regulations pertaining to the
sale, transportation, and marketing of natural gas resulted in increasing
competition and declining prices. It is likely that supply and demand factors
will continue to be the driving force in the changing marketplace.
Crude Oil. Oil produced from Canaan's properties will be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on
30-days notice. The price paid by these purchasers is generally an established,
or "posted," price that is offered to all producers. During 1999, the average
monthly prices received by the Combining Entities ranged from $10.48 to $22.44
per barrel. During the last several years prices paid for crude oil have
fluctuated substantially. Future oil prices are difficult to predict due to the
impact of worldwide economic trends, coupled with supply and demand variables,
and such non-economic factors as the impact of political considerations on OPEC
pricing policies and the possibility of supply interruptions. Oil production
comprised approximately 14% of Canaan's total pro forma oil and gas production
calculated on an equivalent Mcf basis for the first nine months of 1999.
Therefore, an increase or decrease in oil prices has a minimal effect on
revenues when compared to the effect on the price of natural gas.
Competition
The oil and gas industry is highly competitive in all phases. Canaan
will encounter strong competition from other independent oil companies in
acquiring economically desirable properties as well as in marketing production
therefrom and obtaining external financing. Many of Canaan's competitors may
have financial resources, personnel and facilities substantially greater than
those of Canaan.
Regulation
Exploration and Production. The exploration, production and sale of
oil and gas are subject to various types of local, state and federal laws and
regulations. These laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. These regulations may adversely affect the rate at
which wells produce oil and gas.
Environmental Matters. The discharge of oil, gas or other pollutants
into the air, soil or water may give rise to liabilities to the government and
third parties and may require Canaan to incur costs to remedy discharges.
Natural gas, oil or other pollutants, including salt water brine, may be
discharged in many ways, including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and transportation facilities,
leakage from storage tanks and sudden discharges from damage or explosion at
natural gas facilities of oil and gas wells.
-138-
<PAGE>
Discharged hydrocarbons may migrate through soil to water supplies or adjoining
property, giving rise to additional liabilities.
A variety of federal and state laws and regulations govern the
environmental aspects of natural gas and oil production, transportation and
processing and may, in addition to other laws, impose liability in the event of
discharges, whether or not accidental, failure to notify the proper authorities
of a discharge, and other noncompliance with those laws. Compliance with such
laws and regulations may increase the cost of oil and gas exploration,
development and production, although the Company does not currently anticipate
that compliance will have a material adverse effect on capital expenditures or
earnings of Canaan.
Canaan does not believe that its environmental risks will be
materially different from those of comparable companies in the oil and gas
industry. Canaan believes the present activities of the Combining Entities
substantially comply, in all material respects, with existing environmental laws
and regulations. Nevertheless, Canaan cannot assure you that environmental laws
will not result in a curtailment of production or material increase in the cost
of production, development or exploration or otherwise adversely affect Canaan's
financial condition and results of operations. Although Canaan maintains
liability insurance coverage for certain liabilities from pollution,
environmental risks generally are not fully insurable.
Marketing and Transportation. The interstate transportation and sale
for resale of natural gas is regulated by the Federal Energy Regulatory
Commission under the Natural Gas Act of 1938. The sale and transportation of
natural gas also is subject to regulation by various state agencies. The Natural
Gas Wellhead Decontrol Act of 1989 eliminated all gas price regulation effective
January 1, 1993. In addition, FERC recently has proposed several rules and
orders concerning transportation and marketing of natural gas. We cannot predict
the impact of these rules and other regulatory developments on Canaan.
In 1992, FERC finalized Order 636, and also has promulgated
regulations pertaining to the restructuring of the interstate transportation of
natural gas. Pipelines serving this function have since been required to
"unbundle" the various components of their service offerings, which include
gathering, transportation, storage, and balancing services. In their current
capacity, pipeline companies must provide their customers with only the specific
service desired, on a non-discriminatory basis. Although Canaan is not an
interstate pipeline, Canaan believes the changes brought about by Order 636 have
increased competition in the marketplace, resulting in greater market
volatility.
Various rules, regulations and orders, as well as statutory provisions
may affect the price of natural gas production and the transportation and
marketing of natural gas.
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<PAGE>
Operating Hazards and Uninsured Risks
Canaan's oil and gas operations are subject to all operating
hazards and risks normally incident to drilling for and producing oil and gas,
such as encountering unusual formations and pressures, blow-outs, environmental
pollution, and personal injury. Canaan will maintain such insurance coverage as
it believes to be appropriate, taking into account the size of Canaan and its
proposed operations. Canaan currently does not maintain insurance coverage for
physical loss or damage to equipment located on the wells or for selected
properties, such as crude oil stored in tanks. Canaan's insurance policies also
have standard exclusions. Losses can occur from an uninsurable risk or in
amounts more than existing insurance coverage. The occurrence of an event which
is not insured or not fully insured could have an adverse impact on Canaan's
revenues and earnings.
Employees
At September 30, 1999, on a pro forma basis Canaan had 28 full
and part-time employees in its Oklahoma City headquarters and seven employees in
various field offices. None of these employees is represented by a union and
Canaan believes that it maintains good relations with its employees. After
consummation of the combination transactions, Canaan expects to add nine
additional office employees to manage its greater size.
Facilities
Canaan currently leases 5,867 square feet in downtown Oklahoma
City for its corporate headquarters and expects to add additional space after
consummation of the combination transactions.
Legal Proceedings
Canaan expects to be involved from time to time in various
legal and administrative proceedings and threatened legal and administrative
proceedings incidental to the ordinary course of its business. Neither Canaan
nor any of the Combining Entities is now involved in any litigation,
individually or in the aggregate, which could have a material adverse effect on
Canaan's business, financial condition, results of operations, or cash flows.
Capitalization
The following table sets forth as of September 30, 1999 the
pro forma capitalization of Canaan giving effect to the combination transactions
assuming consummation of the combination transactions as of such date and no
limited partners elect to receive cash or exercise dissenters rights. The table
also reflects the pro forma capitalization assuming that limited partners elect
to receive cash or exercise dissenters rights to the maximum $5 million limit.
-140-
<PAGE>
September 30, 1999
----------------------------------
No Cash $5 Million in Cash
to Limited to Limited
Partners Partners
---------- -----------------
Long term debt, including current maturities
Senior bank credit facility ............ $25,432,489 $30,432,489
Subordinated bank debt ................. 6,000,000 6,000,000
------------- ------------
Total long term debt ............... $31,432,489 $36,432,489
------------- ------------
Shareholders' Equity
Preferred Stock, $.01 par
value, 1,000,000 shares
authorized, none
outstanding ............................ - -
Common Stock $.01 par
value, 50,000,000 shares
authorized, 5,000,000 shares
and 4,509,804 shares issued
and outstanding, respectively .......... $ 50,000 $ 45,098
Additional paid in capital ............. 26,451,999 21,456,901
Stock subscription receivable .......... (8,755) (8,755)
Retained earnings (deficit) ............ (1,167,749) (1,167,749)
------------ ------------
Total ............................. $25,325,495 $20,325,495
------------ ------------
Total capitalization $56,757,984 $56,757,984
============ ============
Credit Facilities
As a result of the combination transactions, Canaan expects to
succeed to the obligations of Indian on its senior bank debt under a secured
credit facility provided by Bank One, Oklahoma, N.A., unless Canaan elects to
seek similar financing from another commercial lender. The Bank One credit
facility provides for a line of credit of up to $50 million, subject to a
borrowing base which is based on a periodic valuation of oil and gas reserves
(the "Borrowing Base"). The amount of credit available to Indian at any time
under the credit facility is the lesser of the Borrowing Base or the amount of
commitment. As of September 30, 1999, Indian's Borrowing Base was $20 million.
Canaan expects that its borrowing base under the Bank One credit facility will
be increased significantly upon consummation of the combination transactions
based on its pro forma reserves to make available sufficient funds for its
general corporate purposes. The credit facility has a maturity date of January
15, 2001, which Canaan expects to extend upon consummation of the combination
transactions. Indian has, and Canaan expects to have, the option of either
borrowing at the LIBOR rate plus a margin currently ranging from 2.5% to
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<PAGE>
2.75% depending on the amount of advances outstanding in relation to the
Borrowing Base or at a base rate (approximating the prime rate). Indian is
obligated to make monthly principal payments in amounts determined by Bank One
after taking into consideration the expected reductions in the borrowing base as
a result of production. Indian's most recent determination of the Borrowing Base
was as of January 15, 2000 and Indian is currently making monthly principal
reductions in the amount of $215,000. Canaan expects that the monthly principal
reduction amount will be reset at the completion of the combination transactions
based on Canaan's Borrowing Base which will lead to a material reduction in the
required principal payments.
The Bank One credit facility contains various affirmative and
restrictive covenants. These covenants, among other things, limit additional
indebtedness, sales of assets, mergers and consolidations, dividends and
distributions and require the maintenance of certain financial ratios.
Borrowings under the Indian agreement with Bank One are secured by substantially
all of Indian's oil and gas properties and Canaan expects that such security
arrangements will remain in effect following consummation of the combination
transactions with the addition of Coral Group properties to the security.
Funding for any cash payments to be made to Placing Brokers or
to limited partners electing to receive cash or exercising dissenters rights are
expected to be provided under the Bank One credit facility. In addition, the
partnerships collectively are indebted to Bank One in the amount of $6.9 million
as of September 30, 1999 under separate individual partnership loans. Canaan
expects to repay these obligations at the closing with advances under the Bank
One credit facility.
Indian also has outstanding $6.425 million in debt to
Mid-First Bank which matures on March 1, 2001. On July 1, 2000, Indian is
obligated to make an interim principal payment of $425,000 plus accrued
interest. Thereafter, interest only is payable quarterly commencing September
30, 2000 until maturity. The Mid-First debt is subordinate and junior to the
Bank One debt. The Mid-First debt bears interest at the rate of the prime rate
as published in the Wall Street Journal, 8.25% at September 30, 1999, and is
secured by the personal guaranty of Indian's shareholders and certain affiliated
entities, pledges of the stock of Indian by such persons, as well as pledges of
certain investment accounts. The personal guarantees and pledges are required to
be released as a part of the combination transactions. Canaan expects that it
will borrow under the Bank One facility to repay Mid-First upon consummation of
the combination transactions or will negotiate a further extension of payment of
the Mid-First debt.
Pro forma total long term debt outstanding as of September 30,
1999 will be $31.4 million, assuming no limited partners elect to receive cash
or exercise dissenters' rights and Canaan's pro forma long term debt as a
percentage of its total pro forma capitalization will be 55%. Canaan believes
that the borrowing capacity that will be available under the Bank One credit
facility, combined with the company's internal cash flows, will be adequate to
finance the initial capital expenditure programs of Canaan. Repayment of the
Bank One credit facility will be made from cash flow from operations.
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<PAGE>
Financing Plans
Canaan intends to finance its growth through various methods,
including bank debt and public and private offerings of equity and debt
securities. Canaan believes that a public offering of its common stock would be
desirable in order to improve the trading market for its common stock and to
raise additional capital for specified purposes. Canaan expects to complete a
public offering of its common stock after closing of a combination transaction
when Canaan determines market conditions are desirable for such purpose and an
appropriate use of proceeds can be determined.
Quantitative and Qualitative Disclosures about Market Risk
The following information provides quantitative and
qualitative information about Canaan's potential exposure to market risks. The
term "market risk" refers to the risk of loss arising from adverse changes in
oil and gas prices and interest rates. The disclosures are not meant to be
precise indicators of expected future losses, but rather indicators of
reasonably possible losses. All of the historical market risk sensitive
instruments entered into by Indian and the partnerships were for purposes other
than trading.
Commodity Price Risk
Canaan's major market risk exposure will be in the pricing
applicable to its oil and gas production. Realized pricing will be primarily
driven by the prevailing worldwide price for crude oil and spot market prices
applicable to its U.S. natural gas production. Pricing for oil and gas
production has been volatile and unpredictable for several years.
Indian and the partnerships have entered into, and Canaan
expects to periodically enter into, financial hedging activities with respect to
a portion of projected oil and gas production through financial price swaps
whereby they receive a fixed price for production and pay a variable market
price to the contract counterparty. These financial hedging activities are
intended to reduce exposure to oil and gas price fluctuations. Realized gains or
losses from the settlement of these financial hedging instruments are recognized
in oil and gas sales when the associated production occurs. The gains and losses
realized as a result of these hedging activities are substantially offset in the
cash market when the hedged commodity is delivered.
During the first nine months of 1999, the partnerships and
Indian entered into financial oil and gas price hedging instruments which
represented approximately 1.8 MMBtu of gas production during the period from
April 1, 1999 to September 30, 1999 at the rate of 300,000 MMBtu per month at a
weighted average price of $1.91 per MMBtu. The hedged gas volumes represented
approximately 31% of pro forma combined total production for the nine months
ending September 30, 1999.
-143-
<PAGE>
At September 30 or thereafter, the Coral Group and Indian have
entered into financial hedging arrangements as follows:
<TABLE>
Party Commodity Period Monthly Weighted Fair Value at
Volumes Average September 30,
Price 1999(1)
- ------------------ -------------- -------------------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Indian Gas October 1, 1999 - 50,000 $1.86 $ (198,275)
March 31, 2000 MMBtu
Indian Gas October 1, 1999 - 250,000 $2.23 $ (719,027)
September 30, MMBtu
2000
Coral Group Gas October 1, 1999 - 100,650 $2.60 $ 104,461
September 30, MMBtu
2000
Indian and Coral Oil January 1, 2000 - 12,000 $22.00 N/A
Group December 31, 2000 Bbls
</TABLE>
(1) Adjusted for modifications in terms subsequent to September 30, 1999.
These arrangements hedged approximately 56% of Canaan's pro
forma combined estimated production on an Mcfe basis for the balance of 1999 and
calendar year 2000 based on the Netherland Sewell reserve reports.
Interest Rate Risk
On a pro forma combined basis, Canaan had long-term debt
outstanding of $31.4 million as of September 30, 1999. All of the debt
outstanding at September 30, 1999 bears interest at floating rates which
averaged 8.1% as of September 30, 1999. A 10% increase in short-term interest
rates on the floating-rate debt outstanding at September 30, 1999 would equal
approximately 81 basis points. Such an increase in interest rates would have
increased Canaan's interest expense on a pro forma basis for the nine months
ended September 30, 1999 by approximately $300,000.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities because of the
short-term maturity of such instruments.
MANAGEMENT
Officers and Directors
The executive officers and directors of Canaan following completion of
the combination transactions will be as follows:
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<PAGE>
Term as
Director
Name Age Position Expires
- ---- --- -------- -------
Leo E. Woodard 51 Chairman and Chief Executive Officer 2003
John K. Penton 43 President and Director 2002
Michael S. Mewbourn 45 Senior Vice President, Chief Financial
Officer and Director 2001
Thomas H. Henson 53 Senior Vice President-Investor Relations
and Director 2001
Anthony Lasuzzo/1/ 49 Senior Vice President and Chief Operating
Officer N/A
_______________________
/1/ Canaan and Mr. Lasuzzo have not yet reached final agreement on his
employment.
The Board of Directors of Canaan will initially consist of 4
members and is divided into three classes, with the terms of office of expiring
as described above. Canaan expects that three additional directors will be
appointed to the board prior to the closing of the combination transactions or
as soon as practicable thereafter.
The executive officers of Canaan are elected by the Board of
Directors and serve at its discretion.
The following is a brief description of the business
background of each of the executive officers and directors of Canaan.
Leo E. Woodard
Mr. Woodard graduated from the University of Oklahoma in May,
1972 with a Bachelor of Science degree in Chemical Engineering. From 1972 to
1977 he was employed in a variety of engineering positions with Exxon Co.,
U.S.A. From 1977 to 1979, Mr. Woodard was a petroleum engineer with J. M. Huber
Corporation in Oklahoma City. From 1979 to 1982, he served as Chief Engineer for
Post Petroleum Co., Inc. until he co-founded Wood/Gate Engineering, Inc. in
Oklahoma City where he served as President. In 1987, he formed Canaan with John
K. Penton and served as its President until 1999 when he became Chairman and
Chief Executive
-145-
<PAGE>
Officer. He serves as Chairman of the Board of Canaan, as President of the Coral
Companies and as an additional general partner of each partnership. He also has
served as President of Indian since the February 1999 acquisition agreement
between Canaan and Indian.
John K. Penton
Mr. Penton received a Bachelor of Science degree in Economics
from Oklahoma City University in 1978 and a Masters of Business Administration
degree from Central State University in 1980. Mr. Penton was employed as a
petroleum landman by Hunt Energy Corporation in its Oklahoma City office from
1980 through 1984. From 1984 until 1987, Mr. Penton owned and managed an
independent exploration company based in Oklahoma City called Newport Resources,
Inc. In 1987, he co-founded Canaan with Leo Woodard and served as its
Vice-President until 1999 when he became President. He serves as a director of
Canaan, as Vice- President of the Coral Companies and as an additional general
partner of each partnership. He also has served as Executive Vice President of
Indian since the February 1999 acquisition agreement between Canaan and Indian.
Michael S. Mewbourn
Mr. Mewbourn is a graduate of the University of Oklahoma, and
received Bachelor of Business Science degrees in Marketing and Accounting in
1977 and 1980, respectively. He has served as Canaan's Vice President -- Finance
and Chief Financial Officer since June 1993, and was named Senior Vice President
and Chief Financial Officer in 1999. From 1989 to 1993, Mr. Mewbourn worked in
private practice as a Certified Public Accountant, which included accounting and
tax work performed for Canaan as well as the Partnerships. From 1983 to 1989, he
was with Devon Energy Corporation, Oklahoma City, Oklahoma, where he served as
Manager of Financial Accounting. From 1983 to 1985, Mr. Mewbourn was Controller
and Treasurer of Sabre Oil and Gas Co., Oklahoma City, Oklahoma, and from 1980
through 1983 was employed by Arthur Young & Company, Oklahoma City, Oklahoma,
with various duties including senior auditor. Mr. Mewbourn is a Certified Public
Accountant and a member of the Oklahoma Society of Certified Public Accountants.
Thomas H. Henson
Mr. Henson received a Bachelor of Arts degree in Economics
from the University of Michigan and a Master of Business Administration degree
from Michigan State University. Since June of 1989, he has served as the owner
and President of Canaan Securities. Mr. Henson will become Senior Vice President
- - Investor Relations and a director of Canaan upon completion of the combination
transactions.
-146-
<PAGE>
Anthony Lasuzzo
Mr. Lasuzzo, has served as a consultant to Indian since April
1, 1999. He previously served as a Director and Executive Vice President of
Indian from March 1997 to April 1, 1999. Mr. Lasuzzo has been in the oil and gas
business since 1974. He graduated with Bachelor of Science. and Master of
Science degrees in Geology from Northeast Louisiana University in 1972 and 1974,
respectively. Mr. Lasuzzo was employed by several major and independent oil and
gas companies and was an independent geologist prior to joining Indian in March,
1997.
Committees
The Board of Directors of Canaan will establish an Audit
Committee consisting of at least three independent directors. The Audit
Committee's functions will include recommending to the Board of Directors the
engagement of Canaan's independent public accountants, reviewing with such
accountants the results and scope of their auditing engagement and certain other
matters.
Compensation of Directors
Each director who is not an employee of Canaan or any
affiliate of Canaan will be reimbursed for certain expenses in connection with
attendance at such meetings. Canaan's Certificate of Incorporation provides for
the mandatory indemnification of directors and officers of Canaan and limits the
liability of directors of Canaan to Canaan or its shareholders for breaches of
the directors' fiduciary duty to the fullest extent permitted by Oklahoma law.
In addition, Canaan will enter into indemnification agreements with each
non-employee director of Canaan.
Executive Compensation
The following table sets forth information with respect to
compensation received by the chief executive officer of Canaan and the other
executive officers of Canaan. Such individuals are hereinafter referred to as
the "named executive officers".
-147-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(1) Compensation(2)
- --------------------------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Leo E. Woodard 1999 $150,000 $100,000 $29,481 $24,000
Chairman and Chief Executive 1998 150,000 125,000 32,315 24,000
Officer 1997 150,000 260,000 34,829 24,000
John Penton 1999 150,000 100,000 29,481 24,000
President 1998 150,000 125,000 32,315 24,000
1997 150,000 260,000 34,829 24,000
Michael S. Mewbourn 1999 100,800 6,017 ---- 26,963
Senior Vice-President and 1998 98,400 6,017 ---- 26,603
Chief Financial Officer 1997 96,000 20,000 ---- 17,400
</TABLE>
___________________
(1) Includes cash distributions to Mr. Woodard and Mr. Penton as Additional
General Partners of the partnerships.
(2) Includes amounts contributed by Canaan for the account of the named
executive officers under Canaan's profit sharing plan and for Mr. Mewbourn,
in 1998 and 1999, $10,939 in each year of debt forgiveness in connection
with indebtedness incurred to purchase stock of Canaan.
Upon completion of the combination transactions, the annual base
salary of Canaan's chief executive officer and each of its four other most
highly compensated executive officers is expected as follows:
Name Salary
Leo E. Woodard............................. $ 300,000
John Penton................................ 300,000
Michael S. Mewbourn........................ 120,000
Anthony Lasuzzo............................ 150,000
Thomas H. Henson........................... 120,000
Change in Control Agreements
Canaan has entered into agreements with Messrs. Woodard, Penton,
Mewbourn and Henson providing for the payment of severance benefits upon
involuntary termination of such persons, other than for cause, within two years
after a Change in Control (as defined in these agreements) of Canaan, including
constructive termination as a result of certain changes in duties
-148-
<PAGE>
or reduction of compensation. Canaan expects to enter into similar agreements
with other officers including Mr. Lasuzzo, if he is employed. The agreements are
intended to promote the retention of these officers by providing them with an
extra measure of financial security in the event of a Change of Control of
Canaan. In the event of involuntary termination within two years after a Change
in Control, the agreements provide that the officers will receive a lump sum
severance payment equal to three times the officers' annual compensation defined
as annual salary immediately prior to the Change in Control plus the highest
annual bonus received by the officer in the three years immediately preceding
the Change in Control or any lesser period the officer has been employed by
Canaan. No amounts are payable by Canaan under these agreements unless a Change
in Control occurs and the Change in Control is followed within two years by the
involuntary termination of the officer. The amounts payable under the agreement
are subject to a limitation that the amounts paid may in no event be greater
than the amount that would be deductible by Canaan under applicable Internal
Revenue Code (golden parachute) payment limitations, after taking into
consideration all payments to the officer covered by such limitation, which
would include payments deemed to have been received due to any acceleration of
vesting of stock options or other benefits.
Compensation Decisions
Canaan does not currently have a compensation committee. Messrs.
Woodard and Penton participated in the decision making process with respect to
each of their respective compensation and the compensation of Mr. Mewbourn.
Stock Option Plan
In January, 2000, the Board of Directors and Canaan's shareholders
adopted Canaan's 2000 Stock Option Plan (the "Option Plan"). Under the Option
Plan, Canaan may grant both incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code and options which are not qualified as
incentive stock options.
The maximum number of shares of Common Stock issuable under the Option
Plan is 500,000, subject to appropriate equitable adjustment in the event of a
reorganization, stock split, stock dividend, reclassification or other change
affecting Canaan's Common Stock. All executive officers of Canaan and other key
employees who hold positions of significant responsibility are eligible to
receive awards under the Option Plan. The exercise price of options granted
under the Plan is not less than 100% of the fair market value of the shares on
the date of grant. Options granted under the Plan become exercisable at such
time as the Board may determine in connection with the grant of each option. In
addition, the Board may at any time accelerate the date that any option granted
becomes exercisable. Certain limitations exist on the duration, exercise price
and number of shares that may be subject to or exercised in connection with
incentive stock options. The exercise price of options may be paid in cash, in
shares of Common Stock (valued at fair market value at the date of exercise), by
surrender of a portion of the option, or by a combination of such means of
payment, as may be determined by the Board of Directors.
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<PAGE>
In the event of any reorganization, merger, consolidation or sale of
substantially all of the assets of Canaan while options remain outstanding under
the Plan, the Plan provides for substitute options with an appropriate number of
shares or other securities of the reorganized, merged, consolidated or acquiring
corporation which were distributed to the shareholders of Canaan. Unless the
Board of Directors expressly provides otherwise, in the event of a Change in
Control (as defined in the Option Plan) of Canaan, all outstanding options will
become immediately and fully exercisable and optionees will be entitled to
surrender, within 60 days following the Change in Control, unexercised options
or portions of options in return for cash payment equal to the difference
between the aggregate exercise price of the surrendered options and the fair
market value of the shares of Common Stock underlying the surrendered options.
The Board of Directors may amend or terminate the Option Plan at any
time, except that no amendment will become effective without the approval of the
shareholders except to the extent such approval may be required by applicable
law or by the rules of any securities exchange upon which the Canaan shares are
admitted to listed trading. The Option Plan will terminate in 2010, except with
respect to awards then outstanding.
Prior to the offering, no options have been granted by Canaan pursuant
to the Option Plan. Upon completion of the Offering, Canaan expects to grant to
executive officers and eligible participants under the Option Plan incentive and
nonqualified stock options in amounts which will be determined at a later date.
Profit Sharing Plan and 401(k) Plan
Canaan has historically maintained a profit sharing plan pursuant to
which Canaan makes annual discretionary contributions. In 1997, 1998 and 1999,
Canaan accrued discretionary contributions to the plan in the aggregate amount
of $132,000, $124,000 and $132,000 respectively, including $65,400, $63,663 and
$64,033 respectively, for the account of Canaan's named executive officers.
Certain Transactions
In 1998 Michael S. Mewbourn, Senior Vice President and Chief Financial
Officer of Canaan, purchased 5% of the stock of Canaan and the Coral Companies
for an aggregate purchase price of $32,819 payable on or before November 30,
2001 with interest at the Federal Reserve discount rate. Canaan and the Coral
Companies agreed to forgive such indebtedness over a three year period and to
pay an annual bonus equal to 40% of the amount of debt forgiveness, subject to
Mr. Mewbourn continuing his employment. In 1999, $10,939 of the indebtedness was
forgiven by Canaan and the Coral Companies and Mr. Mewbourn received a bonus of
$_____________. At December 31, 1999, the amount of the remaining indebtedness
to Canaan and the Coral Companies was a total of $10,939.
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<PAGE>
Canaan Securities, of which Thomas H. Henson is sole owner and
President, receives fees from the partnerships for services in connection with
providing reports and distribution information to limited partners. Canaan
Securities also receives fees from the general partner of each partnership for
services in connection with the sale of partnership interests in the
partnerships. In 1999, Canaan received $89,810 in fees from the partnerships and
$185,586 in fees from the Coral Companies.
SECURITY OWNERSHIP OF CERTAIN BENEFICIALY OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Canaan's Common Stock as of January 1, 2000 and the pro
forma ownership after completion of the combination transactions based on the
estimated Exchange Values and assuming no limited partners elect to receive cash
or exercise dissenters rights by (i) each director, (ii) each of the named
executive officers, (iii) all executive officers and directors of Canaan as a
group, and (iv) all those known by Canaan to be beneficial owners of more than
five percent of Canaan's Common Stock.
<TABLE>
<CAPTION>
Pro Forma
Current Estimated
Beneficial Ownership (1) Beneficial Ownership (1)
------------------------------ ---------------------------
Number of Percentage Number of Percentage
Beneficial Owner Shares of Total Shares of Total
- ---------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Leo E. Woodard................................ 300 47.5% 495,807 9.92%
John Penton................................... 300 47.5% 495,807 9.92%
Michael S. Mewbourn........................... 32 5.0% 51,386 1.03%
Thomas H. Henson.............................. --- --- 126,500 2.53%
Anthony Lasuzzo............................... --- --- 54,389 1.09%
All executive officers and directors
as a group (6 persons)....................... 632 100.0% 1,223,889 24.48%
</TABLE>
____________________
(1) Based on estimated Exchange Values and assuming no limited partners elect
to reserve cash or exercise dissenter's rights.
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<PAGE>
COMPARISON OF SECURITYHOLDER RIGHTS
Introduction
The following comparative information is a summary of the material
differences associated with rights of a limited partner in the partnerships
versus a shareholder in Canaan, and the effect such differences likely will have
on shareholders. The rights and duties of the limited partners in the
partnerships summarized below are the same for each of the partnerships, except
as otherwise noted. Capitalized terms used in this section shall have the
meaning ascribed to them in this document or in the partnership agreements.
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Federal Income Taxation
- --------------------------------------------------------------------------------
None of the partnerships is subject to Canaan is subject to federal income
federal or state income taxes. Each tax on its income after allowable
partner is allocated his pro rata deductions and credits. Shareholders
share of the partnership's taxable will not be taxed on Canaan's income,
income. but generally will be subject to
federal and state income taxes on any
dividends received from Canaan.
- --------------------------------------------------------------------------------
Each of the partnerships is a pass-through entity for tax purposes, in which
income is not taxed at the entity level but instead is allocated, along with
losses, directly to the partners. The partners are taxed on income allocated to
them, whether or not actual cash distributions are made to the partners. On the
other hand, to the extent that Canaan has any net income, such income will be
taxed at the corporate level at the standard corporate tax rates.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Management and Compensation
- --------------------------------------------------------------------------------
Coral and Coral Corp. each serve as The shareholders of Canaan elect
the General Partner of certain of the directors of Canaan. The Board of
partnerships. The General Partner Directors appoints officers to serve
makes all decisions regarding the at the discretion of the Board of
business and operations of the Directors. Executive officer salaries
partnerships, including production, and incentive compensation are
development and other activities, and determined by the Board of Directors
any sale of properties and the and/or the Chief Executive Officer of
acquisition of additional properties Canaan.
subject to certain limitations. The
General Partner received an
organization and acquisition fee in
connection with the organization of
the partnerships equal to 6% of the
total capital contributions. The
General Partner also receives
compensation as a result of the cost
and revenue sharing structure of the
partnerships which allocates a greater
portion of revenues to it than its
proportionate capital investments.
Furthermore, the partnerships
reimburse the General Partners for
their general and administrative
expenses.
- --------------------------------------------------------------------------------
Shareholders have greater control over management of Canaan than the limited
partners have over the management of the partnerships because the members of the
Board of Directors of Canaan are elected on an annual basis by the shareholders
of Canaan. However, in both cases, limited partners and shareholders must rely
upon management for the prudent administration of their investments.
- --------------------------------------------------------------------------------
Operating Strategy
- --------------------------------------------------------------------------------
The partnerships were each formed to Canaan will be primarily engaged in
invest in producing oil and gas the acquisition, development and
properties and to engage in limited production of oil and gas properties.
drilling activities associated with Canaan's business strategy is to seek
such properties. Each of the new reserves in areas of low geologic
partnership agreements restricts the risk and to exploit underdeveloped
amount of money that could be borrowed existing oil and gas fields. Canaan
to finance additional activities. will not be subject to any
restrictions on the methods of
financing its activities
- --------------------------------------------------------------------------------
-153-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
The basic operating strategy of Canaan will be substantially similar to the operating strategies of the
partnerships. However, Canaan's oil and natural gas interests will be substantially larger and more diversified
than any of the individual partnerships or all of the partnerships taken together. Furthermore, unlike the
partnerships, Canaan has substantial flexibility to raise equity, through the sale of common stock or preferred
stock, to finance its operations.
- --------------------------------------------------------------------------------------------------------------------
Fiduciary Duties
- --------------------------------------------------------------------------------------------------------------------
The General Partner's fiduciary duties to the The fiduciary duties owed by the directors of
limited partners include legal responsibilities Canaan to its shareholders under the OGCA
of loyalty, care and good faith. include duties of and loyalty, care and good faith.
- --------------------------------------------------------------------------------------------------------------------
The fiduciary duty owed to shareholders of Canaan is substantially the same as the fiduciary duty owed to the
limited partners in the partnerships. Therefore, the combination transactions generally will not involve any
reduction in the standard of care owed to investors or any reduction in the remedies available for any breach of
those duties.
- --------------------------------------------------------------------------------------------------------------------
Voting Rights
- --------------------------------------------------------------------------------------------------------------------
Limited partners in the partnerships are entitled to vote Shareholders of Canaan are entitled to one vote per
on matters submitted to them for a vote, including any share on all matters submitted to them for a vote,
sale of all or substantially all of the assets, the including the election and removal of directors,
borrowing of funds in excess of specific limits and amendments to the certificate of incorporation,
removal of the General Partner. Each of these matters certain mergers and share exchanges, dissolution and
requires the consent of a majority in interest of the the sale of all or substantially all of Canaan's
limited partners, except removal of a General Partner, assets. These matters require the approval of the
either with or without cause, which requires a vote of 75% holders of a majority of the outstanding common
in interest of the limited partners. stock, and removal of directors may only be for
cause. Furthermore, Canaan has adopted several
anti-takeover provisions which could have the effect
of delaying or impeding an unfriendly takeover of
Canaan. Please see "Description of Capital Stock."
- --------------------------------------------------------------------------------------------------------------------
With the exception of the right to participate in annual elections of directors, the voting rights of shareholders
of Canaan will be substantially the same as the voting rights of limited partners in the partnerships; however,
because the former limited partners will own a smaller percentage interest in Canaan than they did of their
respective partnerships, the former limited partners will experience a corresponding decrease in their relative
voting power once they become shareholders of Canaan.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-154-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
Special Meetings
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Meetings of the limited partners may be called upon Special meetings of Canaan's shareholders may be
written request of a majority in interest of the Limited called by the President, the Chairman of the Board
Partners. of Directors, or the Board of Directors. Special
meetings may not be called by shareholders. Actions
requiring a vote may be taken without a meeting only
upon written consent of all the shareholders.
- --------------------------------------------------------------------------------------------------------------------
The ability of the shareholders of Canaan to call a special meeting of the shareholders will be more difficult
than the ability of the limited partners to call a meeting of the limited partners.
- --------------------------------------------------------------------------------------------------------------------
Amendment to Organizational Documents
- --------------------------------------------------------------------------------------------------------------------
Each of the partnership agreements may be modified or The certificate of incorporation of Canaan, subject
amended at any time by a writing signed by all the general to certain limitations, may be amended by
partners and a majority in interest of the limited affirmative vote of the holders of at least a
partners of each partnership. No modification or majority of the shares of Canaan common stock
amendment of the partnership agreements, however, may outstanding. The Eleventh Article of the
change the interest of any partner in the capital, profit certificate, relating to the number and term of the
or cash distributions of the partnership or his, her or Board of Directors, provides that an affirmative
its right of contribution or withdrawal with respect vote of the holders of at least sixty-six and two
thereto, or amend the term of the partnership, the third percent (66 2/3%) of the outstanding Canaan
provisions of the partnership agreement relating to shares then entitled to be voted in an election of
dissolution of the partnership or the provisions of the directors is required to alter, amend or repeal, or
partnership agreement relating to its amendment, without to adopt any provision inconsistent with, Article
the express written consent of each partner materially Eleventh. The bylaws of Canaan may be amended or
affected thereby. repealed by the Board of Directors at any meeting or
by the shareholders at any meeting, except that the
amendment or repeal of bylaws relating to written
consents, the number and term of the Board of
Directors or the removal of members of the Board of
Directors or the entire Board of Directors, is
prohibited unless the certificate of incorporation
is amended to permit the amendment or repeal of such
sections of the bylaws.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-155-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
With the exception of the ability to amend the certificate of incorporation of Canaan relating to the number and
term of the Board of Directors, the ability of the shareholders of Canaan to amend the organizational documents of
Canaan will be substantially similar to the ability of the limited partners to amend the organizational documents
relating to the partnerships.
- --------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provisions
- --------------------------------------------------------------------------------------------------------------------
There are no anti-takeover provisions in the partnership The certificate and bylaws of Canaan, and the OGCA
agreements under Oklahoma partnership law. include a number of provisions which may have the
effect of encouraging persons considering
unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Canaan
Board of Directors rather than pursue non-negotiated
takeover attempts. These provisions include a
classified Board of Directors, advance notice
requirements for shareholder proposals and Director
nominations, restrictions on certain business
combinations and stock repurchases, prohibition
against actions approved by written consent without
the approval of all the shareholders, and the
adoption of the Oklahoma Control Share Provisions.
- --------------------------------------------------------------------------------------------------------------------
The shareholders of Canaan are subject to various anti-takeover provisions in the certificate of incorporation and
bylaws of Canaan which the limited partners did not face in the partnership. These anti-takeover provisions could
work to delay or frustrate the assumption of control of Canaan by a holder of a large block of common stock or the
removal of incumbent members of the Board of Directors of Canaan, even if such actions would be beneficial to the
shareholders of Canaan.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-156-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
Distributions and Dividends
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Under the terms of the 1990, 1991, 1992, 1993, 1995 and Although holders of common stock are entitled to
1996 partnership agreements, revenues (other than net receive any dividends declared by Canaan's Board of
proceeds from the sale or other disposition of all or part Directors out of legally available funds, no
of an oil and gas property) available for distribution dividends are expected to be paid on the common
after the payment of partnership expenses and the stock for the foreseeable future. Under Oklahoma
establishment of any necessary reserves ("Distributable law, dividends may be paid out of the Company's
Cash") will be distributed 90% to the limited partners, surplus or out of its net profits for the fiscal
and 10% to the General Partners (9% to the General Partner year in which the dividend is declared and/or the
and .5% to each of the Additional General Partners) until preceding fiscal year.
such time as Payout is achieved. "Payout" is defined as
the time at which the amount of Distributable Cash and any
proceeds from the sale of partnership property distributed
to a limited partner, equals the capital contributions of
such limited partner. Distributable Cash after Payout
will be distributed 75% to the limited partners, and 25%
to the General Partners (24% to the General Partner and
.5% to each of the Additional General Partners).
Net proceeds from nonliquidating sales and other
dispositions of all or a portion of an oil and gas
property shall be distributed, to the extent available
after paying creditors and setting up reserves, in the
following manner: (i) first, to the partners in proportion
to and to the extent of their respective share of the tax
basis of the property; (ii) to the extent next, until
Payout is achieved, 90% to the limited partners and 10% to
the General Partners (9% to the General Partner and .5% to
each of the Additional General Partners); and (iii)
thereafter, 75% to the limited partners and 25% to the
General Partners (24% to the
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-157-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
General Partner and .5% to each of the Additional General
Partners). Liquidating distributions will be made, pro
rata, in accordance with the positive capital account
balances of the partners.
Under the terms of the 1993-I and 1996-I partnership
agreements, revenues (other than net proceeds from the
sale or other disposition of all or part of an oil and gas
property) available for distribution after the payment of
partnership expenses and the establishment of any
necessary reserves ("Distributable Cash") will be
distributed 87.5% to the limited partners, and 12.5% to
the General Partners (12% to the General Partner and .25%
to each of the Additional General Partners).
Net proceeds from nonliquidating sales and other
dispositions of all or a portion of any oil and gas
property shall be distributed, to the extent available
after paying creditors and setting up reserves, in the
following manner: (i) first, to the partners in proportion
to and to the extent of their respective share of the
basis of the property; and, (ii) thereafter 87.5% to the
limited partners, and 12.5% to the General Partners (12%
to the General Partner and .25% to each of the Additional
General Partners).
- --------------------------------------------------------------------------------------------------------------------
Both the partnership interests of the partnerships and the common stock of Canaan represent equity interests
entitling the holders thereof to participate in the growth of the partnership and Canaan, respectively.
Distributions and dividends payable with respect to the partnership interests and the common stock of Canaan
depend upon the performance of the partnerships and the company, respectively. However, Canaan's Board of
Directors does not anticipate paying any dividends on the common stock for the foreseeable future.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------------------------------------------
Liquidation Rights
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
In the event of liquidation, the partners are entitled to In the event of liquidation, holders of common stock
a distribution in proportion to their positive capital would be entitled to share ratably in any assets of
account balances after the creditors, including partners Canaan remaining after satisfaction of obligations
who are creditors (to the extent permitted by law), have to its creditors and liquidation preferences on any
been paid. If the liabilities of the partnership exceed series of preferred stock of Canaan then outstanding.
the assets upon liquidation, or otherwise if any General
Partner then has a negative balance in its capital
account, the General Partner must contribute funds to the
partnership in the ratio of their negative capital
accounts until the negative capital accounts are
eliminated.
- --------------------------------------------------------------------------------------------------------------------
The liquidation rights of shareholders of Canaan will be substantially the same as the liquidation rights of
limited partners in the partnerships.
- --------------------------------------------------------------------------------------------------------------------
Limited Liability
- --------------------------------------------------------------------------------------------------------------------
Under the terms of the partnership agreements, Canaan's shareholders will not be subject to
limited partners are not subject to additional assessments or to personal liability for obligations
assessments. The liability of the limited of Canaan.
partners generally is limited to their capital
contributions and, in certain circumstances, the amount of
any capital distributed or returned to them.
- --------------------------------------------------------------------------------------------------------------------
The limitation on personal liability of shareholders of Canaan will be substantially the same as the limitation on
personal liability of limited partners in the partnerships.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Continuity of Existence
- --------------------------------------------------------------------------------
The partnership agreements provide for Canaan has a perpetual term.
terms ending as follows:
1990 -- December 31, 2009
1991 -- January 1, 2011
1992 -- January 1, 2012
1993 -- January 1, 2013
1993-I -- January 1, 2014
1995 -- January 1, 2015
1996 -- January 1, 2016
1996-I -- January 1, 2016
- --------------------------------------------------------------------------------
Because Canaan has a perpetual term of existence, the shareholders of Canaan
have more of an opportunity to share in any future growth of Canaan beyond the
dates on which the respective partnerships would have terminated.
- --------------------------------------------------------------------------------
Financial Reporting
- --------------------------------------------------------------------------------
The limited partners in the partnerships Canaan will be subject to the
are entitled to receive audited financial reporting requirements of the
statements each fiscal year, until the Exchange Act and will be required to
payout for each particular partnership. file periodic reports as well as
After payout, the General Partner will proxy statements with the SEC,
not be required to furnish audited copies of which will be provided or
financial statements unless requested to made available to shareholders.
do so by a majority in interest of the
limited partners.
- --------------------------------------------------------------------------------
Because Canaan will be subject to the reporting requirements of the Exchange Act
and the SEC, shareholders of Canaan will receive substantially more information
in the periodic financial reports than they would have received as limited
partners in the partnerships.
- --------------------------------------------------------------------------------
Redemption and Conversion
- --------------------------------------------------------------------------------
The interests in the partnerships are not Canaan common stock is not
redeemable or convertible into other redeemable or convertible.
securities.
- --------------------------------------------------------------------------------
There is no difference between the redemption and conversion rights of Canaan
and the partnerships.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Right to Compel Dissolution
- --------------------------------------------------------------------------------
There is no right to compel the dissolution of Under Oklahoma law, Canaan
any of the partnerships. However, the withdrawal, shareholders may not vote to
bankruptcy, insolvency or dissolution of any compel dissolution of Canaan
of the General Partner will cause the without prior action by its
dissolution of the partnership. The partnership Board of Directors.
agreement provides, however, that (i) in any
such event if there is at least one remaining
General Partner, the business of the partnership
may be continued without dissolution by a
remaining General Partner or (ii) within ninety
(90) days of a General Partner's withdrawal,
all the remaining partners may agree in writing
to continue the business of the partnership and
elect additional General Partners, if necessary
or desired.
- --------------------------------------------------------------------------------
Although the partnerships provide for dissolution upon certain events, there are
no unilateral rights of the limited partners to compel a dissolution of the
partnerships. As such, the right of the shareholders to compel dissolution of
Canaan will be substantially the same as the limited partners rights to compel
dissolution of the partnerships.
- --------------------------------------------------------------------------------
Liquidity, Marketability and Restriction on Transfer
- --------------------------------------------------------------------------------
There is no trading market for the interests in Canaan's common stock will be
the partnership. The General Partners may not traded on the NASDAQ-NMS and
assign or transfer any portion of its interest the shares issued pursuant to
in the partnership without the consent of a the combination transactions
majority in interest of the limited partners of will be freely tradable by
the partnership. No limited partners of the non-affiliates of Canaan.
partnership may assign or transfer their Units
or any interest therein without the prior written
consent of the General Partner, which consent
may be withheld for any reason at the sole
discretion of the General Partner.
- --------------------------------------------------------------------------------
Because the common stock of Canaan will be traded on the NASDAQ-NMS, the
shareholders of Canaan will have substantially more liquidity than the limited
partners of the partnerships.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Limitations on Liability of Management
- --------------------------------------------------------------------------------
The partnership agreement provides that in any Canaan's certificate provides
threatened, pending or completed action, suit for the elimination of
or proceeding to which the General Partners directors' liability for
were or are a party or are threatened to be monetary damages arising from
made a party by reason of the fact that they the breach of certain
were or are a general partner of the partnership fiduciary obligations and for
involving any alleged cause of action for the indemnification of
damages, the partnership will indemnify the directors, officers,
General Partners against expenses actually and employees or agents of
reasonably incurred by them in connection with Canaan to the fullest extent
such action, suit or proceeding if they acted in provided by the OGCA and any
good faith and in a manner they reasonably other law of the State of
believed to be in or not opposed to the best Oklahoma. These provisions
interests of the partnership, and provided that generally provide for
their conduct does not constitute negligence, indemnification so long as
misconduct, or a breach of their fiduciary the indemnitee acted in good
obligations to the limited partners of the faith and in a manner he or
partnerships. Under the partnership agreement she reasonably believed to be
the limited partners of the partnerships are in or not opposed to the best
each solely and individually responsible only interests of Canaan.
for their initial capital contribution to the
partnership.
- --------------------------------------------------------------------------------
The limitation on liability of management of Canaan will be substantially the
same as the limitation on liability of management of the partnerships.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS CANAAN
- --------------------------------------------------------------------------------
Right to Investor List; Inspection of Books and Records
- --------------------------------------------------------------------------------
The partnership agreements provide, in Canaan is required to maintain
accordance with Oklahoma law, that the a list of the names and addresses
General Partner will maintain or cause to of all shareholders at its
to be maintained full and accurate books principal office and make such
and records of the partnerships, and all information available for review
partners will have the right to inspect to shareholders of record during
and examine the same at reasonable times normal business hours for any
and upon reasonable notice. The records proper purpose. Also, Canaan must
to be kept at the partnership's office in make all books and records
Oklahoma shall include, without available for shareholders review
limitation, (i) a current list of the full during normal business hours for a
name and last known business address of proper purpose.
each partner set forth in alphabetical
order; (ii) a copy of the certificate
of limited partnership and all certificates
of amendment thereto, together with
executed copies of any powers of attorney
pursuant to which any certificate has been
executed, (iii) copies of the partnership's
federal, state and local tax returns and
reports, if any, for the three most recent
years, and (iv) copies of any then effective
written partnership agreement and any
financial statements of the partnership for
the three most recent years.
- --------------------------------------------------------------------------------
The rights of shareholders of Canaan to inspect the investor list and books and
records of Canaan will be substantially the same as the rights of the limited
partners to inspect the investor list and the books and records of the
partnerships.
- --------------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK
General
Canaan's authorized capital stock consists of 50,000,000 shares of
common stock, $.01 par value, and 1,000,000 shares of preferred stock, $.01 par
value.
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<PAGE>
Common Stock
The holders of common stock are entitled to one vote for each share of
common stock held on all matters voted upon by shareholders, including the
election of directors. Subject to the rights of any then outstanding shares of
preferred stock, the holders of common stock are entitled to dividends as may be
declared in the discretion of the board of directors out of funds legally
available for the payment of dividends. The holders of common stock are entitled
to share ratably in Canaan's net assets upon liquidation after Canaan pays or
provides for all liabilities and for any preferential liquidation rights of any
preferred stock then outstanding. The common shareholders have no preemptive
rights to purchase shares of Canaan stock. Shares of common stock are not
subject to any redemption provisions and are not convertible into any of our
other securities. All of the shares of common stock which we are going to issue
in the combination transactions will be fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without further action by
shareholders, to issue shares of undesignated preferred stock from time to time
in one or more series and to fix the related number of shares and the
designations, voting powers, preferences, optional and other special rights, and
restrictions or qualifications of that preferred stock. The rights, preferences,
privileges and restrictions or qualifications of different series of preferred
stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. The issuance of preferred stock could:
. decrease the amount of earnings and assets available for
distribution to holders of common stock;
. adversely affect the rights and powers, including voting rights,
of holders of common stock; and
. have the effect of delaying , deferring or preventing a change in
control.
Oklahoma Law and Certificate and Bylaw Provisions - Anti-Takeover Effects
General. Canaan's certificate and bylaws, and the OGCA include a
number of provisions which may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral takeover proposals to
negotiate with Canaan's board of directors rather than pursue non-negotiated
takeover attempts. These provisions include a classified board of directors,
advance notice requirements for shareholder proposals and director nominations,
restrictions on certain business combinations and stock repurchases, prohibition
against actions approved by written consent without the approval of all the
shareholders, and the adoption of the Oklahoma control share provisions. These
certificate and bylaws provisions could work to delay or frustrate
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<PAGE>
the assumption of control of Canaan by the holder of a large block of common
stock or the removal of incumbent directors, even if such actions would be
beneficial to the shareholders as a whole. Furthermore, these provisions may
discourage or prevent a merger, tender offer or proxy contest even if it would
be favorable to the interests of the shareholders as a whole. The following is a
more specific description of each of these certificate and bylaws provisions:
Classified Board of Directors. Canaan's certificate and bylaws contain
provisions for a staggered board of directors with one-third (1/3) of the Board
standing for election each year. The term of each director is three years, and
in each year the terms of the directors in one class will expire. Directors may
be removed only for cause and by the affirmative vote of the holders of a
majority of the shares entitled to vote in an election of directors. A staggered
board of directors makes it more difficult for shareholders to change the
majority of the members of the board of directors and instead promotes
continuity of existing management.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. Under the bylaws, a notice of intent of a shareholder to bring any
matter before a meeting of the shareholders must be made in writing and received
by our corporate secretary not more than one hundred fifty (150) days and not
less than ninety (90) days in advance of the annual meeting, or, in the event of
a special meeting of shareholders, such notice must be received by the secretary
not later than the close of the fifteenth (15th) day following the day on which
notice of the special meeting is first mailed to the shareholders. Every notice
by a shareholder must state:
. The name and address of the shareholder who intends to bring up
any matter.
. A representation that the shareholder is a registered holder of
Canaan's voting stock and intends to appear in person or by proxy
at the meeting to bring up the matter specified in the notice.
. With respect to notice of an intent to make a director
nomination, a description of all understandings among the
shareholder and each nominee and any other person (naming such
person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder and such other
information regarding each nominee proposed by the shareholder as
would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the SEC had each nominee
been nominated by the board of directors of Canaan.
. With respect to notice of an intent to bring up any other matter,
a description of the matter, and any material interest of the
shareholder in the matter.
. Notice of intent to make a nomination shall be accompanied by the
written consent of each nominee to serve as a director, if
elected.
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<PAGE>
Business Combinations with Interested Shareholders. Canaan's
certificate contains a provision expressly electing to be governed by Section
1090.3 of the OGCA which places restrictions on Canaan's ability to enter into
certain business combinations and effect certain stock repurchases.
Specifically, Section 1090.3 of the OGCA generally prevents an "interested
shareholder" from engaging in a "business combination" with a corporation for
three years following the date such person became an interested shareholder,
unless:
. Prior to the time such person became an interested shareholder,
the board of directors of the corporation approved the
transaction in which the interested shareholder became an
interested shareholder or approved the business combination;
. Upon consummation of the transaction that resulted in the
interested shareholder becoming an interested shareholder, the
interested shareholder owns at least 85% of the voting stock of
the corporation outstanding at the time the transaction
commenced, excluding stock held by directors who are also
officers of the corporation and stock held by certain employee
stock plans; or
. On or subsequent to the time of the transaction in which such
person became an interested shareholder, the business combination
is approved by the board of directors of the corporation and
authorized at a meeting of shareholders by the affirmative vote
of the holders of two-thirds (2/3) of the outstanding voting
stock of the corporation not owned by the interested shareholder.
The statute defines a "Business Combination" to include:
. any merger or consolidation involving the corporation and an
interested shareholder;
. any sale, transfer, pledge or other disposition involving an
interested shareholder of ten percent (10%) or more of the assets
of the corporation;
. subject to certain exceptions, any transaction which results in
the issuance or transfer by the corporation of any stock of the
corporation to an interested shareholder;
. any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
shareholder;
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<PAGE>
. the receipt by an interested shareholder of any loans,
guarantees, pledges or other financial benefits provided by or
through the corporation; or
. any share acquisition by the interested shareholder pursuant to
Section 1090.1 of the OGCA.
In addition, the statutes define "interested shareholder" as any
entity or person beneficially owning fifteen percent (15%) or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.
Prohibition Against Actions by Written Consent. Canaan's certificate
provides for any action required by the OGCA to be taken or otherwise permitted
to be taken at any annual or special meeting of shareholders of the corporation
may be taken without a meeting, without prior notice and without a vote, only if
a consent or consents in writing, setting forth the action taken, shall be
signed by the holders of all outstanding stock entitled to vote thereon. This
provision effectively prevents any actions without a meeting, notice and a vote
of our shareholders.
Control Share Provisions. Canaan's certificate specifically provides
that we will be subject to the Oklahoma control share acquisition statute
("Oklahoma Control Share Statute"), codified at Sections 1145-1155 of the OGCA.
Section 1145 of the OGCA defines "control shares" as those issued and
outstanding shares of an "issuing public corporation" that, in the absence of
the Oklahoma Control Share Statute, would have voting power, when added to all
the other shares of the issuing public corporation which are owned, directly or
beneficially, by an acquiring person or over which the acquiring person has the
ability to exercise voting power, that would entitle the acquiring person,
immediately after the acquisition of the shares to exercise (or direct the
exercise of) the voting power of the issuing public corporation in the election
of directors within any of the following ranges of voting power: (i) one-fifth
(1/5) or more but less than one-third (1/3) of all voting power; (ii) one-third
(1/3) or more but less than a majority of all voting power; or (iii) a majority
of all voting power.
A "control share acquisition" means the acquisition by any person of
ownership of, or the power to direct the exercise of voting power with respect
to, "control shares." After a control share acquisition occurs, the acquiring
person is subject to certain limitations on the ability to vote such control
shares. Specifically, Section 1149 of the OGCA provides in pertinent part that
under most control share acquisition scenarios, "the voting power of control
shares having voting power of one-fifth (1/5) or more of all voting power is
reduced to zero unless the shareholders of the issuing public corporation
approve a resolution . . . according the shares the same voting rights as they
had before they became control shares." Section 1153 of the OGCA provides the
procedures for obtaining shareholder consent of a resolution of an "acquiring
person" to determine the voting rights to be accorded the shares acquired or to
be acquired in the control share acquisition. Accordingly, "to be approved, the
resolution shall receive the affirmative votes of a majority of all voting
power, excluding all interested shares." Therefore, Canaan's adoption of the
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<PAGE>
Oklahoma Control Share Statute makes it more difficult for a person acquiring
"control shares" to exercise his voting rights as a shareholder.
General Result of Anti-Takeover Measures. By discouraging takeover
attempts, these provisions may have the incidental effect of inhibiting the
temporary fluctuations of the market price of Canaan's common stock or other
securities which may result from actual or rumored takeover attempts. In
addition, these provisions could limit or reduce the price that investors might
be willing to pay for our shares and may limit the ability of Canaan's
shareholders to receive premium prices for their shares which an acquiring party
might be willing to pay in connection with the acquisition of control of Canaan.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is UMB Bank,
n.a., Kansas City, Kansas.
LEGAL MATTERS
Crowe & Dunlevy, A Professional Corporation, Oklahoma City, Oklahoma,
as our counsel, will issue an opinion for Canaan regarding the validity of the
common stock to be issued in the combination transactions and certain federal
income tax matters related to the combination transactions.
EXPERTS
The financial statements of Canaan Energy Corporation and Indian Oil
Company as of December 31, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of each of the partnerships as of December
31, 1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the reports of William T. Zumwalt, Inc., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The information appearing in this prospectus with respect to proved
oil and gas reserves of Canaan, the partnerships and Indian, as of December 31,
1998, to the extent stated herein, was estimated and audited by Netherland,
Sewell & Associates, Inc. independent petroleum engineers, and is included
herein on the authority of such firm as experts in petroleum engineering.
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<PAGE>
AVAILABLE INFORMATION
Canaan has filed with the SEC a registration statement on Form S-4
(including all amendments and exhibits thereto) under the Securities Act with
respect to the common stock in this offering. As permitted by the rules and
regulations of the SEC, this prospectus omits some of the information contained
in the registration statement. For further information with respect to Canaan
and the common stock offered in this offering, you should refer to the
registration statement and its exhibits and schedules. You may obtain copies of
all or any portion of the registration statement at prescribed rates from the
public reference facilities maintained by the SEC at:
. Room 1024, Judiciary Plaza
450 Fifth Street, N.W.,
Washington, D.C. 20549
. 7 World Trade Center
New York, New York 10007
. CitiCorp Center
500 W. Madison Street, Suite 1400
Chicago, IL 60661
You may also call the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website that contains reports, proxy statements and information
statements and other information regarding registrants (including Canaan) that
file electronically with the SEC, which can be accessed at http://www.sec.gov.
Canaan intends to furnish to our shareholders annual reports
containing financial statements audited by an independent public accounting firm
and to make available to shareholders quarterly reports for each of the quarters
of each fiscal year containing unaudited financial statements.
FORWARD LOOKING STATEMENTS
All statements made in this prospectus/proxy statement and
accompanying supplements other than purely historical information are "forward
looking statements" within the meaning of the federal securities laws. These
statements reflect expectations and are based on historical operating trends,
proved reserve positions and other currently available information. Forward
looking statements include statements regarding future plans and objectives,
exploration and development budgets and number and location of planned wells and
statements regarding the quality of our properties and potential reserve and
production levels. This statement may be
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<PAGE>
preceded or followed by or otherwise include the words "believes", "expects",
"anticipates", "intends", "plans", "estimates", "projects" or similar
expressions or statements that certain events "will" or "may" occur. These
statements assume that no significant changes will occur in the operating
environment for oil and gas properties and that there will be no material
acquisitions or divestitures except as otherwise described.
The forward looking statements are subject to all the risks and
uncertainties incident to the combination transactions and acquisition,
exploration, development, marketing of oil and gas reserves, including the risks
described under "Risk Factors." Canaan may also make material acquisitions or
divestitures or enter into financing transactions. None of these events can be
predicted with certainty or not taken into consideration in the forward looking
statements.
For all of these reasons, actual results may vary materially from the
forward looking statements and there is no assurance that the assumptions used
are necessarily the most likely. Canaan will not update any forward looking
statements to reflect events or circumstances occurring after the date the
statement is made except as may be required by federal securities laws.
CERTAIN DEFINITIONS
When the following words are used in the text of this joint proxy
statement prospectus, they have the following meaning:
Bbl. "Bbl" means one stock tank barrel, or 42 U.S. gallons liquid
---
volume, used herein in reference to oil or other liquid hydrocarbons.
Bcf. "Bcf" means billion cubic feet.
---
Bcfe. "Bcfe" means billion cubic feet of natural gas equivalent,
----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
Btu. "Btu" means british thermal unit, which is the heat required to
---
raise the temperature of a one pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
Bbtu. "Bbtu" means billion Btus.
----
Capital Expenditures. "Capital Expenditures" means costs associated
--------------------
with exploratory and development drilling (including exploratory dry holes);
leasehold acquisitions; seismic data acquisitions; geological, geophysical and
land-related overhead expenditures; delay rentals; producing property
acquisitions; and other miscellaneous capital expenditures.
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Completion Costs. "Completion Costs" means as to any well, all those
----------------
costs incurred after the decision to complete the well as a producing well.
Generally, these costs include all costs, liabilities and expenses, whether
tangible or intangible, necessary to complete a well and bring it into
production, including installation of service equipment, tanks and other
materials necessary to enable the well to deliver production.
Developed Acreage. "Developed Acreage" means the number of acres
-----------------
which are allocated or assignable to producing wells or wells capable of
production.
Development Location. "Development Location" means a location on
--------------------
which a development well can be drilled.
Development Well. "Development Well" means a well drilled
----------------
within the proved area of an oil or gas reservoir to the depth of a
stratigraphic horizon known to be productive in an attempt to recover proved
undeveloped reserves.
Drilling Unit. "Drilling Unit" means an area specified by governmental
-------------
regulations or orders or by voluntary agreement for the drilling of a well to a
specified formation or formations which may combine several smaller tracts or
subdivides a large tract, and within which there is usually some right to share
in production or expense by agreement or by operation of law.
Dry Hole. "Dry Hole" means a well found to be incapable of producing
--------
either oil or gas in sufficient quantities to justify completion as an oil or
gas well.
EBITDA. "EBITDA" is defined as income (loss) before interest, income
------
taxes, depreciation, depletion and amortization and impairment. We believe that
EBITDA is a financial measure commonly used in the oil and gas industry as an
indicator of a company's ability to service and incur debt. However, EBITDA
should not be considered in isolation or as a substitute for net income, cash
flows provided by operating activities or other data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. EBITDA measures as presented may not be comparable
to other similarly titled measures of other companies.
Estimated Future Net Revenues. "Estimated Future Net Revenues" means
-----------------------------
revenues from production of oil and gas, net of all production-related taxes,
lease operating expenses, capital costs and abandonment costs.
Exploratory Well. "Exploratory Well" means a well drilled to find and
----------------
produce oil or gas in an unproved area, to find a new reservoir in a field
previously found to be productive of oil or gas in another reservoir, or to
extend a known reservoir.
Future Development Cost. "Future Development Cost" means Future
-----------------------
Development Cost of proved non-producing reserves, expressed in dollars per BOE,
is calculated by dividing the
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amount of future capital expenditures related to development properties by the
amount of total proved non-producing reserves associated with such activities.
Gross Acre. "Gross Acre" means an acre in which a working interest
----------
is owned.
Gross Well. "Gross Well" means a well in which a working interest
----------
is owned.
Infill Drilling. "Infill Drilling" means drilling for the development
---------------
and production of proved undeveloped reserves that lie within an area bounded by
producing wells.
Lease Operating Expense. "Lease Operating Expense" means all direct
-----------------------
costs associated with and necessary to operate a producing property.
Lifting Costs. "Lifting Costs" means the expenses of lifting oil from
-------------
a producing formation to the surface, consisting of the costs incurred to
operate and maintain wells and related equipment and facilities, including labor
costs, repair and maintenance, supplies, insurance, production, severance and
windfall profit taxes.
MBbls. "MBbls" means thousand barrels.
-----
MBtu. "MBtu" means thousand Btus.
----
Mcf. "Mcf" means thousand cubic feet.
---
Mcfe. "Mcfe" means thousand cubic feet of natural gas equivalent,
----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
MMBbls. "MMBbls" means million barrels.
------
MMBtu. "MMBtu" means million Btus.
-----
MMcf. "MMcf" means million cubic feet.
----
MMcfe. "MMcfe" means million cubic feet of natural gas equivalent,
-----
determined using the ratio of one Bbl of oil or condensate to six Mcf of natural
gas.
Natural Gas Liquids. "Natural Gas Liquids" means liquid
-------------------
hydrocarbons which have been extracted from natural gas (e.g., ethane, propane,
butane and natural gasoline).
Net Acres or Net Wells. "Net Acres or Net Wells" means the sum of the
----------------------
fractional working interests owned in gross acres or gross wells.
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Oil and Gas Lease. "Oil and Gas Lease" means an agreement whereby the
-----------------
grantee receives for a period of time of the full or partial interest in oil and
gas properties, oil and gas mineral rights, fee rights or other rights of the
grantor granting the grantee the right to drill for, produce and sell oil and
gas upon payment of rentals, bonuses and/or royalties. Oil and Gas Leases are
generally acquired from private landowners and federal and state governments.
Overriding Royalty Interest. "Overriding Royalty Interest" means an
---------------------------
interest in an oil and gas property entitling the owner to a share of oil and
gas production free of well or production costs.
Present Value. "Present Value," when used with respect to oil and gas
-------------
reserves, means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production, future development
costs, and future abandonment costs, using prices and costs in effect as of the
date of the report or estimate, without giving effect to non-property related
expenses such as general and administrative expenses, debt service and future
income tax expense or to deprecation, depletion and amortization, discounted
using an annual discount rate of 10%.
Productive Well. "Productive Well" means a well that is producing
---------------
oil or gas or that is capable of production.
Proved Developed Reserves. "Proved Developed Reserves" means proved
-------------------------
reserves that are expected to be recovered through existing wells with existing
equipment and operating methods.
Proved Reserves. "Proved Reserves" means the estimated quantities of
---------------
oil and gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved Undeveloped Reserves. "Proved Undeveloped Reserves" means
---------------------------
proved reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required
for recompletion.
Recompletion. "Recompletion" means the completion for production of
------------
an existing wellbore in another formation from that in which the well has
previously been completed.
Royalty Interest. "Royalty Interest" mean an interest in an oil and
----------------
gas property entitling the owner to a share of oil and gas production (or the
proceeds of the sale thereof) free of the costs of production.
3-D Seismic. "3-D Seismic" means the method by which a three
-----------
dimensional image of the earth's substance is created through the interpretation
of aerially collected seismic data. 3-D
-173-
<PAGE>
surveys allow for a more detailed understanding of the subsurface than do
conventional surveys and contribute significantly to field appraisal,
development and production.
Undeveloped Acreage. "Undeveloped Acreage" means lease 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 such
acreage contains proved reserves.
Working Interest. "Working Interest" means the operating interest
----------------
which gives the owner the right to drill, produce and conduct operating
activities on the property and a share of production.
-174-
<PAGE>
CANAAN ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Canaan Energy Corporation
Independent Auditors' Report.............................................. F-4
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-5
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-6
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-7
Statements of Stockholders' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-8
Notes to Financial Statements............................................. F-9
Indian Oil Company
Independent Auditors' Report.............................................. F-22
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-23
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-24
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-25
Statements of Stockholders' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-26
Notes to Financial Statements............................................. F-27
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Independent Auditors' Report.............................................. F-45
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-46
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-47
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-48
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-49
Notes to Financial Statements............................................. F-50
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Independent Auditors' Report.............................................. F-59
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-60
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-61
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-62
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-63
Notes to Financial Statements............................................. F-64
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Independent Auditors' Report.............................................. F-73
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-74
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-75
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-76
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-77
Notes to Financial Statements............................................. F-78
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Independent Auditors' Report.............................................. F-86
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-87
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-88
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-89
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-90
Notes to Financial Statements............................................. F-91
Coral Reserves 1993 Institutional Limited Partnership
Independent Auditors' Report.............................................. F-100
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-101
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-102
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-103
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-104
Notes to Financial Statements............................................. F-105
Coral Reserves Energy Income Fund 1995 Limited Partnership
Independent Auditors' Report.............................................. F-114
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-115
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-116
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-117
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-118
Notes to Financial Statements............................................. F-119
Coral Reserves Energy Income Fund 1996 Limited Partnership
Independent Auditors' Report.............................................. F-127
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-128
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-129
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-130
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-131
Notes to Financial Statements............................................. F-132
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Coral Reserves 1996 Institutional Limited Partnership
Independent Auditors' Report.............................................. F-141
Balance Sheets, December 31, 1997 and 1998 and September 30, 1999......... F-142
Statements of Operations, Years ended December 31, 1996, 1997, and 1998
and Nine Months ended September 30, 1998 and 1999.................... F-143
Statements of Cash Flow, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1998 and 1999........... F-144
Statements of Partners' Equity, Years ended December 31, 1996, 1997,
and 1998 and Nine Months ended September 30, 1999.................... F-145
Notes to Financial Statements............................................. F-146
</TABLE>
F-3
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Canaan Energy Corporation:
We have audited the accompanying balance sheets of Canaan Energy Corporation, as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Canaan Energy Corporation, as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
January 28, 2000
F-4
<PAGE>
CANAAN ENERGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 360,272 $ 749,538 $ 466,388
Accounts receivable (Note 4) 232,297 231,745 458,220
Other assets - 1,401 1,291
Deferred tax assets (Note 6) - 4,000 4,000
---------------- ---------------- -----------------
Total current assets 592,569 986,684 929,899
---------------- ---------------- -----------------
Property and equipment, at cost, based on the full cost method
of accounting for oil and natural gas properties (Note 5) 870,860 897,656 979,013
Less accumulated depreciation, depletion and amortization (523,546) (571,896) (622,378)
---------------- ---------------- -----------------
347,314 325,760 356,635
---------------- ---------------- -----------------
Other assets - - 28,358
---------------- ---------------- -----------------
Total assets $ 939,883 $1,312,444 $1,314,892
================ ================ =================
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 32,076 $ 32,728 $ 59,650
Revenue and royalties due to others 173,505 289,553 203,105
Payroll income tax withholdings 8,213 117,381 -
Accrued profit sharing contributions 132,011 124,092 85,253
Income taxes payable - 53,000 97,000
---------------- ---------------- -----------------
Total current liabilities 345,805 616,754 445,008
---------------- ---------------- -----------------
Deferred income taxes (Note 6 ) 94,000 84,000 84,000
Stockholders' equity:
Common stock, $1.00 par value; 25,000 shares
authorized, 600 shares outstanding in 1997, 632 shares
outstanding in 1998 and 1999 600 632 632
Additional paid-in capital 523,968 545,756 545,756
Common stock subscription receivable - (14,547) (8,755)
Retained earnings (accumulated deficit) (24,490) 79,849 248,251
---------------- ---------------- -----------------
Total stockholders' equity 500,078 611,690 785,884
---------------- ---------------- -----------------
Total liabilities and stockholders' equity $ 939,883 $1,312,444 $1,314,892
================ ================ =================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CANAAN ENERGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales $ 95,675 $ 112,412 $ 83,652 $ 66,052 $ 91,672
Salt water disposal services 57,000 49,000 51,000 43,000 38,000
Other 27,574 16,409 21,883 12,653 10,241
----------- ----------- --------- --------- ---------
Total revenues 180,249 177,821 156,535 121,705 139,913
----------- ----------- --------- --------- ---------
Costs and expenses:
Lease operating 8,557 17,792 27,593 21,300 10,678
Production taxes 7,288 7,213 5,577 4,258 6,598
Depreciation, depletion and amortization (Note 5) 53,952 59,304 48,350 37,477 50,482
General and administrative expenses 1,188,039 1,281,143 936,720 483,581 471,056
Less partnership management fees (Note 9) (1,072,000) (1,373,000) (970,500) (766,000) (620,000)
----------- ----------- --------- --------- ---------
Net general and administrative expenses 116,039 (91,857) (33,780) (282,419) (148,944)
----------- ----------- --------- --------- ---------
Total costs and expenses 185,836 (7,548) 47,740 (219,384) (81,186)
----------- ----------- --------- --------- ---------
Other income, principally interest 28,938 38,059 41,544 28,902 26,303
----------- ----------- --------- --------- ---------
Earnings before income taxes 23,351 223,428 150,339 369,991 247,402
Income taxes (Note 6) 2,000 68,000 46,000 115,000 79,000
----------- ----------- --------- --------- ---------
Net earnings $ 21,351 $ 155,428 $ 104,339 $ 254,991 $ 168,402
=========== =========== ========= ========= =========
Net earnings per average common share
Outstanding - basic and diluted $35.59 $259.05 $173.03 $424.99 $266.46
=========== =========== ========= ========= =========
Weighted average common shares outstanding -
basic and diluted 600 600 603 600 632
=========== =========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CANAAN ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
------------ ---------- --------- -------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 21,351 $ 155,428 $104,339 $254,991 $ 168,402
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 53,952 59,304 48,350 37,477 50,482
Deferred income tax expense (benefit) (2,000) 40,000 (14,000) - -
Forgiveness of subscription receivable - - 7,273 - 5,792
Changes in:
Accounts receivable (55,845) (68,671) 552 (76,437) (226,475)
other assets (2,921) 4,805 (1,401) - 110
Accounts payable, accrued expenses and
other liabilities (3,830) 67,134 270,949 128,304 (171,746)
------------ ---------- --------- -------- -----------
Net cash provided by (used in) operating
activities 10,707 258,000 416,062 344,335 (173,435)
------------ ---------- --------- -------- -----------
Cash flows from investing activities:
Proceeds from sales of property and equipment 39,851 - 32,915 28,476 -
Capital expenditures (35,532) (204,490) (59,711) (31,187) (109,715)
------------ ---------- --------- -------- -----------
Net cash provided by (used in) investing
activities 4,319 (204,490) (26,796) (2,711) (109,715)
------------ ---------- --------- -------- -----------
Net increase (decrease) in cash and cash equivalents 15,026 53,510 389,266 341,624 (283,150)
Cash and cash equivalents at beginning of period 291,736 306,762 360,272 360,272 749,538
------------ ---------- --------- -------- -----------
Cash and cash equivalents at end of period $306,762 $360,272 $749,538 $701,896 $ 466,388
============ ========== ========= ======== ===========
Supplemental Cash Flow Information:
Cash payments for income taxes $ 20,000 $ 29,000 $ 4,000 $ - $ 35,000
============ ========== ========= ======== ===========
Supplemental Schedule of Non-cash Financing
activities:
Issuance of common stock for subscription
receivable $ - $ - $ 21,820 $ - $ -
============ ========== ========= ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CANAAN ENERGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Common Retained
Shares of Additional Stock Earnings Total
Common Stock Common Paid-in Subscription (Accumulated Stockholders'
Outstanding Stock Capital Receivable Deficit) Equity
------------ -------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 600 $ 600 $ 523,968 $ - $ (179,918) $ 344,650
Net earnings - - - - 155,428 155,428
------- -------- ----------- ------------- ------------- -------------
Balance at December 31, 1997 600 600 523,968 - (24,490) 500,078
Net earnings - - - - 104,339 104,339
Common stock issued through
subscription receivable 32 32 21,788 (21,820) - -
Forgiveness of subscription
receivable - - - 7,273 - 7,273
------- -------- ----------- ------------- ------------- -------------
Balance at December 31, 1998 632 632 545,756 (14,547) 79,849 611,690
Net earnings (unaudited) - - - - 168,402 168,402
Forgiveness of subscription
receivable (unaudited) - - - 5,792 - 5,792
------- -------- ----------- ------------- ------------- -------------
Balance at September 30, 1999 (unaudited) 632 $ 632 $ 545,756 $ (8,755) $ 248,251 $ 785,884
======= ======== =========== ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Organization and Basis of Presentation
Canaan Energy Corporation (Canaan) is engaged primarily in the acquisition,
development and production of oil and natural gas properties. Canaan serves
as operator for approximately 113 producing oil and natural gas wells
located in Oklahoma.
Canaan also manages eight oil and natural gas limited partnerships (the
Coral Limited Partnerships) on behalf of Coral Reserves, Inc. and Coral
Reserves Energy Corporation, the general partners of the Coral Limited
Partnerships (the General Partners). Canaan and the General Partners have
the same ownership.
Canaan, the Coral Limited Partnerships, the General Partners and Canaan
Securities, Inc. (CSI), an unaffiliated broker/dealer which has previously
participated in marketing of the limited partnership interests, are in the
process of merging (subject to the approval of all parties), whereby the
Coral Limited Partnerships, the General Partners and CSI will merge with
and into Canaan for shares of Canaan's common stock. The merger is expected
to be accounted for as a reorganization of interests in a manner similar to
a pooling of interests. Additionally, on February 15, 1999 Canaan entered
into an agreement and plan of merger with Indian Oil Company (Indian), an
unaffiliated oil and natural gas company. Under the agreement, Indian will
merge with and into Canaan for shares of Canaan's common stock in a
business combination to be accounted for as a purchase. The mergers are
anticipated to be completed by June 2000.
On January 3, 2000, Coral Reserves Group, Ltd. changed its name to Canaan
Energy Corporation and continues to conduct business as Coral Reserves
Group, Ltd.
Accounting policies employed by Canaan reflect industry practices and
conform to generally accepted accounting principles. The more significant
of such policies are discussed below.
In the opinion of management, the accompanying unaudited financial
statements as of September 30, 1999 and for the nine months ended September
30, 1998 and 1999, reflect adjustments (all of which were normal and
recurring) which, in the opinion of management, are necessary for a fair
statement of the financial position and results of operations of the
interim periods presented.
F-9
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
2. Summary of Significant Accounting Policies
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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
Canaan considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents. Cash and cash
equivalents consist of overnight investments in money market funds.
Fair Value of Financial Instruments
Canaan's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and other
liabilities. Fair value of financial instruments approximates carrying
value due to the short-term nature of the instruments.
Property and Equipment
Canaan follows the full cost method of accounting for its oil and natural
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and natural gas properties, including
costs of undeveloped leasehold, dry holes and leasehold equipment, are
capitalized. Net capitalized costs are limited to the estimated future net
revenues, discounted at 10% per annum, from proved oil, natural gas and
natural gas liquids reserves. Capitalized costs are depleted by an
equivalent unit-of-production method, converting natural gas to oil at the
ratio of one barrel ("Bbl") of oil to six thousand cubic feet ("Mcf") of
natural gas. No gain or loss is recognized upon disposal of oil and natural
gas properties unless such dispositions significantly alter the
relationship between capitalized costs and proved oil and natural gas
reserves.
Depreciation and amortization of other property and equipment are provided
using the straight-line method based on estimated useful lives of the
related assets, which range from 3 to 7 years.
F-10
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Canaan accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
Other Assets
Other assets as of September 30, 1999, represent costs incurred in
connection with Canaan's proposed merger with Indian and CSI, discussed
above. Such costs are being deferred and will be included in the purchase
price upon completion of the respective mergers or will be expensed if the
mergers are terminated. Costs incurred in connection with the proposed
merger of the Coral Limited Partnerships and the General Partners are
expensed as incurred and approximated $17,000 for the nine months ended
September 30, 1999.
Revenue and Royalty Distributions Payable
For certain oil and natural gas properties, Canaan receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. Canaan accrues revenue for only
its net interest in its oil and natural gas properties.
Hedging Activities
Canaan periodically enters into oil and natural gas price swap agreements
to manage its exposure to oil and natural gas price volatility. These
hedging instruments are usually placed with counterparties that Canaan
believes have minimal credit risks. The oil and natural gas reference
prices upon which the price hedging instruments are based reflect various
market indices that have a high degree of historical correlation with
actual prices received by Canaan.
F-11
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Canaan accounts for it's hedging instruments using the deferral method of
accounting. Under this method, realized gains and losses from Canaan's
price risk management activities are recognized in oil and natural gas
revenues when the associated production occurs and the resulting cash flows
are reported as cash flows from operating activities. In the event of a
loss of correlation between changes in oil and natural gas reference prices
under a hedging instrument and actual oil and natural gas prices, a gain or
loss is recognized currently to the extent the hedging instrument has not
offset changes in actual oil and natural gas prices.
Canaan was not a party to any hedging instruments as of December 31, 1997
and 1998. On September 24, 1999, Canaan, as a participating party with the
Coral Limited Partnerships, entered into a natural gas price swap covering
1,500 Mcf, or approximately 27% of its monthly natural gas production
beginning October 1999 through September 2000. The price to be received for
this production is $2.60 per Mcf, while Canaan will pay the counterparty a
floating index price. At September 30, 1999, the natural gas price swap had
no significant value.
Natural Gas Balancing
During the course of normal operations, Canaan and other joint interest
owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. Canaan follows the sales method of accounting for
natural gas imbalances. A liability is recorded only if Canaan's excess
takes of natural gas volumes exceed its estimated remaining recoverable
reserves. No receivables are recorded for those wells where Canaan has
taken less than its ownership share of natural gas production.
Major Purchasers
Canaan markets its oil and natural gas production to numerous purchasers
under a variety of contracts. Two purchasers accounted for 47%, three
purchasers accounted for 58% and four purchasers accounts for 64% of
Canaan's 1996, 1997 and 1998 oil and natural gas revenues, respectively.
Canaan had no other purchasers that accounted for greater than 10% of its
oil and natural gas revenues. Canaan does not believe that the loss of any
single customer would have a material effect on the results of its
operations.
F-12
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
General and Administrative Expenses
General and administrative expenses are reported net of amounts allocated
to working interests of the oil and natural gas properties operated by
Canaan, and net of amounts capitalized pursuant to the full cost method of
accounting. No general and administrative costs were capitalized for the
years ended December 31, 1996, 1997 and 1998, or for the nine month periods
ended September 30, 1998 and 1999, due to nominal exploration and
development activities of Canaan.
General and administrative costs recovered through allocation to other
working interest owners approximated $395,000, $416,000, $538,000, $396,000
(unaudited) and $478,000 (unaudited), respectively, for the years ended
December 31, 1996, 1997 and 1998, and for the nine months ended
September 30, 1998 and 1999.
Income Taxes
Canaan accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized at the enacted tax rates for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and the respective tax bases and
tax operating losses and tax credit carryforwards. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Earnings Per Share
Basic earnings per share data is computed by dividing net earnings
attributable to common shareholders by the weighted average number of
common shares outstanding during the period. Canaan has no other securities
that would dilute its basic earnings per share.
Comprehensive Income
Canaan adopted SFAS No. 130, "Reporting Comprehensive Income," on January
1, 1998. SFAS No. 130 establishes standards for reporting and display of
"comprehensive income" and its components in a set of financial statements.
It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Canaan had no items of comprehensive income as
defined by SFAS No. 130 not included in the accompanying statements of
operations; therefore, statements of comprehensive income have not been
presented in the accompanying financial statements.
F-13
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
3. Property Acquisitions
In 1997, Canaan acquired oil and natural gas producing properties located
in Oklahoma from Boswell Energy Corp. (Boswell) for $16,000. Estimated
proved reserves acquired in the Boswell acquisition approximated 31,000 Mcf
of natural gas equivalent (unaudited). As a result of the acquisition,
Canaan assumed operations of 15 of the producing oil and natural gas
properties.
In December 1998, Canaan acquired oil and natural gas producing properties
located in Oklahoma from Marathon Oil Co. (Marathon) for $18,000. Estimated
proved reserves acquired in the Marathon acquisition approximated 24,000
Mcf of natural gas equivalent (unaudited). As a result of the acquisition,
Canaan assumed operations of 16 of the producing oil and natural gas
properties.
The acquired properties described above were accounted for by the purchase
method and accordingly, operations have been included in the financial
statements from the date of the respective acquisitions.
4. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
September 30,
December 31, 1999
----------------------------------- ---------------
1997 1998 (Unaudited)
---------- ----------
<S> <C> <C> <C>
Oil and natural gas revenue accruals.................. $ 35,495 $ 13,424 $ 23,118
Joint interest billings............................... 184,237 197,563 244,172
Receivables from officers and affiliates.............. 1,952 16,466 184,053
Other................................................. 10,613 4,292 6,877
---------- ---------- --------------
Total................................................. $232,297 $231,745 $458,220
========== ========== ==============
</TABLE>
At September 30, 1999, $166,000 of receivables from officers and affiliates
consisted of amounts due from the General Partners representing several
months of fees for Canaan managing the Coral Limited Partnerships.
F-14
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
5. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------- September 30,
1997 1998 1999
------------ -------------- ------------
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas properties-subject to amortization.... $ 682,198 $ 718,099 $ 791,349
Accumulated depreciation, depletion and amortization...... (403,465) (433,165) (469,660)
---------- ---------- ----------
Net oil and natural gas properties........................ 278,733 284,934 321,689
---------- ---------- ----------
Other equipment........................................... 188,662 179,557 187,664
Accumulated depreciation.................................. (120,081) (138,731) (152,718)
---------- ---------- ----------
Net other equipment....................................... 68,581 40,826 34,946
---------- ---------- ----------
Property and equipment, net of accumulated depreciation,
depletion and amortization............................... $ 347,314 $ 325,760 $ 356,635
========== ========== ==========
</TABLE>
Depreciation, depletion and amortization expense consisted of the
following:
<TABLE>
<CAPTION> Nine months ended
Year ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Depreciation, depletion and amortization of oil
and natural gas properties..................... $20,541 $29,084 $29,700 $23,490 $36,495
Depreciation of other equipment................. 33,411 30,220 18,650 13,987 13,987
------- ------- ------- ------- -------
Total expense................................... $53,952 $59,304 $48,350 $37,477 $50,482
======= ======= ======= ======= =======
</TABLE>
6. Income Taxes
The components of income tax expense (benefit) for the years ended
December 31, 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
U.S. Federal........................................ $ 2,000 $22,000 $ 50,000
State............................................... 2,000 6,000 10,000
------- ------- --------
Total current tax expense..................... 4,000 28,000 60,000
------- ------- --------
Deferred income tax expense (benefit):
U.S. Federal........................................ (2,000) 36,000 (13,000)
State............................................... - 4,000 (1,000)
------- ------- --------
Total deferred tax expense (benefit).......... (2,000) 40,000 (14,000)
------- ------- --------
Total income tax expense (benefit)..................... $ 2,000 $68,000 $ 46,000
======= ======= ========
</TABLE>
F-15
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Total income tax expense for the respective years differed from the amounts
computed by applying the U.S. federal income tax rate to earnings before income
taxes as a result of the following:
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
U.S. statutory tax rate......................... 34% 34% 34%
State income taxes.............................. 4 4 4
Effect of graduated tax rates................... (19) (8) (5)
Non conventional fuel source tax credits........ (9) (2) (2)
Other........................................... (1) 2 -
--- - -
Effective income tax rate....................... 9% 30% 31%
=== === ===
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities at December 31, 1996, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Effect of cash-basis tax reporting $ - $ - $ 4,000
-------- -------- --------
Deferred tax liabilities:
Effect of cash-basis tax reporting............... (3,000) - -
Property and equipment, principally due to
differences in depreciation and expensing of
intangible drilling costs for tax purposes..... (51,000) (94,000) (84,000)
-------- -------- --------
Total deferred tax liabilities................... (54,000) (94,000) (84,000)
-------- -------- --------
Net deferred tax liability....................... $(54,000) $(94,000) $(80,000)
======== ======== ========
</TABLE>
The rates at which Canaan provided for income tax for the nine month periods
ended September 30, 1998 and 1999 were based on estimates of its effective tax
rate for the respective years.
7. Employee Benefit Plan
Canaan maintains a qualified profit sharing plan pursuant to which it may make
annual discretionary contributions subject to Internal Revenue Code limits. The
plan allows employees to make voluntary deferred contributions subject to
Internal Revenue Code limits. Benefits payable under the plan are limited to the
amount of plan assets allocable to the account of each plan participant. Canaan
retains the right to modify, amend or terminate the plan at any time. Canaan
recorded $118,000, $132,000 and $124,000 of expenses related to discretionary
contributions to the Plan in 1996, 1997 and 1998, respectively. Such costs were
accrued by Canaan during the year and funded in the following year.
F-16
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
8. Commitments and Contingencies
Canaan leases office space and equipment under operating leases expiring over
the next three years. Future minimum lease payments under non-cancelable
operating leases having remaining terms in excess of one year as of December 31,
1998 are as follows:
1999................ $60,000
2000................ 19,000
2001................ 1,500
----------
Total.......... $80,500
==========
Rent expense for the years ended December 31, 1996, 1997 and 1998 approximated
$56,000, $61,000 and $63,000, respectively. Rent expense for the nine months
ended September 30, 1998 and 1999 approximated $47,000 (unaudited) and $53,000
(unaudited), respectively.
9. Related Party Transactions
Canaan manages the Coral Limited Partnerships on behalf of the General Partners
which reimburse Canaan for such services with payments equal to operating fees
received from the Coral Limited Partnerships, as defined in the partnership
agreements plus the General Partners' monthly distributions received from the
Coral Limited Partnerships.
In November 1998, Canaan issued 32 shares or 5% of its common stock to one of
its officers in exchange for a $22,000 promissory note. The principle balance
of the promissory note equaled the fair value of the shares issued. The note
earns interest at the annual rate equal to the discount rate charged by the New
York Federal Reserve Bank, redetermined semi-annually, and is secured by the
common stock. The note matures in November 2001; however, it allows Canaan to
forgive the note as services are provided by the officer over the term of the
note. Canaan forgave approximately $7,000 and $6,000 (unaudited) of the note in
1998 and for the nine months ended September 30, 1999, respectively. The note
is reflected in the accompanying balance sheets and statements of stockholders'
equity as a stock subscription receivable. Compensation expense is recorded pro
ratably over the term of the note.
F-17
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
10. Oil and Natural Gas Operations
The following table reflects the costs incurred in oil and natural gas
property acquisition and development activities:
<TABLE>
<CAPTION> Nine months ended
Year ended December 31, September 30,
----------------------------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition costs..................... $ - $ 16,000 $18,000 $ - $ -
Development costs.................... 21,025 139,433 50,816 22,127 101,609
</TABLE>
Results of Operations for Oil and Natural Gas Producing Activities:
Below is a summary of results of operations for oil and natural gas
producing activities. The results do not include any allocation of Canaan's
general corporate overhead and, therefore, are not necessarily indicative
of the contribution to net earnings of its oil and natural gas operations.
Income tax expense has been calculated by applying statutory income tax
rates to oil and natural gas sales after deducting costs, including
depreciation, depletion and amortization and after giving effect to
permanent differences.
<TABLE>
<CAPTION> Nine months ended
Year ended December 31, September 30,
------------------------------------------------ -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales ..................... $ 95,675 $112,412 $ 83,652 $ 66,052 $ 91,672
Production and operating expenses ............. (8,557) (17,792) (27,593) (21,300) (10,678)
Depreciation, depletion, and amortization ..... (20,541) (29,084) (29,700) (23,490) (36,495)
Income tax expense ............................ (10,000) (10,000) (4,000) (3,000) (7,000)
--------- --------- --------- --------- ---------
Results of operations from oil and natural gas
producing activities ......................... $ 56,577 $ 55,536 $ 22,359 $ 18,262 $ 37,499
======== ======== ======== ======== ========
Depreciation, depletion, and amortization
per equivalent Mcf of production ............. $ 0.50 $ 0.76 $ 0.73 $ 0.75 $ 0.88
======== ======== ======== ======== ========
</TABLE>
11. Supplemental Information on Oil and Natural Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and
natural gas activities of Canaan is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission (SEC)
and SFAS No. 69, "Disclosures About Oil and Gas Producing Activities".
F-18
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Quantities of Oil and Natural Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three year
period ended December 31, 1998. Canaan's proved reserves were calculated by
the independent petroleum consultants of Netherland, Sewell & Associates,
Inc. Canaan cautions that there are many uncertainties inherent in
estimating reserve quantities, and in projecting future production rates
and the timing of future development cost expenditures. In addition,
reserve estimates of new discoveries are more imprecise than those of
properties with a production history. Accordingly, these estimates are
subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
Canaan prepared the estimated reserves as of December 31, 1995, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1995, 1996 and 1997, Canaan used production costs based on actual costs
incurred during the years and actual oil and natural gas prices received on
December 31, 1995, 1996 and 1997. Canaan has estimated its reserves as of
December 31, 1995, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1995, 1996 and 1997 are not necessarily
reflective of quantities that might have been estimated based on
information available as of such dates had estimates in accordance with SEC
guidelines been made at such dates. Management believes that, because of
the methodology used, the reserve information presented is more reflective
of actual reserve quantities than estimates that might have been generated
as of such dates.
F-19
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
Oil Natural Gas
(Bbls) (Mcf)
------------ ------------
Proved reserves as of December 31, 1995 9,000 594,000
Extensions and discoveries................. 2,000 -
Production................................. (1,000) (35,000)
Sale of reserves........................... - (46,000)
------------ ------------
Proved reserves as of December 31, 1996...... 10,000 513,000
Extensions and discoveries................. 1,000 18,000
Purchases of reserves...................... 3,000 16,000
Production................................. (1,000) (32,000)
Sale of reserves........................... (1,000) -
------------ ------------
Proved reserves as of December 31, 1997...... 12,000 515,000
Purchases of reserves...................... 1,000 25,000
Production................................. (2,000) (29,000)
------------ ------------
Proved reserves as of December 31, 1998...... 11,000 511,000
============ ============
Oil Natural Gas
(Bbls) (Mcf)
------------ ------------
Proved developed reserves as of:
December 31, 1995.......................... 9,000 348,000
December 31, 1996.......................... 8,000 267,000
December 31, 1997.......................... 9,000 249,000
December 31, 1998.......................... 9,000 245,000
Standardized Measure of Discounted Future Net Cash Flows:
The following table reflects the standardized measure of discounted future
net cash flows relating to Canaan's interest in proved reserves:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Future cash inflows......................... $2,043,000 $1,364,000 $1,178,000
Future development costs.................... (128,000) (131,000) (133,000)
Future production costs..................... (346,000) (474,000) (399,000)
--------- ---------- ----------
Future net cash flows before income taxes... 1,569,000 759,000 646,000
10% discount to reflect timing of cash flows (827,000) (400,000) (339,000)
--------- ---------- ----------
Discounted future net cash flows............. 742,000 359,000 307,000
Future income taxes, net of 10% discount..... (246,000) (110,000) (90,000)
--------- ---------- ----------
Standardized measure of discounted future
net cash flows............. $ 496,000 $ 249,000 $ 217,000
========== ========== ==========
</TABLE>
F-20
<PAGE>
CANAAN ENERGY CORPORATION
Notes to Financial Statements
(Continued)
Future cash inflows are computed by applying year-end prices (averaging
$9.33 per barrel of oil, adjusted for transportation and other charges, and
$2.09 per Mcf of natural gas at December 31, 1998) to the year-end
quantities of proved reserves, except where fixed and determinable price
changes are provided by contractual arrangements in existence at year-end.
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future
income tax expenses give effect to permanent differences and tax credits,
but do not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to Canaan's proved reserves are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Beginning balance........................................ $ 301,000 $ 496,000 $ 249,000
Sales of oil and natural gas, net of production costs (80,000) (87,000) (50,000)
Net changes in prices and production costs............... 384,000 (380,000) (51,000)
Extensions and discoveries............................... 17,000 20,000 -
Purchase of reserves, net of future development - 26,000 19,000
costs..................................................
Sales of reserves in place............................... (63,000) (8,000)
Accretion of discount....... 44,000 74,000 36,000
Net change in income taxes............................... (107,000) 136,000 20,000
Other.................................................... - (28,000) (6,000)
--------- --------- ---------
Ending balance $ 496,000 $ 249,000 $ 217,000
========= ========= =========
</TABLE>
12. Segment Information
Canaan manages its business by country, which results in one operating segment
during the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1999.
Canaan is engaged primarily in the acquisition, development and production of
oil and natural gas properties located in Oklahoma. Canaan also operates 113
producing oil and natural gas producing properties located in Oklahoma, and
manages eight oil and natural gas limited partnerships on behalf of those
partnership's general partners.
F-21
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Indian Oil Company:
We have audited the accompanying balance sheets of Indian Oil Company as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Indian Oil Company as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
February 4, 2000
F-22
<PAGE>
Indian Oil Company
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1997 1998 1999
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,735,321 $ 1,990,838 $ 1,159,598
Accounts receivable, net (Note 4) 2,415,609 2,744,729 3,161,886
Prepaid expenses and other current assets 190,136 95,247 82,135
----------- ----------- -----------
Total current assets 5,341,066 4,830,814 4,403,619
Property and equipment, net, based on
the full cost method of accounting for
oil and natural gas properties (Note 5) 37,207,113 30,189,843 28,126,675
Debt issuance costs, net (Note 2) 269,713 133,714 83,618
Deferred tax asset (Note 7) - 1,520,000 1,520,000
Other assets - 30,000 30,000
----------- ----------- -----------
Total assets $42,817,892 $36,704,371 $34,163,912
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Trade $ 725,729 $ 505,239 $ 937,951
Revenues and royalties due to others 1,069,813 2,558,373 2,487,704
Accrued expenses 662,048 192,195 278,545
Current portion of long-term debt (Note 6) - - 3,603,000
Other current liabilities - 84,778 84,778
----------- ----------- -----------
Total current liabilities 2,457,590 3,340,585 7,391,978
----------- ----------- -----------
Long-term debt, less current portion (Note 6) 37,950,000 35,333,968 30,141,041
Other non-current liabilities - 134,232 70,649
Deferred income taxes (Note 7) 675,000 - -
Stockholders' equity (deficit):
Common stock, $0.005 par value; 2,000,000 shares
authorized, 62,360 shares outstanding (less
treasury shares of 37,187) 312 312 312
Additional paid-in capital 1,332,603 1,332,603 1,332,603
Retained earnings (accumulated deficit) 402,387 (3,437,329) (4,772,671)
----------- ----------- -----------
Total stockholders' equity (deficit) 1,735,302 (2,104,414) (3,439,756)
----------- ----------- -----------
Total liabilities and stockholders' equity $42,817,892 $36,704,371 $34,163,912
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
Indian Oil Company
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales $ 3,098,816 $ 3,356,616 $10,014,808 $ 7,660,893 $ 6,730,705
Other income 144,433 312,656 234,599 179,327 212,038
----------- ----------- ----------- ----------- -----------
Total revenues 3,243,249 3,669,272 10,249,407 7,840,220 6,942,743
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Lease operating 967,330 1,038,562 2,971,006 2,244,009 2,023,529
Production taxes 207,230 220,810 504,833 371,819 362,316
Depreciation, depletion, and amortization (Note 5) 533,420 739,397 4,029,243 2,973,151 2,578,023
General and administrative 825,896 1,138,632 1,659,255 1,119,233 1,264,969
Interest expense (Note 6) 476,786 509,381 3,119,786 2,349,082 2,049,248
Reduction of carrying cost
of oil and natural gas properties (Note 11) - - 4,000,000 - -
----------- ----------- ----------- ----------- -----------
Total costs and expenses 3,010,662 3,646,782 16,284,123 9,057,294 8,278,085
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes 232,587 22,490 (6,034,716) (1,217,074) (1,335,342)
Income tax expense (benefit) (Note 7) 50,000 - (2,195,000) (444,000) -
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 182,587 $ 22,490 $(3,839,716) $ (773,074) $(1,335,342)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
Indian Oil Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------------ -------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 182,587 $ 22,490 $ (3,839,716) $ (773,074) $ (1,335,342)
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization 533,420 739,397 4,029,243 2,973,151 2,578,023
Reduction in carrying cost of
oil and natural gas properties - - 4,000,000 - -
Provision for allowance for doubtful
accounts - 20,000 - - -
Amortization of debt issuance costs - 9,000 136,000 111,001 170,496
Accretion of discount on long-term debt 30,000 35,000 40,200 29,700 34,300
Deferred income tax expense (benefit) 25,000 - (2,195,000) (444,000) -
Gain on sale of equipment (9,550) (32,858) (35,258) (7,171) (12,470)
Accrued interest expense increasing debt - - 343,769 249,360 233,523
Changes in operating assets and liabilities:
Accounts receivable (1,067,543) 729,452 (1,490,850) (2,803,217) (555,051)
Other current assets (1,592) (132,639) 94,889 120,150 13,112
Accounts payable and accrued expenses 551,597 61,267 1,312,031 2,082,436 448,393
-------------- -------------- -------------- -------------- --------------
Net cash provided by operating activities 243,919 1,451,109 2,395,308 1,538,336 1,574,984
-------------- -------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (1,461,559) (33,769,226) (1,809,140) (1,467,758) (1,136,190)
Proceeds from sales of property and
equipment 790,868 276,776 334,293 334,293 570,222
Cash received from adjustment to purchase
price of property and equipment - - 1,533,769 1,533,769 137,894
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in) investing
activities (670,691) (33,492,450) 58,922 400,304 (428,074)
-------------- -------------- -------------- -------------- --------------
Cash flows from financing activities:
Borrowings on long-term debt 600,000 35,068,000 - - 6,000,000
Repayments of long-term debt (125,000) (1,918,000) (3,000,000) - (7,857,750)
Payments for debt issuance costs - (80,000) (198,713) (198,713) (120,400)
Proceeds from sales of common stock 22,650 - - - -
------------- --------------- -------------- -------------- --------------
Net cash provided by (used in) financing
activities 497,650 33,070,000 (3,198,713) (198,713) (1,978,150)
------------- --------------- -------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents 70,878 1,028,659 (744,483) 1,739,927 (831,240)
Cash and cash equivalents at beginning
of period 1,635,784 1,706,662 2,735,321 2,735,321 1,990,838
------------- --------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,706,662 $ 2,735,321 $ 1,990,838 $ 4,475,248 $ 1,159,598
============= =============== ============== ============== ==============
Supplemental cash flow information:
Cash payments for interest $ 427,000 $ 366,000 $ 2,600,000 $ 1,959,000 $ 1,611,000
============= =============== ============== ============== ==============
Cash payments for income taxes $ 1,000 $ 13,000 $ - $ - $ -
============= =============== ============== ============== ==============
Supplemental schedule of non-cash investing
and financing activities:
Debt issuance costs included in
accounts payable $ - $ 198,713 $ - $ - $ -
============= =============== ============== ============== ==============
Purchases of property and equipment
included in accounts payable $ - $ 315,101 $ - $ - $ -
============= =============== ============== ============== ==============
Adjustment to purchase price of
property and equipment included in
accounts receivable $ - $ 1,533,796 $ 372,066 $ 365,176 $ -
============= =============== ============== ============== ==============
Sale of property and equipment for
notes receivable $ - $ - $ 30,000 $ 30,000 $ -
============= =============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
Indian Oil Company
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Number of Shares Retained
of Common Stock Additional Earnings Total
------------------------ Common Paid-in (Accumulated Stockholders'
Outstanding Treasury Stock Capital Deficit) Equity
----------- -------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 62,360 37,725 $ 312 $1,332,603 $ 379,897 $ 1,712,812
Retirement of treasury stock - (538) - - - -
Net earnings - - - - 22,490 22,490
----------- -------- ------ ---------- ------------ -------------
Balance at December 31, 1997 62,360 37,187 312 1,332,603 402,387 1,735,302
Net loss - - - - (3,839,716) (3,839,716)
----------- -------- ------ ---------- ------------ -------------
Balance at December 31, 1998 62,360 37,187 312 1,332,603 (3,437,329) (2,104,414)
Net loss (unaudited) - - - - (1,335,342) (1,335,342)
----------- -------- ------ ---------- ------------ -------------
Balance at September 30, 1999 (unaudited) 62,360 37,187 $ 312 $1,332,603 $ (4,772,671) $ (3,439,756)
=========== ======== ====== ========== ============ =============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
INDIAN OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Organization and Basis of Presentation
Indian Oil Company (Indian) is engaged in the exploration, development and
production of natural gas, and to a lesser extent, crude oil. Indian focuses
its oil and natural gas operations in Oklahoma and western Arkansas, and to a
lesser extent in Texas, Kansas and Louisiana.
On February 15, 1999, Indian entered into an Agreement and Plan of Merger
with Canaan Energy Corporation, d/b/a Coral Reserves Group, Ltd., (Canaan) and
its affiliates (the Coral Group). Under the plan, within 18 months, Indian will
merge with and into Canaan and all of its issued and outstanding shares will be
converted into shares of Canaan. During the interim period prior to the Merger,
Indian signed an agreement authorizing Canaan to manage Indian on a day-to-day
basis.
In the opinion of management, the accompanying unaudited financial
statements as of September 30, 1999 and for the nine months ended September 30,
1998 and 1999, reflect adjustments (all of which were normal and recurring)
which, in the opinion of management, are necessary for a fair statement of the
financial position and results of operations of the interim periods presented.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Indian considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist of
overnight investments in money market funds.
Fair Value of Financial Instruments
Indian's financial instruments consist of cash and cash equivalents,
accounts receivable, other current assets, accounts payable, accrued expenses
and current and long-term debt obligations. The subordinated 2003 notes payable
and the production payment
F-27
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
obligation, as discussed in Note 6, are Indian's only financial instruments for
which fair value differs from carrying value. Fair value of all other financial
instruments approximates carrying value due to the short-term nature or the
variable interest rate structure of the instruments.
Property and Equipment
Indian follows the full cost method of accounting for its oil and natural
gas properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and natural gas properties are capitalized, including
nonproductive costs and certain general and administrative expenses. Net
capitalized costs are limited to the estimated future net revenues, discounted
at 10% per year, from proved oil and natural gas reserves. Such capitalized
costs are depleted by an equivalent units-of-production method, converting
barrels to natural gas at the ratio of one barrel of oil to six Mcf of natural
gas. No gain or loss is recognized upon the disposal of oil and natural gas
properties, unless such dispositions significantly alter the relationship
between capitalized costs and proved oil and natural gas reserves.
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds and acreage. These costs are reviewed
periodically by management for impairment, with the impairment provision
included in the cost of oil and natural gas properties subject to amortization.
Factors considered by management in its impairment assessment include drilling
results by Indian and other operators, the terms of oil and natural gas leases
not held by production, and available funds for exploration and development.
Depreciation and amortization of other property and equipment, including
leasehold improvements, are provided using the straight-line method based on
estimated useful lives of the related assets, which range from 3 to 7 years.
Indian accounts for its non-oil and natural gas long-lived assets in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets
to be Disposed Of." SFAS No. 121 requires that long-lived assets and
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell.
Debt Issuance Costs
Indian capitalized approximately $279,000 of costs related to the issuance
of debt in December 1997. Included in the amount capitalized was $125,000 of
costs paid to certain stockholders and an affiliated company for their guaranty
of a 1997 term loan and
F-28
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
for modifications to the terms of the subordinated 1998 notes payable. Also
included in the amount capitalized was $45,000 paid to the president of Indian
for his role as legal counsel in the preparation and review of the related debt
agreements. In 1999, Indian capitalized $120,000 (unaudited) of costs related to
the modification of its debt agreements. Amortization of debt issuance cost is
recognized as interest expense over the repayment terms of the related debt
using the straight-line method.
Accumulated amortization of debt issuance costs as of December 31, 1997 and
1998, and September 30, 1999, approximated $9,000, $145,000 and $315,000
(unaudited), respectively.
Revenue and Royalty Distributions Payable
For certain oil and natural gas properties, Indian receives production
proceeds from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue and
royalty owners are reflected as revenue and royalty distributions payable in the
accompanying balance sheets. Indian accrues revenue for only its net revenue
interest in oil and natural gas properties.
Hedging Activities
Indian periodically enters into oil and natural gas price swap agreements
to manage its exposure to oil and natural gas price volatility. These hedging
instruments are usually placed with counterparties that Indian believes have
minimal credit risks. The oil and natural gas reference prices upon which the
price hedging instruments are based reflect various market indices that have a
high degree of historical correlation with actual prices received by Indian.
Indian accounts for it's hedging instruments using the deferral method of
accounting. Under this method, realized gains and losses from Indian's price
risk management activities are recognized in oil and natural gas revenues when
the associated production occurs and the resulting cash flows are reported as
cash flows from operating activities. In the event of a loss of correlation
between changes in oil and natural gas reference prices under a hedging
instrument and actual oil and natural gas prices, a gain or loss is recognized
currently to the extent the hedging instrument has not offset changes in actual
oil and natural gas prices.
Indian was not a party to any such hedging instruments as of December 31,
1997 and 1998. At September 30, 1999, Indian had an open natural gas price-
hedging instrument covering 250,000 thousand cubic feet (Mcf) per month of
natural gas production through March 2000. The price to be received for this
production is $1.915 per Mcf, while Indian will pay the counterparty a floating
index price. Effective November 1, 1999 this instrument was modified, changing
the price to $2.19 per Mcf and extending the termination date through September
of 2000. Also, at September 30, 1999, Indian had an open natural gas price
hedging instrument covering 50,000 Mcf per month of natural gas production
through March 2000. The price to be received for this
F-29
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
production is $1.86 per Mcf, while Indian will pay the counterparty a floating
index price.
Fair value of the liability related to Indian's natural gas price hedging
instruments approximated $1,333,000 (unaudited) at September 30, 1999. This
liability represents the estimated amount Indian would have to pay to cancel the
contract or transfer them to other parties.
Natural Gas Balancing
During the course of normal operation, Indian and other joint interest
owners of natural gas reservoirs will take more or less than their respective
ownership share of the natural gas volumes produced. These volumetric
imbalances are monitored over the lives of the wells' production capability. If
an imbalance exists at the time the wells' reserves are depleted, cash
settlements are made among the joint interest owners under a variety of
arrangements.
Indian follows the sales method of accounting for natural gas imbalances.
A liability is recorded only if Indian's excess takes of natural gas volumes
exceed its estimated remaining recoverable reserves. No receivables are
recorded for those wells where Indian has taken less that its ownership share of
natural gas production.
General and Administrative Expenses
General and administrative expenses are reported net of amounts allocated
to working interest owners of the oil and natural gas properties operated by
Indian and net of amounts capitalized pursuant to the full cost method of
accounting. Indian capitalized $240,000 and $200,000 of such costs for the years
ended December 31, 1997 and 1998, respectively. Indian capitalized $180,000
(unaudited) of such costs for the nine months ended September 30, 1998. No
costs were capitalized for the year ended December 31, 1996 and the nine months
ended September 30, 1999.
Major Customers
Indian markets its oil and gas production to numerous purchasers under a
variety of short-term contracts. During 1996 and 1998, Indian's seven largest
purchasers accounted for 29% and 38%, respectively of it's oil and natural gas
revenues. During 1997 and the nine months ended September 30, 1999, Indian's six
largest purchasers accounted for 40% and 31% (unaudited), respectively of its
oil and natural gas revenues. Indian had no other purchasers that accounted for
greater than 10% of its oil and natural gas revenues. Indian does not believe
that the loss of any single customer would have a material effect on the results
of its operations.
Income Taxes
Indian accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted tax rates for the future tax consequences attributable
to differences between the financial
F-30
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
statement carrying amounts of existing assets and liabilities and the respective
tax bases and tax operating losses and tax credit carryforwards. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Comprehensive Income
Indian adopted SFAS No. 130, "Reporting Comprehensive Income," on January
1, 1998. SFAS No. 130 establishes standards for reporting and display of
"comprehensive income" and its components in a set of financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Indian had no items of comprehensive income as defined by SFAS No.
130 not included in the accompanying statements of operations; therefore,
statements of comprehensive income have not been presented in the accompanying
financial statements.
3. Property Acquisition
In December 1997, Indian acquired certain producing Oklahoma and western
Arkansas properties from Sonat Exploration Inc. (Sonat) for approximately $30.2
million. Estimated proved reserves of the Sonat properties as of December 31,
1997 were 48,816 million cubic feet of natural gas equivalent (unaudited).
Indian funded the purchase through borrowings under a line of credit and a term
note.
Included in the acquisition were numerous natural gas properties in which
Sonat took more or less than its ownership share of natural gas volumes
produced. On the acquisition date and through December 31, 1998, Indian was
unable to estimate the value of these volumetric imbalances. Accordingly, the
purchase price of the Sonat properties did not include a value for the acquired
volumetric imbalances. As the volumetric imbalances are settled, Indian will
record the settlements as other revenues/expenses.
The acquisition of the Sonat properties described above was accounted for
by the purchase method and accordingly have been included in Indian's financial
statements from the date of the acquisition.
F-31
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
4. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1997 1998 1999
------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas revenue accruals $ 427,009 $ 1,946,000 $ 2,477,000
Joint interest billings 280,331 341,508 328,062
Receivables from officers and affiliates 62,511 105,155 112,513
Other 1,665,758 372,066 264,311
Allowance for doubtful accounts (20,000) (20,000) (20,000)
------------ ----------- ------------
Net accounts receivable $ 2,415,609 $ 2,744,729 $ 3,161,886
============ =========== ============
</TABLE>
Indian requires other joint interest owners to pay drilling costs in
advance. The advances are recorded as liabilities by Indian. Indian does not
require parties to collaterize amounts owing for joint interest billings after
completion of the well. To mitigate this credit risk, Indian has the ability to
offset amounts owed through application of revenues of joint interest owners and
also has the ability to file liens on the related properties.
Accounts receivable - other, for the respective periods, mainly represents
amounts due from Sonat for adjustments to the purchase price of oil and natural
gas assets discussed in Note 3.
F-32
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
5. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1997 1998 1999
------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas properties:
Subject to amortization $ 40,508,275 $ 37,598,702 $ 38,100,346
Not subject to amortization 1,030,100 812,929 865,242
------------ ------------ ------------
41,538,375 38,411,631 38,965,588
Accumulated depreciation, depletion
and amortization (4,600,000) (8,500,000) (10,997,000)
------------ ------------ ------------
Net oil and natural gas properties 36,938,375 29,911,631 27,968,588
------------ ------------ ------------
Other equipment and leasehold improvements 593,782 690,604 585,305
Accumulated depreciation and amortization (325,044) (412,392) (427,218)
------------ ------------ ------------
Net other equipment and leasehold
improvements 268,738 278,212 158,087
------------ ------------ ------------
Property and equipment, net of accumulated
depreciation, depletion and amortization $ 37,207,113 $ 30,189,843 $ 28,126,675
============ ============ ============
</TABLE>
Depreciation, depletion and amortization expense consisted of the following:
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------- ---------------------------
1996 1997 1998 1998 1999
--------- --------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Depreciation, depletion and amortization
of oil and natural gas properties $ 475,000 $ 650,000 $ 3,900,000 $ 2,878,000 $ 2,497,000
--------- --------- ----------- ----------- -----------
Depreciation, depletion and amortization
of other equipment and leasehold
improvements 58,420 89,397 129,243 95,151 81,023
--------- --------- ----------- ----------- -----------
$ 533,420 $ 739,397 $ 4,029,243 $ 2,973,151 $ 2,578,023
========= ========= =========== =========== ===========
</TABLE>
F-33
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
6. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1997 1998 1999
------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Credit facilities:
1997 line of credit $ 23,000,000 $ 20,000,000 $ 18,536,000
1997 term loan 12,000,000 12,000,000 6,000,000
Production payment obligation - - 5,606,250
Subordinated 2003 notes payable 1,740,000 1,999,644 2,185,611
Subordinated 1998 notes payable 1,210,000 1,334,324 1,416,180
------------ ------------ ------------
37,950,000 35,333,968 33,744,041
Current portion - - (3,603,000)
------------ ------------ ------------
Net long-term debt $ 37,950,000 $ 35,333,968 $ 30,141,041
============ ============ ============
</TABLE>
1997 Line of Credit
- -------------------
In conjunction with the Sonat property acquisition in December 1997, Indian
established a line of a credit pursuant to which it can borrow up to an amount
determined by the bank based on evaluation of the assets and cash flow of
Indian. The established borrowing base at September 30, 1999 was $20 million
(unaudited). Amounts borrowed under the line of credit bear interest at various
fixed rate options, which Indian may elect for periods up to 90 days. Such
rates are generally less than the prime rate. Indian may also elect to borrow
at the prime rate. The average interest rate at December 31, 1997 and 1998 was
8.38% and 7.80%, respectively. The average rate of interest at September 30,
1999 was 8.01% (unaudited). The line of credit is secured by essentially all of
Indian's oil and natural gas properties. The line of credit expires in January
2000 at which date all unpaid balances become due.
On March 31, 1999, in conjunction with the merger agreement with the Coral
Group, a monthly borrowing base reduction of $244,000 per month was established
for a period of eighty-two (82) months.
On January 1, 2000, the bank renewed the line of credit extending the
maturity date to January 15, 2001 and lowering the borrowing base reduction to
$215,000 per month.
F-34
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
1997 Term Loan
- --------------
Also in conjunction with the Sonat property acquisition in December 1997,
Indian established a $12 million term loan with a bank. Amounts borrowed under
the term loan bear interest at a specified prime rate redetermined annually.
The interest rate at December 31, 1997 and 1998 was 8.41% and 8.00%,
respectively. The interest rate at September 30, 1999 was 8.25% (unaudited).
The term loan matures in March 2000 and is secured by certain assets of
affiliates.
As discussed below, in March 1999, Indian repaid $6 million of the term
loan with proceeds received from its issuance of a $6 million production payment
obligation to the Coral Group.
On February 1, 2000, the bank amended the term loan agreement extending its
maturity to March 1, 2001.
As of December 31, 1998, and September 30, 1999, Indian was in default with
certain covenants required under the 1997 line of credit and the 1997 term loan.
The financial institutions have waived all prior noncompliance with the
respective debt covenants.
Production Payment Obligation
- -----------------------------
In March 1999, as a result of the Agreement and Plan of Merger with the
Coral Group, the Coral Group loaned Indian $6 million in return for a monthly
production payment of $56,250 until the obligation is paid in full. The
production payment obligation is unsecured and interest free. The estimated
fair value of the production payment obligation at September 30, 1999
approximated $6.9 million (unaudited) using an interest rate of 8.25%.
Subordinated 2003 Notes Payable
- -------------------------------
Indian has $2 million of 10% (discounted using a 13.7% interest rate)
subordinated, unsecured notes payable to stockholders. Prior to the following
term modifications, Indian paid interest quarterly. The notes originally
required a balloon payment in 2003. The estimated fair value of the notes
payable at December 31, 1997 and 1998 and September 30, 1999 approximated $1.87
million, $2.0 million and $2.2 million (unaudited), respectively.
In conjunction with the December 1997 Sonat property acquisition and the
execution of the 1997 line of credit and the 1997 term loan, the terms of the
subordinated 2003 notes were modified to defer all payments of interest until
the 1997 line of credit maturity date.
As a result of the Agreement and Plan of Merger with the Coral Group, the
notes payable will be contributed to Indian's equity prior to the merger.
F-35
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Subordinated 1998 Notes Payable
- -------------------------------
Indian has two subordinated notes payable secured by treasury stock. The
notes were held by two former stockholders and in April 1996, the notes were
purchased by an affiliate of Indian. Prior to the following term modification,
Indian paid $33,000 quarterly, including interest at the national prime rate
plus one half percent, revalued semiannually. The interest rate at December 31,
1997 and 1998 and September 30, 1999 was 8.5%, 8.0% and 8.0% (unaudited),
respectively.
The terms of the subordinated notes were modified in December 1997. The
maturity date became the same as the 1997 line of credit, the interest rate was
changed to the national prime rate and interest payments were deferred until the
maturity of the note.
As a result of the Agreement and Plan of Merger with the Coral Group, the
notes payable will be contributed to Indian's equity prior to the merger.
Future Maturities
- -----------------
As of December 31, 1998, all debt matures during the year 2000.
7. Income Taxes
At December 31, 1998, Indian had the following carryforwards available to
reduce future income taxes:
Types of Years of Carryforward
Carryforward Expiration Amounts
- ----------------------------------- ----------- ------------
Net operating loss - U.S. federal 2005 - 2018 $ 4,858,000
Net operating loss - various states 2005 - 2018 $ 7,654,000
Statutory depletion - $ 1,387,000
The components of income tax expense (benefit) for the years ended December
31, 1996, 1997 and 1998 were as follows:
F-36
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Current income tax expense:
U.S. federal $ 25,000 $ - $ -
Various states - - -
-------- -------- -----------
Total current tax expense 25,000 - -
-------- -------- -----------
Deferred income tax expense (benefit):
U.S. federal 16,000 - (1,954,000)
Various states 9,000 - (241,000)
-------- -------- -----------
Total deferred tax expense (benefit) 25,000 - (2,195,000)
-------- -------- -----------
Total income tax expense (benefit) $ 50,000 $ - $(2,195,000)
======== ======== ===========
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1996,
1997 and 1998 differed from the amounts computed by applying the U.S. federal
income tax rate to earnings (loss) before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
U.S. statutory tax (benefit) rate 34% 34% (34%)
State income tax (benefit) 4 4 (4)
Effect of graduated tax rates (3) (19) -
Other, net (13) (19) 2
-------- -------- -----------
Effective income tax expense
(benefit) rate 22% 0% (36%)
======== ======== ===========
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 115,000 $ 347,000 $ 1,958,000
Statutory depletion carryforwards 285,000 378,000 471,000
------------ ------------ ------------
Total gross deferred tax assets 400,000 725,000 2,429,000
Less valuation allowance - - 279,000
------------ ------------ ------------
Net deferred tax assets 400,000 725,000 2,150,000
------------ ------------ ------------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation,
and the expensing of intangible
drilling costs for tax purposes (1,075,000) (1,400,000) (630,000)
------------ ------------ ------------
Net deferred tax asets (liability) $ (675,000) $ (675,000) $ 1,520,000
============ ============ ============
</TABLE>
Indian has recognized $2.15 million of net deferred tax assets as of
December 31, 1998, which consist of various carryforwards available to offset
future income taxes. The carryforwards include federal net operating loss
carryforwards, the majority of which do not begin to expire until 2018, and
state net operating loss carryforwards, which expire primarily between 2005 and
2018. The tax benefits of carryforwards are recorded as an asset to the extent
that management assesses the utilization of such carryforwards to be
F-37
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
"more likely than not" realizable. When the future utilization of some portion
of the carryforwards is determined not to be likely, a valuation allowance is
provided to reduce the recorded tax benefits from such assets.
Indian expects the tax benefit from the net operating loss and statutory
depletion carryforwards to be utilized between 2000 and 2009. Such expectation
is based upon current estimates of taxable income during this period.
Significant changes in such estimates caused by variables such as future oil and
natural gas prices or capital expenditures could alter the timing of the
eventual utilization of such carryforwards. There can be no assurance that
Indian will generate any specific level of continuing taxable earnings.
However, management believes that Indian's future taxable income will more
likely than not be sufficient to utilize $5.7 million ($2.15 million tax
effected) of its carryforwards prior to their expiration.
8. Employee Benefit Plan
Employees of Indian, if eligible, may participate in a defined contribution
plan with features under Section 401(k) of the Internal Revenue Code. The plan
allows employees to make voluntary deferral contributions up to a maximum of 15%
of their compensation. Indian matches 50% of each employee's contribution up to
6% of such employee's compensation. Benefits payable under the plan are limited
to the amount of plan assets allocable to the account of each plan participant.
Indian retains the right to modify, amend or terminate the plan at any time.
For the year ended December 31, 1996, 1997 and 1998, Indian made matching
contributions of $27,000, $35,000 and $44,000, respectively. For the nine
months ended September 30, 1998 and 1999, Indian made matching contributions of
$32,000 (unaudited) and $26,000 (unaudited), respectively.
9. Related Party Transactions
Historically, Indian subleased a condominium and leased a boat and an
automobile from an affiliate. Indian reimbursed the affiliate for related
expenses incurred. Lease and reimbursement costs incurred by Indian
approximated $17,000, $77,000 and $71,000 for the years ended December 31, 1996,
1997 and 1998, respectively and $56,356 for the nine months ended September 30,
1998 (unaudited).
Terms of the sublease and lease allowed Indian to cancel upon 30 days
notice. Indian terminated the lease in September 1998.
In 1996, 16% of Indian's natural gas sales were to an affiliate. Such sales
were in the normal course of business at market prices. The affiliate was sold
to an unaffiliated party effective July 1, 1996.
During 1997, Indian received $100,000 from an affiliate, as a reimbursement
for management services provided. Such services were not provided in either
1996 or 1998.
F-38
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
10. Commitments and Contingencies
Indian leases its corporate offices through several lease obligations
expiring August 1, 2001. Minimum future rental payments under non-cancelable
operating leases having remaining terms in excess of one year as of December 31,
1998 are as follows:
1999 $ 246,500
2000 237,500
2001 158,000
----------
Total $ 642,000
==========
Rent expense for the years ended December 31, 1996, 1997 and 1998
approximated $85,000, $118,000 and $224,000, respectively. Rent expense for the
nine months ended September 30, 1998 and 1999 approximated $180,000 (unaudited)
and $188,000 (unaudited), respectively.
11. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated after-
tax future net revenues from proved oil and natural gas properties. In
calculating future net revenues, current prices and costs are generally held
constant indefinitely. The net book value less deferred income taxes is
compared to the ceiling with any excess written off as an expense. An expense
recorded in one period may not be reversed in a subsequent period even though
higher oil and natural gas prices may have increased the ceiling applicable to
the subsequent period.
At December 31, 1998, the carrying value of Indian's oil and natural gas
properties, less related deferred income taxes, exceeded the full cost ceiling
by $4 million. Accordingly, a $4 million pre-tax reduction of the carrying
value of such properties was recorded. This reduction was partially offset by a
$1.5 million deferred income tax benefit, resulting in an after-tax charge of
$2.5 million.
12. Oil and Natural Gas Operations
Below is a summary of results of operations for oil and natural gas producing
activities. The results do not include any allocation of Indian's interest
costs or general corporate overhead and, therefore, are not necessarily
indicative of the contribution to net income of its oil and natural gas
operations. Income tax expense (benefit) has been calculated by applying
statutory income tax rates to oil and gas sales after deducting costs, including
depreciation, depletion and amortization and after giving effect to permanent
differences.
F-39
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales $ 3,098,816 $ 3,356,616 $ 10,014,808 $ 7,660,893 $ 6,730,705
Lease operating expenses and gross
production taxes (1,174,560) (1,259,372) (3,475,839) (2,615,828) (2,385,845)
Depreciation, depletion and
amortization (475,000) (650,000) (3,900,000) (2,878,000) (2,497,000)
Reduction of carrying value of oil and
natural gas properties - - (4,000,000) - -
Income tax (expense) benefit (509,000) (492,000) 462,000 (737,000) (628,000)
------------ ------------ ------------ ------------ ------------
Results of operations from oil and
natural gas producing activities $ 940,256 $ 955,244 $ (899,031) $ 1,430,065 $ 1,219,860
============ ============ ============ ============ ============
Depreciation, depletion, and amortization
per equivalent Mcf of production $ 0.39 $ 0.52 $ 0.80 $ 0.76 $ 0.70
============ ============ ============ ============ ============
</TABLE>
The following is a summary of costs incurred, all of which were
capitalized, for oil and gas property development and acquisition activities:
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Development costs $935,995 $ 1,681,672 $1,298,316 $1,005,437 $1,056,228
Acquisition costs 451,500 30,622,885 - - -
</TABLE>
13. Supplemental Information on Oil and Natural Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and
natural gas activities of Indian is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission (SEC) and
SFAS No. 69 "Disclosures About Oil and Gas Producing Activities."
Oil and Natural Gas Quantities
- ------------------------------
The reserve information for the year ended December 31, 1998 presented
below was prepared by the independent engineering firm of Netherland, Sewell, &
Associates, Inc. Indian cautions that there are many uncertainties inherent in
estimating reserve quantities, and in projecting future production rates and the
timing of future development expenditures. In addition, reserve estimates of new
discoveries are more imprecise than those of properties with a production
history. Accordingly, these estimates are subject to change as additional
information becomes available.
F-40
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions. Proved
developed oil and natural gas reserves are those reserves expected to be
recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and natural
gas, as well as the changes in proved reserves during the periods indicated, are
set forth in the tables below. All reserves are located in the United Sates.
Indian prepared the estimated reserves as of December 31, 1995, 1996 and
1997 based on geological and engineering evaluations performed as of December
31, 1998. The reserve estimates as of the prior year-end dates were derived by
analyzing actual historical production amounts and by adjusting the reserves
attributable to wells acquired or disposed of during the relevant periods. In
addition, in deriving the estimates as of December 31, 1995, 1996 and 1997,
Indian used production costs based on actual costs incurred during the years and
actual oil and natural gas prices received on December 31, 1995, 1996 and 1997.
Indian has estimated its reserves as of December 31, 1995, 1996 and 1997 in this
manner because the actual information necessary to calculate estimated proved
reserves and related information in accordance with guidelines of the SEC as of
each date is not available. Because the reserve estimates as of December 31,
1998 are based on additional information gained from the result of drilling,
testing and production subsequent to the dates of the estimated reserves, the
reserve estimates as of December 31, 1995, 1996 and 1997 are not necessarily
reflective of quantities that might have been estimated based on information
available as of such dates had estimates in accordance with SEC guidelines been
made at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
F-41
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
Changes in Proved Reserves
- --------------------------
Oil Natural gas
(Bbls) (Mcf)
--------- -----------
Proved reserves, at December 31, 1995 195,000 8,229,000
Extension and discoveries 3,000 489,000
Purchase of reserves 128,000 317,000
Production (53,000) (894,000)
Sales of reserves in place (9,000) -
--------- -----------
Proved reserves, at December 31, 1996 264,000 8,141,000
Extension and discoveries 1,000 59,000
Purchase of reserves 174,000 47,772,000
Production (51,000) (953,000)
Sales of reserves in place (1,000) (25,000)
--------- -----------
Proved reserves, at December 31, 1997 387,000 54,994,000
Extension and discoveries 2,000 467,000
Production (59,000) (4,552,000)
Sales of reserves in place - (126,000)
--------- -----------
Proved reserves, at December 31, 1998 330,000 50,783,000
========= ===========
Proved Developed Reserves as of:
- --------------------------------
Oil Natural Gas
(Bbls) (Mcf)
--------- -----------
December 31, 1995 173,000 5,665,000
December 31, 1996 241,000 5,575,000
December 31, 1997 292,000 38,162,000
December 31, 1998 236,000 33,952,000
Standardized Measure of Discounted Future Net Cash Flows
- --------------------------------------------------------
The following table sets forth the standardized measure of the discounted
future net cash flows attributable to Indian's proved oil and natural gas
reserves. Future cash inflows were computed by applying period-end prices of oil
and natural gas to the estimated future production of proved oil and natural gas
reserves. All prices were held constant except where definite price escalation
is provided for in the sales contracts. Contractually provided natural gas
prices in excess of estimated market prices were used in computing the future
cash inflows only if Indian expects to continue to receive higher prices under
legally enforceable contract terms. Future prices received may differ from the
estimates in the standardized measure.
Future production and development costs represent the estimated future
expenditures (based on current costs) to be incurred in developing and producing
the proved reserves, assuming continuation of existing economic conditions. The
resulting periodic future net cash flows were discounted using a 10% annual
rate.
F-42
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
The additions to proved reserves from new discoveries and extensions
could vary significantly from year to year, additionally, the impact of changes
to reflect current prices and costs of reserves proved in prior years could be
significant. Accordingly, the information presented below should not be viewed
as an estimate of the fair value of Indian's oil and natural gas properties, nor
should it be considered indicative of any trends.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Future cash inflows $ 37,452,000 $ 128,942,000 $ 103,279,000
Future development costs (904,000) (8,425,000) (8,425,000)
Future production costs (9,720,000) (40,694,000) (40,526,000)
------------- ------------- -------------
Future net cash flows before income taxes 26,828,000 79,823,000 54,328,000
10% discount to reflect timing of cash flows (12,455,000) (37,057,000) (25,221,000)
------------- ------------- -------------
Discount future net cash flows 14,373,000 42,766,000 29,107,000
Future income taxes, net of 10% discount (4,441,000) (8,451,000) (4,806,000)
------------- ------------- -------------
Standardized measure of discounted future
net cash flows $ 9,932,000 $ 34,315,000 $ 24,301,000
============= ============= =============
</TABLE>
The weighted average prices at December 31, 1998 used in the computations
in the table above were $10.52 per barrel of oil and $1.97 per Mcf of natural
gas.
Changes Relating to Standardized Measure of Discounted Future Net Cash Flows
- ----------------------------------------------------------------------------
Principle changes in the standardized measure of discounted future net cash
flows attributable to Indian's proved reserves are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Beginning balance $ 4,186,000 $ 9,932,000 $ 34,315,000
Sales of oil and natural gas, net of
production costs (1,924,000) (2,097,000) (6,839,000)
Net changes in prices and production costs 7,418,000 (6,455,000) (10,222,000)
Purchase of reserves, net of future
development costs 1,709,000 35,943,000 -
Extensions and discoveries less related costs 768,000 53,000 307,000
Sales of reserves in place (90,000) (25,000) (81,000)
Accretion of discount 560,000 1,437,000 4,277,000
Net change in income taxes (3,028,000) (4,009,000) 3,645,000
Other 333,000 (464,000) (1,101,000)
------------- ------------- -------------
Ending balance $ 9,932,000 $ 34,315,000 $ 24,301,000
============= ============= =============
</TABLE>
F-43
<PAGE>
INDIAN OIL COMPANY
Notes to Financial Statements
(Continued)
14. Segment Information
Indian manages its business by country, which resulted in one operating
segment during the year ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999. Indian is engaged in the exploration,
development and production of natural gas, and to a lessor extent, crude oil.
Indian's operations are primarily focused in Oklahoma and western Arkansas. All
of Indian's operations are in the U.S.
15. Subsequent Events
On October 10, 1999, Indian transferred certain assets to be excluded from
the merger with Canaan to INDCO L.L.C. (INDCO), an entity owned by certain
shareholders, for two notes totaling $1,043,000. The transferred assets included
certain undeveloped leases, office fixtures, other equipment and receivables due
from Indian's officers and stockholders. The notes' principal amount equaled the
book value of transferred assets on the date of transfer. Also in October 1999,
Indian issued INDCO a $500,000 note for cash. The $500,000 note payable to INDCO
is expected to be repaid; however, the notes receivable from INDCO are not
expected to be collected and will be accounted for as a distribution to
shareholders.
F-44
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1990 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1990 Limited Partnership as of December 31, 1997 and 1998 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Natural Gas
Income Fund 1990 Limited Partnership as of December 31, 1997 and 1998, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-45
<PAGE>
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------ September 30,
1997 1998 1999
------------ ------------ -------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 114,000 $ 73,681 $ 75,749
Accounts receivable, net (Note 2) 283,644 123,388 118,176
------------ ------------ -------------
Total current assets 397,644 197,069 193,925
------------ ------------ -------------
Property and equipment, at cost, based on the full cost
Method of accounting for oil and gas properties 3,490,328 3,537,870 3,568,137
Accumulated depreciation, depletion and amortization (1,918,211) (2,152,633) (2,311,390)
------------ ------------ -------------
1,572,117 1,385,237 1,256,747
------------ ------------ -------------
Total assets $ 1,969,761 $ 1,582,306 $ 1,450,672
============ ============ =============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 33,040 $ 15,937 $ 13,888
Revenue and royalty distributions payable 25,387 24,680 29,277
------------ ------------ -------------
Total current liabilities 58,427 40,617 43,165
------------ ------------ -------------
Long-term debt (Note 3) 598,955 628,455 655,455
Partners' equity (deficit):
General partners 20,757 (20,425) (21,033)
Limited partners 1,291,622 933,659 773,085
------------ ------------ -------------
Total partners' equity 1,312,379 913,234 752,052
------------ ------------ -------------
Total liabilities and partners' equity $ 1,969,761 $ 1,582,306 $ 1,450,672
============= ============ =============
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 1,143,826 $ 1,014,006 $ 700,257 $ 546,982 $ 460,465
Other income 4,836 6,317 5,588 4,455 2,550
----------- ----------- ---------- ---------- ----------
Total revenues 1,148,662 1,020,323 705,845 551,437 463,015
----------- ----------- ---------- ---------- ----------
Costs and expenses:
Lease operating 123,993 103,886 105,603 71,246 69,307
Production taxes 80,514 45,033 52,015 40,628 32,634
Depreciation, depletion and amortization 300,698 256,591 234,422 180,792 158,757
General and administrative 50,621 55,483 52,775 38,597 33,007
Interest 49,100 50,364 48,475 39,907 41,775
----------- ----------- ---------- ---------- ----------
Total costs and expenses 604,926 511,357 493,290 371,170 335,480
----------- ----------- ---------- ---------- ----------
Net earnings $ 543,736 $ 508,966 $ 212,555 $ 180,267 $ 127,535
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 543,736 $ 508,966 $ 212,555 $ 180,267 $ 127,535
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 300,698 256,591 234,422 180,792 158,757
Changes in operating assets and liabilities:
Accounts receivable (106,468) 39,285 160,256 84,306 5,212
Increase (decrease) in:
Accounts payable and Revenue and royalties
Payable (33,916) 17,243 (17,810) (22,761) 2,548
---------- ---------- ---------- ---------- -----------
Net cash provided by operating activities 704,050 822,085 589,423 422,604 294,052
---------- ---------- ---------- ---------- -----------
Cash flows from investing activities:
Proceeds from sales of property and
equipment 112,309 8,072 - - -
Purchases of property and equipment (158,095) (205,604) (47,542) (57,908) (30,267)
---------- ---------- ---------- ---------- -----------
Net cash (used) provided by investing
activities (45,786) (197,532) (47,542) (57,908) (30,267)
---------- ---------- ---------- ---------- -----------
Cash flows from financing activities:
Borrowings on long-term debt 109,500 276,500 29,500 27,000 27,000
Repayments of long-term debt (93,000) (139,500) - - -
Distributions to partners (669,956) (761,700) (611,700) (449,708) (288,717)
---------- ---------- ---------- ---------- -----------
Net cash (used) provided by financing
activities (653,456) (624,700) (582,200) (422,708) (261,717)
---------- ---------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents 4,808 (147) (40,319) (58,012) 2,068
Cash and cash equivalents at beginning
of year 109,339 114,147 114,000 114,000 73,681
---------- ---------- ---------- ---------- -----------
Cash and cash equivalents at end of year $ 114,147 $ 114,000 $ 73,681 $ 55,988 $ 75,749
========== ========== ========== ========== ===========
Supplemental cash flow information:
Cash payments for interest $ 49,100 $ 50,364 $ 48,475 $ 39,907 $ 41,775
========== ========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
----------------- ----------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 19,794 $1,545,319 $1,565,113
Net Earnings 191,388 317,578 508,966
Distributions to partners (190,425) (571,275) (761,700)
----------------- ----------------- ---------------
Balance at December 31, 1997 20,757 1,291,622 1,312,379
Net Earnings 111,744 100,811 212,555
Distributions to partners (152,926) (458,774) (611,700)
----------------- ----------------- ---------------
Balance at December 31, 1998 (20,425) 933,659 913,234
Net Earnings (unaudited) 71,572 55,963 127,535
Distributions to partners
(unaudited) (72,180) (216,537) (288,717)
----------------- ----------------- ---------------
Balance at September 30, 1999
(unaudited) $ (21,033) $ 773,085 $ 752,052
================= ================= ===============
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 109 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to
the General Partners until payout is achieved. After payout, these
items are allocated 75% to the Limited Partners and 25% to the
General Partners. Payout occurs on an individual partner basis,
and is reached at the point in time when cash distributions to a
Limited Partner equal his or her capital contributions made to the
Partnership. A portion of the Limited Partners reached payout
status during 1995, and the remainder reached payout during 1996.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 38.875 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-50
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance
F-51
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its
oil and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996, 1997
and 1998, the Partnership's largest two purchasers accounted for
approximately 30%, 35% and 35%, respectively of its oil and natural gas
revenues. The Partnership does not believe that the loss of any single
customer would have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs
F-52
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
ongoing evaluations of its customers' financial condition, but does not
generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------- September 30,
1997 1998 1999
------------------- ----------------- ----------------------
<S> <C> <C> <C>
(Unaudited)
Oil and natural gas revenue accruals............. $283,132 $122,254 $115,479
Other............................................ 512 1,134 2,697
-------------- ------------- ------------
Total............................................ $283,644 $ 123,388 $ 118,176
============== ============= ============
</TABLE>
3. Long-Term Debt
The balances at December 31, 1998 and 1997 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $750,000 and $650,000 at
December 31, 1998 and 1997, respectively. Borrowings bear interest at 1%
above a specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1998 was 7.30%. At December 31, 1998
and 1997, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
June 1999, extending the maturity date to October 1, 2000.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-53
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves, Inc., the Managing
General Partner of the Partnership, and certain affiliated partnerships,
whose Managing General Partner is Coral Reserves, Inc. or Coral Reserves
Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy Corp. have
common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $30,676, $40,086 and $36,239 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1996, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, an affiliated partnership, for aggregate consideration of
$30,472.
Under an agreement between the Partnership and the Selling Agent, the
Selling Agent is to receive compensation for services performed in the
amount of 1 1/2% of Partnership gross annual revenues, plus 1% of
Partnership monthly distributable cash before payout and an additional 1%
after payout (paid solely out of the Managing General Partner's share of
monthly distributable cash). Effective January 1, 1992, the Selling Agent
sold the rights to these fees to Coral Reserves Natural Gas Income Fund
1991 Limited Partnership ("Coral 1991"), with the sole exception being that
the Selling Agent retained the additional 1% after payout interest in
Partnership monthly distributable cash. Fees subsequently paid to Coral
1991, in Lieu of the Selling Agent, totaled $18,603, $22,191, and $20,557
for the years ended December 31, 1998, 1997 and 1996, respectively. The
Selling Agent must continue to perform the services for the Partnership as
originally contracted.
F-54
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION> Nine months ended
Year Ended December 31, September 30,
--------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs
(proved)...................... $30,467 $ - $ - $ - $ -
Development costs.............. 99,430 93,428 28,620 23,088 4,873
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION> Nine months ended
Year Ended December 31, September 30,
-------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
------------- -------------- ------------- ---------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales................. $1,143,826 $1,014,006 $ 700,257 $ 546,982 $ 460,465
Production and operating expenses......... (204,507) (148,919) (157,618) (111,874) (101,941)
Depreciation, depletion and
amortization............................. (300,698) (256,591) (234,422) (180,792) (158,757)
---------- ---------- --------- --------- ---------
Results of operations for oil and gas
producing activities..................... $ 638,621 $ 608,496 $ 308,217 $ 248,016 $ 199,767
========== ========== ========= ========= =========
Depreciation, depletion and amortization
per equivalent MCF of production......... $ 0.65 $ 0.69 $ 0.70 $ 0.71 $ 0.72
========== ========== ========= ========= =========
</TABLE>
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
F-55
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1995,
1996 and 1997 based on geological and engineering evaluations performed as
of December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1995, 1996 and 1997, The Partnership used production costs based on
actual costs incurred during the years and actual oil and natural gas
prices received on December 31, 1995, 1996 and 1997. The Partnership has
estimated its reserves as of December 31, 1995, 1996 and 1997 in this
manner because the actual information necessary to calculate estimated
proved reserves and related information in accordance with guidelines of
the SEC as of each date is not available. Because the reserve estimates as
of December 31, 1998 are based on additional information gained from the
result of drilling, testing and production subsequent to the dates of the
estimated reserves, the reserve estimates as of December 31, 1995, 1996 and
1997 are not necessarily reflective of quantities that might have been
estimated based on information available as of such dates had estimates in
accordance with SEC guidelines been made at such dates. Management believes
that, because of the methodology used, the reserve information presented is
more reflective of actual reserve quantities than estimates that might have
been generated as of such dates.
F-56
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
-------------------- --------------------
<S> <C> <C>
Proved Reserves as of December 31, 1995 17,000 2,804,000
Sale of reserves - (119,000)
Extensions and discoveries - 40,000
Purchases of reserves 11,000 416,000
Production (7,000) (417,000)
------ ---------
Proved Reserves as of December 31, 1996 21,000 2,724,000
Extensions and discoveries 1,000 144,000
Production (5,000) (344,000)
------ ---------
Proved Reserves as of December 31, 1997 17,000 2,524,000
Extensions and discoveries - 6,000
Production (3,000) (313,000)
------ ---------
Proved Reserves as of December 31, 1998 14,000 2,217,000
====== =========
Proved developed reserves as of:
December 31, 1995 16,000 2,780,000
December 31, 1996 20,000 2,600,000
December 31, 1997 15,000 2,256,000
December 31, 1998 12,000 1,943,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Future cash inflows $10,789,000 $ 6,344,000 $ 4,415,000
Future production costs (1,139,000) (1,244,000) (1,670,000)
Future development costs (235,000) (235,000) (235,000)
-------------- -------------- ---------------
Future net cash flows 9,415,000 4,865,000 2,510,000
10% discount to reflect timing of cash flows (3,473,000) (1,794,000) (926,000)
-------------- -------------- ---------------
Standardized measure of discounted future net cash
flows $ 5,942,000 $ 3,071,000 $ 1,584,000
============== ============== ===============
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging
$9.79 per barrel of oil, adjusted for transportation and other charges, and
$1.93 per Mcf of gas at December 31, 1998) to the year-end quantities of
proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
F-57
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1990 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future
income tax expenses give effect to permanent differences and tax credits,
but do not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1997 1998
----------------- ------------------ --------------------
<S> <C> <C> <C>
Beginning balance $2,982,000 $ 5,943,000 $ 3,071,000
Sales of oil and natural gas, net of production costs (939,000) (836,000) (514,000)
Net changes in prices and production costs 2,710,000 (2,524,000) (1,167,000)
Extensions, discoveries, and improved recovery, net of 88,000 180,000 5,000
future development costs
Purchases of reserves, net of future development costs 1,010,000 - -
Sales of reserves in place (254,000) - -
Accretion of discount 298,000 594,000 307,000
Other, primarily changes in timing 48,000 (286,000) (118,000)
---------- ----------- -----------
Ending balance $5,943,000 $ 3,071,000 $ 1,584,000
========== =========== ===========
</TABLE>
F-58
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1991 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1991 Limited Partnership as of December 31, 1997 and 1998 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Natural Gas
Income Fund 1991 Limited Partnership as of December 31, 1997 and 1998, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-59
<PAGE>
<TABLE>
<CAPTION>
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Balance Sheets
December 31,
---------------------------------------------- September 30,
1997 1998 1999
------------------------ ------------------ ---------------
<S> <C> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 121,814 $ 84,107 $ 79,068
Accounts receivable, net (Note 2) 224,260 193,120 205,598
------------------------ ------------------ ---------------
Total current assets 346,074 277,227 284,666
------------------------ ------------------ ---------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 3,859,671 4,056,139 4,089,383
Accumulated depreciation, depletion and amortization (2,206,941) (2,511,090) (2,725,088)
------------------------ ------------------ ---------------
1,652,730 1,545,049 1,364,295
------------------------ ------------------ ---------------
Total assets $ 1,998,804 $ 1,822,276 $ 1,648,961
======================== ================== ===============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 36,305 $ 38,425 $ 32,654
Revenue and royalty distributions payable 32,199 28,186 34,049
------------------------ ------------------ ---------------
Total current liabilities
68,504 66,611 66,703
------------------------ ------------------ ---------------
Long-term debt (Note 3) 520,234 695,734 742,734
Partners' equity:
General partners 4,966 5,586 3,984
Limited partners 1,405,100 1,054,345 835,540
------------------------ ------------------ ---------------
Total partners' equity 1,410,066 1,059,931 839,524
------------------------ ------------------ ---------------
Total liabilities and partners' equity $ 1,998,804 $ 1,822,276 $ 1,648,961
======================== ================== ===============
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 1,453,841 $1,145,085 $ 1,088,300 $ 783,303 $ 731,259
Other income 5,197 5,375 10,201 8,393 2,966
----------- ---------- ----------- ---------- ----------
Total revenues 1,459,038 1,150,460 1,098,501 791,696 734,225
----------- ---------- ----------- ---------- ----------
Costs and expenses:
Lease operating 197,451 155,094 154,048 116,093 102,557
Production taxes 100,988 78,715 86,911 62,666 52,235
Depreciation, depletion and amortization 361,553 249,661 304,149 212,416 213,998
General and administrative 71,406 61,071 66,824 47,647 47,853
Interest 61,737 51,117 48,463 39,017 51,147
----------- ---------- ----------- ---------- ----------
Total costs and expenses 793,135 595,658 660,395 477,839 467,790
----------- ---------- ----------- ---------- ----------
Net earnings $ 665,903 $ 554,802 $ 438,106 $ 313,857 $ 266,435
=========== ========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
------------ -------------- ----------- ---------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 665,903 $ 554,802 $ 438,106 $ 313,857 $ 266,435
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation, depletion and amortization 361,553 249,661 304,149 212,416 213,998
Changes in operating assets and liabilities:
Accounts receivable (46,827) 43,216 31,140 5,924 (12,478)
Increase (decrease) in:
Accounts payable and Revenue and royalties
Payable 32,259 (15,578) (1,893) 17,809 92
---------- ---------- --------- ---------- ----------
Net cash provided by operating activities 1,012,888 832,101 771,502 550,006 468,047
---------- ---------- --------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales
of property and equipment 128,735 193,246 - - -
Purchases of property and equipment (189,951) (181,612) (196,468) (197,527) (33,244)
---------- ---------- --------- ---------- ----------
Net cash (used) provided by investing activities (61,216) 11,634 (196,468) (197,527) (33,244)
---------- ---------- --------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt 219,000 415,000 175,500 168,000 47,000
Repayments of long-term debt (205,520) (438,246) - - -
Distributions to partners (955,730) (807,827) (788,241) (547,825) (486,842)
---------- ---------- --------- ---------- ----------
Net cash (used) provided by financing activities (942,250) (831,073) (612,741) (379,825) (439,842)
---------- ---------- --------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 9,422 12,662 (37,707) (27,346) (5,039)
---------- ---------- --------- ---------- ----------
Cash and cash equivalents at beginning of year 99,730 109,152 121,814 121,814 84,107
---------- ---------- --------- ---------- ----------
Cash and cash equivalents at end of year $ 109,152 $ 121,814 $ 84,107 $ 94,468 $ 79,068
========== ========== ========= ========== ==========
Supplemental cash flow information:
Cash payments for interest $ 61,737 $ 51,117 $ 48,463 $ 39,017 $ 51,147
========== ========== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE>
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
---------------------- ---------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 5,775 $1,657,316 $1,663,091
Net Earnings 194,295 360,507 554,802
Distributions to partners (195,104) (612,723) (807,827)
---------------------- ---------------- -------------
Balance at December 31, 1997 4,966 1,405,100 1,410,066
Net Earnings 197,679 240,427 438,106
Distributions to partners (197,059) (591,182) (788,241)
---------------------- ---------------- -------------
Balance at December 31, 1998 5,586 1,054,345 1,059,931
Net Earnings (unaudited) 120,109 146,326 266,435
Distributions to partners (unaudited) (121,711) (365,131) (486,842)
---------------------- ---------------- -------------
Balance at September 30, 1999 (unaudited) $ 3,984 $ 835,540 $ 839,524
====================== ================ =============
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 124 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to
the General Partners until payout is achieved. After payout, these
items are allocated 75% to the Limited Partners and 25% to the
General Partners. Payout occurs on an individual partner basis, and
is reached at the point in time when cash distributions to a
Limited Partner equal his or her capital contributions made to the
Partnership. A portion of the Limited Partners reached payout
status during 1996, and the remainder reached payout during 1997.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 44.80 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-64
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance
F-65
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its
oil and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996, the
Partnership's largest two purchasers accounted for approximately 30%, and
during 1998 the Partnership's largest single purchaser accounted for 20% of
its oil and natural gas revenues. During 1997, no single purchaser
accounted for more than 10% of oil and natural gas revenues. The
Partnership does not believe that the loss of any single customer would
have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
F-66
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------ September 30,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas revenue accruals.......... $224,260 $193,120 $202,838
Other......................................... - - 2,760
-------- -------- --------
Total......................................... $224,260 $193,120 $205,598
======== ======== ========
</TABLE>
3. Long-Term Debt
The balances at December 31, 1998 and 1997 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to
the Partnership under this credit facility was $750,000 at December 31,
1998 and 1997. Borrowings bear interest at 1% above a specified prime rate
and are collateralized by certain oil and gas properties of the
Partnership, as well as guarantees by the Managing and Additional General
Partners. The average interest rate under this credit facility outstanding
at December 31, 1998 was 7.79%. At December 31, 1998 and 1997, the balances
of the revolving line of credit facility were classified as long-term,
based on the Partnership's continuing intent and ability to refinance, as
evidenced by the renewal of the credit facility in June 1999, extending the
maturity date to October 1, 2000.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-67
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $39,606, $42,908 and $51,302 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1997, the Partnership sold interests in various producing oil and
gas properties to Coral Reserves Energy Income Fund 1996 Limited
Partnership and Coral Reserves 1996 Institutional Limited Partnership, two
affiliated partnerships, for aggregate consideration of $193,246. The
Partnership realized a gain of $112,320 on this transaction.
During 1996, in two separate transactions, the Partnership sold interests
in various oil and gas producing properties to Coral Reserves Natural Gas
Income Fund 1990 Limited Partnership and Coral Reserves Energy Income Fund
1996 Limited Partnership, both affiliated partnerships, for aggregate
consideration of $91,967, realizing gains totaling $62,902 on these
transactions.
Effective January 1, 1992, the Partnership purchased for $67,500 the rights
to consulting fees paid by Coral Reserves Natural Gas Income Fund 1990
Limited Partnership ("Coral 1990") to the Selling Agent of Coral 1990. The
fees are paid by Coral 1990 for services performed by the Selling Agent,
and consist of 1 1/2% of Coral 1990's gross annual revenues, plus 1% of
monthly distributable cash before payout and an additional 1% after payout.
The sole exception to this fee structure as purchased is that the Selling
Agent will retain the additional 1% after payout interest in Partnership
monthly distributable cash. Revenues received by the Partnership under this
arrangement totaled $18,603, $22,191 and $20,557 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Under an agreement between the Partnership and the Selling Agent, the
Selling Agent is to receive compensation for services performed in the
amount of 1 1/2% of Partnership gross annual revenues, plus 1% of
Partnership monthly distributable cash
F-68
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
before payout and an additional 1% after payout (paid solely out of the
Managing General Partner's share of monthly distributable cash). Effective
January 1, 1994, the Selling Agent sold the rights to these fees to Coral
Reserves 1993 Institutional Limited Partnership ("Coral 1993-I"), with the
sole exception being that the Selling Agent retained the additional 1%
after payout interest in Partnership monthly distributable cash. Fees
subsequently paid to Coral 1993-I, in lieu of the Selling Agent, totaled
$23,936, $24,188, and $22,044 for the years ended December 31, 1998, 1997
and 1996, respectively. The Selling Agent must continue to perform the
services for the Partnership as originally contracted.
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Property acquisition costs (proved) $ - $ - $ - $ - $ -
Development costs 152,296 127,917 178,706 164,928 -
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION> Nine months ended
Year Ended December 31, September 30,
------------------------------------------- ------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales............ $1,453,841 $1,145,085 $1,088,300 $ 783,303 $ 731,259
Production and operating expenses (298,439) (233,809) (240,959) (178,759) (154,792)
Depreciation, depletion and amortization (361,553) (249,661) (304,149) (212,416) (213,998)
---------- ---------- ---------- --------- ---------
Results of operations for oil and
gas producing activities $ 793,849 $ 661,615 $ 543,192 $ 392,128 $ 672,053
========== ========== ========== ========= =========
Depreciation, depletion and amortization $ 0.64 $ 0.60 $ 0.61 $ 0.61 $ 0.62
per equivalent Mcf of production...... ========== ========== ========== ========= =========
</TABLE>
F-69
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1995,
1996 and 1997 based on geological and engineering evaluations performed as
of December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1995, 1996 and 1997, The Partnership used production costs based on
actual costs incurred during the years and actual oil and natural gas
prices received on December 31, 1995, 1996 and 1997. The Partnership has
estimated its reserves as of December 31, 1995, 1996 and 1997 in this
manner because the actual information necessary to calculate estimated
proved reserves and related information in accordance with guidelines of
the SEC as of each date is not available. Because the reserve estimates as
of December 31, 1998 are based on additional information gained from the
result of drilling, testing and production
F-70
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
subsequent to the dates of the estimated reserves, the reserve estimates as
of December 31, 1995, 1996 and 1997 are not necessarily reflective of
quantities that might have been estimated based on information available as
of such dates had estimates in accordance with SEC guidelines been made at
such dates. Management believes that, because of the methodology used, the
reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
---------- ----------
<S> <C> <C>
Proved Reserves as of December 31, 1995 93,000 4,354,000
Extensions and discoveries - 104,000
Production (13,000) (489,000)
Sale of reserves (7,000) (399,000)
------- ---------
Proved Reserves as of December 31, 1996 73,000 3,570,000
Extensions and discoveries 1,000 201,000
Production (9,000) (362,000)
Sale of reserves (18,000) (547,000)
------- ---------
Proved Reserves as of December 31, 1997 47,000 2,862,000
Extensions and discoveries 6,000 240,000
Production (11,000) (429,000)
------- ---------
Proved Reserves as of December 31, 1998 42,000 2,673,000
======= =========
Proved developed reserves as of:
December 31, 1995 82,000 4,053,000
December 31, 1996 62,000 3,226,000
December 31, 1997 52,000 2,824,000
December 31, 1998 41,000 2,395,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future net
cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ 15,212,000 $ 7,999,000 $ 5,449,000
Future production costs (2,267,000) (1,527,000) (2,057,000)
Future development costs (246,000) (246,000) (246,000)
------------ ----------- -----------
Future net cash flows 12,699,000 6,226,000 3,146,000
10% discount to reflect timing of cash flows (4,573,000) (2,242,000) (1,133,000)
------------ ----------- -----------
Standardized measure of discounted future net cash flows $ 8,126,000 $ 3,984,000 $ 2,013,000
============ =========== ===========
</TABLE>
F-71
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1991 LIMITED PARTNERSHIP
Notes to Financial Statement
(Continued)
Future cash inflows are computed by applying year-end prices (averaging $9.14
per barrel of oil, adjusted for transportation and other charges, and $1.90
per Mcf of gas at December 31, 1998) to the year-end quantities of proved
reserves, except where fixed and determinable price changes are provided by
contractual arrangements in existence at year-end. Future development and
production costs are computed by estimating the expenditures to be incurred in
developing and producing proved oil and gas reserves at the end of the year,
based on year-end costs and assuming continuation of existing economic
conditions.
Future income tax expenses are computed by applying the appropriate statutory
rates to the future pre-tax net cash flows relating to proved reserves, net of
the tax basis of the properties involved. The future income tax expenses give
effect to permanent differences and tax credits, but do not reflect the impact
of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Beginning balance $ 5,184,000 $ 8,126,000 $ 3,984,000
Sales of oil and natural gas, net of production costs (1,155,000) (882,000) (818,000)
Net changes in prices and production costs 4,375,000 (2,975,000) (1,648,000)
Extensions, discoveries, and improved recovery, net of 216,000 270,000 201,000
future development costs
Sales of reserves in place (910,000) (873,000) -
Accretion of discount 518,000 813,000 398,000
Other, primarily changes in timing (102,000) (495,000) (104,000)
----------- ----------- -----------
Ending balance $ 8,126,000 $ 3,984,000 $ 2,013,000
=========== =========== ===========
</TABLE>
F-72
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1992 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1992 Limited Partnership as of December 31, 1997 and 1998 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Natural Gas
Income Fund 1992 Limited Partnership as of December 31, 1997 and 1998, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-73
<PAGE>
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------
1997 1998 1999
----------------- --------------------- --------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 128,396 $ 70,000 $ 106,800
Accounts receivable, net (Note 2) 343,718 204,706 248,264
-------------- ---------------- --------------
Total current assets 472,114 274,706 355,064
-------------- ---------------- --------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 6,216,685 6,334,587 6,377,414
Accumulated depreciation, depletion and amortization (2,540,202) (2,996,451) (3,296,453)
-------------- ---------------- --------------
3,676,483 3,338,136 3,080,961
-------------- ---------------- --------------
Total assets $ 4,148,597 $ 3,612,842 $ 3,436,025
============== ================ ==============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 83,285 $ 58,677 $ 40,218
Revenue and royalty distributions payable 38,608 9,209 47,271
-------------- ---------------- --------------
Total current liabilities 121,893 67,886 87,489
-------------- ---------------- --------------
Long-term debt (Note 3) 364,500 489,000 558,000
Partners' equity:
General partners 14,724 3,576 7,132
Limited partners 3,647,480 3,052,380 2,783,404
-------------- ---------------- --------------
Total partners' equity 3,662,204 3,055,956 2,790,536
-------------- ---------------- --------------
Total liabilities and partners' equity $ 4,148,597 $ 3,612,842 $ 3,436,025
============== ================ ==============
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE>
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
----------------- ---------------- ------------------ ------------- --------------
(Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
Oil and gas sales $2,038,204 $1,865,150 $1,382,833 $1,039,677 $881,805
Other income 7,461 11,233 10,771 8,986 3,438
----------------- ---------------- ------------------ ------------- --------------
Total revenues 2,045,665 1,876,383 1,393,604 1,048,663 885,243
----------------- ---------------- ------------------ ------------- --------------
Costs and expenses:
Lease operating 281,649 252,570 269,910 198,544 175,342
Production taxes 150,147 131,376 112,372 70,222 58,804
Depreciation, depletion and amortization 520,776 454,823 456,249 332,664 300,002
General and administrative 102,864 106,147 95,138 75,889 60,835
Interest 4,312 25,136 38,430 31,494 37,871
----------------- ---------------- ------------------ ------------- --------------
Total costs and expenses 1,059,748 970,052 972,099 708,813 632,854
----------------- ---------------- ------------------ ------------- --------------
Net earnings $ 985,917 $ 906,331 $ 421,505 $ 339,850 $252,389
================= ================ ================== ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE>
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
---------------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 985,917 $ 906,331 $ 421,505 $ 339,850 $ 252,389
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, depletion and amortization 520,776 454,823 456,249 332,664 300,002
Changes in operating assets and liabilities:
Accounts receivable (97,538) 33,961 139,012 165,969 (43,558)
Increase (decrease) in:
Accounts payable and Revenue and
royalties payable 24,700 (5,790) (54,007) (58,532) 19,603
----------- ----------- ----------- ---------- ----------
Net cash provided by operating activities 1,433,855 1,389,325 962,759 779,951 528,436
----------- ----------- ----------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of property and equipment 137,432 7,500 - - -
Purchases of property and equipment (244,356) (233,562) (117,902) (109,997) (42,827)
----------- ----------- ----------- ---------- ----------
Net cash (used) provided by
investing activities (106,924) (226,062) (117,902) (109,997) (42,827)
----------- ----------- ----------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt 196,300 208,200 164,500 164,500 69,000
Repayments of long-term debt (5,000) (35,000) (40,000) - -
Repayments of short-term debt (89,100)
Distributions to partners (1,371,374) (1,410,055) (1,027,753) (840,156) (517,809)
----------- ----------- ----------- ---------- ----------
Net cash (used) provided by financing activities (1,269,174) (1,236,855) (903,253) (675,656) (448,809)
----------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 57,757 (73,592) (58,396) (5,702) 36,800
Cash and cash equivalents at beginning of year 144,231 201,988 128,396 128,396 70,000
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of year $ 201,988 $ 128,396 $ 70,000 $ 122,694 $ 106,800
=========== =========== =========== ========== ==========
Supplemental cash flow information:
Cash payments for interest $ 4,312 $ 25,136 $ 38,430 $ 31,494 $ 37,871
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
------------------ ----------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 19,613 $ 4,146,315 $ 4,165,928
Net Earnings 136,116 770,215 906,331
Distributions to partners (141,005) (1,269,050) (1,410,055)
------------------ ----------------- ------------
Balance at December 31, 1997 14,724 3,647,480 3,662,204
Net Earnings 91,627 329,878 421,505
Distributions to partners (102,775) (924,978) (1,027,753)
------------------ ----------------- ------------
Balance at December 31, 1998 3,576 3,052,380 3,055,956
Net Earnings (unaudited) 56,771 195,618 252,389
Distributions to partners (unaudited) (53,215) (464,594) (517,809)
------------------ ----------------- ------------
Balance at September 30, 1999 $ 7,132 $ 2,783,404 $ 2,790,536
(unaudited)
================== ================= ============
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves Energy Corp., an Oklahoma corporation, and its two principal
stockholders serve as Managing General Partner and Additional General
Partners, respectively. The remaining 191 participants are limited
partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1% to
the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to the
General Partners until payout is achieved. After payout, these items
are allocated 75% to the Limited Partners and 25% to the General
Partners. Payout occurs on an individual partner basis, and is reached
at the point in time when cash distributions to a Limited Partner
equal his or her capital contributions made to the Partnership. A
portion of the Limited Partners reached payout status during 1999.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 75.00 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-78
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the states
of Oklahoma, Texas, Nebraska and Wyoming.
Accounting policies employed by the Partnership reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such policies are discussed below.
Uses 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 the 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 amounts could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or less
to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs incidental to the acquisition, exploration,
and development of oil and gas properties, including costs of undeveloped
leasehold, dry holes and leasehold equipment, are capitalized. Net capitalized
costs are limited to the estimated future net revenues, discounted at 10% per
annum, from proved oil, natural gas and natural gas liquids reserves.
Capitalized costs are depleted by an equivalent unit-of-production method,
converting gas to oil at the ratio of one barrel ("Bbl") of oil to six
thousand cubic feet ("Mcf") of natural gas. No gain or loss is recognized upon
disposal of oil and gas properties unless such disposal significantly alters
the relationship between capitalized costs and proved reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions payable
in the accompanying balance
F-79
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its oil
and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996, the
Partnership's largest two purchasers accounted for approximately 35%, and in
both 1997 and 1998 the largest three purchasers accounted for approximately
50% of it's oil and natural gas revenues. The Partnership does not believe
that the loss of any single customer would have a material effect on the
results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
F-80
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1997 1998 1999
------------ --------------- --------------
<S> <C> <C> <C>
(Unaudited)
Oil and natural gas revenue accruals.................. $334,008 $198,082 $216,547
Other................................................. 9,710 6,624 31,717
-------- -------- --------
Total................................................. $343,718 $204,706 $248,264
======== ======== ========
</TABLE>
3. Long-Term Debt
The balances at December 31, 1998 and 1997 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $600,000 and $500,000 at December
31, 1998 and 1997, respectively. Borrowings bear interest at 1% above a
specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1998 was 7.88%. At December 31, 1998
and 1997, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
June, 1999, extending the maturity date to October 1, 2000.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-81
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff and
appropriate production supervisory personnel, or any other overhead expenses
which the Managing General Partner deems reasonable. The reimbursement for
overhead expenses is limited to a maximum of five percent (5%) of
"Distributable Cash", as defined in the Partnership Agreement. Such overhead
reimbursements amounted to $50,165, $74,405 and $74,002 for 1998, 1997 and
1996, respectively, and are included in "General and administrative"
expenses in the accompanying statements of operations.
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
-------- -------- ------- ---------- --------------
(Unaudited) (Unaudited)
Property acquisition costs (proved) $ 69,245 $ - $ - $ - $ -
Development costs 122,596 163,754 84,983 84,661 51,301
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate overhead
and, therefore are not necessarily indicative of the contribution to net
earnings of the Partnership's oil and gas operations.
F-82
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ---------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales.............. $2,038,204 $1,865,150 $1,382,833 $1,039,677 $ 881,805
Production and operating expenses...... (431,796) (383,946) (382,282) (268,766) (234,146)
Depreciation, depletion and
amortization......................... (520,776) (454,823) (456,249) (332,664) (300,002)
---------- ---------- ---------- ---------- ---------
Results of operations for oil and gas
producing activities................. $1,085,632 $1,026,381 $ 544,302 $ 438,247 $ 347,657
========== ========== ========== ========== =========
Depreciation, depletion and amortization
per equivalent MCF of production...... $ 0.62 $ 0.64 $ 0.65 $ 0.65 $ 0.66
========== ========== ========== ========== =========
</TABLE>
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
F-83
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership prepared the estimated reserves as of December 31, 1995, 1996
and 1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates were
derived by analyzing actual historical production amounts and by adjusting the
reserves attributable to wells acquired or disposed of during the relevant
periods. In addition, in deriving the estimates as of December 31, 1995, 1996
and 1997, The Partnership used production costs based on actual costs incurred
during the years and actual oil and natural gas prices received on December
31, 1995, 1996 and 1997. The Partnership has estimated its reserves as of
December 31, 1995, 1996 and 1997 in this manner because the actual information
necessary to calculate estimated proved reserves and related information in
accordance with guidelines of the SEC as of each date is not available.
Because the reserve estimates as of December 31, 1998 are based on additional
information gained from the result of drilling, testing and production
subsequent to the dates of the estimated reserves, the reserve estimates as of
December 31, 1995, 1996 and 1997 are not necessarily reflective of quantities
that might have been estimated based on information available as of such dates
had estimates in accordance with SEC guidelines been made at such dates.
Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
-------------------- --------------------
<S> <C> <C>
Proved Reserves as of December 31, 1995 210,000 6,508,000
Extensions and discoveries 1,000 138,000
Purchases of reserves 3,000 948,000
Production (29,000) (670,000)
Sale of reserves (3,000) (92,000)
------- ---------
Proved Reserves as of December 31, 1996 182,000 6,832,000
Extensions and discoveries - 121,000
Production (25,000) (564,000)
------- ---------
Proved Reserves as of December 31, 1997 157,000 6,389,000
Extensions and discoveries - 14,000
Production (25,000) (553,000)
Proved Reserves as of December 31, 1998 132,000 5,850,000
======= =========
Proved developed reserves as of:
December 31, 1995 207,000 5,967,000
December 31, 1996 176,000 5,753,000
December 31, 1997 151,000 5,189,000
December 31, 1998 126,000 4,637,000
</TABLE>
F-84
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1992 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future net
cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Future cash inflows $ 28,810,000 $16,988,000 $12,269,000
Future production costs (4,260,000) (4,000,000) (4,723,000)
Future development costs (989,000) (989,000) (989,000)
----------------- ----------------- -------------------
Future net cash flows 23,561,000 11,999,000 6,557,000
10% discount to reflect timing of cash flows (11,224,000) (5,716,000) (3,124,000)
----------------- ----------------- -------------------
Standardized measure of discounted future net cash
flows $ 12,337,000 $ 6,283,000 $ 3,433,000
================= ================= ===================
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging $9.80
per barrel of oil, adjusted for transportation and other charges, and $1.88
per Mcf of gas at December 31, 1998) to the year-end quantities of proved
reserves, except where fixed and determinable price changes are provided by
contractual arrangements in existence at year-end. Future development and
production costs are computed by estimating the expenditures to be incurred in
developing and producing proved oil and gas reserves at the end of the year,
based on year-end costs and assuming continuation of existing economic
conditions.
Future income tax expenses are computed by applying the appropriate statutory
rates to the future pre-tax net cash flows relating to proved reserves, net of
the tax basis of the properties involved. The future income tax expenses give
effect to permanent differences and tax credits, but do not reflect the impact
of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Beginning balance $ 5,770,000 $12,337,000 $ 6,283,000
Sales of oil and natural gas, net of production costs (1,606,000) (1,455,000) (965,000)
Net changes in prices and production costs 5,971,000 (5,401,000) (2,353,000)
Extensions, discoveries, and improved recovery,
net of future development costs 228,000 109,000 8,000
Purchases of reserves, net of future development cost 1,384,000 - -
Sales of reserves in place (175,000) - -
Accretion of discount 577,000 1,234,000 628,000
Other, primarily changes in timing 188,000 (541,000) (168,000)
----------- ----------- -----------
Ending balance $12,337,000 $ 6,283,000 $ 3,433,000
=========== =========== ===========
</TABLE>
F-85
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Natural Gas Income Fund
1993 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Natural Gas Income
Fund 1993 Limited Partnership as of December 31, 1998 and 1997 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Natural Gas
Income Fund 1993 Limited Partnership as of December 31, 1998 and 1997, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-86
<PAGE>
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------------------------- September 30,
1997 1998 1999
----------------------- ------------------- ------------------
Assets (Unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 112,084 $ 82,750 $ 103,297
Accounts receivable, net (Note 2 ) 440,573 218,626 266,925
Inventories 4,060 4,580 2,521
----------------------- ------------------- ------------------
Total current assets 556,717 305,956 372,743
----------------------- ------------------- ------------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 5,508,899 5,181,469 5,208,501
(Note 3)
Accumulated depreciation, depletion and (1,952,454) (2,469,847) (2,773,109)
amortization
----------------------- ------------------- ------------------
3,556,445 2,711,622 2,435,392
----------------------- ------------------- ------------------
Other assets 400 - -
----------------------- ------------------- ------------------
Total assets $ 4,113,562 $ 3,017,578 $ 2,808,135
======================= =================== ==================
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 85,161 $ 65,559 $ 40,669
Revenue and royalty distributions payable 46,746 46,992 50,016
----------------------- ------------------- ------------------
Total current liabilities 131,907 112,551 90,685
----------------------- ------------------- ------------------
Long-term debt (Note 4 ) 519,200 455,800 479,800
Partners' equity (deficit):
General partners 16,605 (4,141) 5,027
Limited partners 3,445,850 2,453,368 2,232,623
----------------------- ------------------- ------------------
Total partners' equity 3,462,455 2,449,227 2,237,650
----------------------- ------------------- ------------------
Total liabilities and partners' equity $ 4,113,562 $ 3,017,578 $ 2,808,135
======================= =================== ==================
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE>
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Statement of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
---------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
------------ -------------- -------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $2,470,660 $2,368,201 $1,513,449 $1,203,877 $1,027,586
Other income 5,975 9,310 9,402 6,964 4,002
----------- -------------- -------------- ---------------- ---------------
Total revenues 2,476,635 2,377,511 1,522,851 1,210,841 1,031,588
----------- -------------- -------------- ---------------- ---------------
Costs and expenses:
Lease operating 525,921 504,583 464,498 352,961 295,909
Production taxes 172,066 184,610 119,430 87,979 76,535
Depreciation, depletion and 645,126 539,825 517,793 370,898 303,262
amortization
General and administrative 115,807 119,377 95,096 78,217 59,522
Interest 38,018 31,582 42,900 35,937 30,298
Reduction of carrying value of oil and gas
properties (Note 6) - - 245,000 - -
----------- -------------- -------------- ---------------- ---------------
Total costs and expenses 1,496,938 1,379,977 1,484,717 925,992 765,526
---------- -------------- -------------- ---------------- ---------------
Net earnings $ 979,697 $ 997,534 $ 38,134 $ 284,849 $ 266,062
========== ============== ============== ================ ===============
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE>
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 979,697 $ 997,534 $ 38,134 $ 284,849 $ 266,062
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 645,126 539,825 517,793 370,898 303,262
Reduction in carrying value of oil and
gas properties 245,000
Changes in operating assets and liabilities:
Accounts receivable 183,905 9,071 221,947 183,922 (48,299)
Inventories (13,138) 9,078 (520) (121) 2,059
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable 28,844 (6,540) (19,356) (51,996) (21,866)
------------- ------------- ------------- -------------- --------------
Net cash provided by operating activities 1,824,434 1,548,968 1,002,998 787,552 501,218
------------- ------------- ------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sales of property and
equipment 137,685 - 141,770 141,770 -
Purchases of property and equipment (199,904) (372,766) (59,340) (59,187) (27,032)
Increase in other assets - 315 - - -
------------- ------------- ------------- -------------- --------------
Net cash (used) provided by investing
activities (62,219) (372,451) 82,430 82,583 (27,032)
------------- ------------- ------------- -------------- --------------
Cash flows from financing activities:
Borrowings on long-term debt 182,000 437,000 61,100 61,100 24,000
Repayments of long-term debt (361,800) (80,000) (124,500) - -
Distributions to partners (1,529,641) (1,545,358) (1,051,362) (847,490) (477,639)
------------- ------------- ------------- -------------- --------------
Net cash (used) provided by financing
activities (1,709,441) (1,188,358) (1,114,762) (786,390) (453,639)
------------- ------------- ------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 52,774 (11,841) (29,334) 83,745 20,547
Cash and cash equivalents at beginning of year 71,151 123,925 112,084 112,084 82,750
------------- ------------- ------------- -------------- --------------
Cash and cash equivalents at end of year $ 123,925 $ 112,084 $ 82,750 $ 195,829 $ 103,297
============= ============= ============= ============== ==============
Supplemental cash flow information:
Cash payments for interest $ 38,018 $ 31,582 $ 42,900 $ 35,937 $ 30,298
============= ============= ============= ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
--------------------- ---------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 17,374 $ 3,992,905 $ 4,010,279
Net Earnings 153,767 843,767 997,534
Distributions to partners (154,536) (1,390,822) (1,545,358)
--------------------- ---------------- ---------------
Balance at December 31, 1997 16,605 3,445,850 3,462,455
Net Earnings 84,390 (46,256) 38,134
Distributions to partners (105,136) (946,226) (1,051,362)
--------------------- ---------------- ---------------
Balance at December 31, 1998 (4,141) 2,453,368 2,449,227
Net Earnings (unaudited) 56,932 209,130 266,062
Distributions to partners (unaudited) (47,764) (429,875) (477,639)
--------------------- ---------------- ---------------
Balance at September 30, 1999 (unaudited) $ 5,027 $ 2,232,623 $ 2,237,650
===================== ================ ===============
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves Energy Corp., an Oklahoma corporation, and its two principal
stockholders serve as Managing General Partner and Additional General
Partners, respectively. The remaining 173 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited Partners
and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of organization
costs are allocated 99% to the Limited Partners and 1% to the Managing
General Partner.
. All other items of income and expense, with certain limited exceptions,
are allocated 90% to the Limited Partners and 10% to the General Partners
until payout is achieved. After payout, these items are allocated 75% to
the Limited Partners and 25% to the General Partners. Payout occurs on an
individual partner basis, and is reached at the point in time when cash
distributions to a Limited Partner equal his or her capital contributions
made to the Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 65.250 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-91
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the states
of Oklahoma, Nebraska, Wyoming and Colorado.
Accounting policies employed by the Partnership reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such policies are discussed below.
Uses 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 the 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 amounts could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or less
to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs incidental to the acquisition, exploration,
and development of oil and gas properties, including costs of undeveloped
leasehold, dry holes and leasehold equipment, are capitalized. Net capitalized
costs are limited to the estimated future net revenues, discounted at 10% per
annum, from proved oil, natural gas and natural gas liquids reserves.
Capitalized costs are depleted by an equivalent unit-of-production method,
converting gas to oil at the ratio of one barrel ("Bbl") of oil to six
thousand cubic feet ("Mcf") of natural gas. No gain or loss is recognized upon
disposal of oil and gas properties unless such disposal significantly alters
the relationship between capitalized costs and proved reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions payable
in the accompanying balance
F-92
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its oil
and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996 and 1998,
the Partnership's largest two purchasers accounted for approximately 45% and
50%, respectively, and in 1997 its largest single purchaser accounted for 35%
of its oil and natural gas revenues. The Partnership does not believe that
the loss of any single customer would have a material effect on the results of
its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
F-93
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1997 1998 1999
------------ --------------- --------------
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas revenue accruals..................... $437,797 $210,151 $258,462
Other.................................................... 2,776 8,475 8,463
-------- -------- --------
Total.................................................... $440,573 $218,626 $266,925
======== ======== ========
</TABLE>
3. Long-Term Debt
The balances at December 31, 1998 and 1997 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $600,000 and $600,000 at December
31, 1998 and 1997, respectively. Borrowings bear interest at 1% above a
specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1998 was 7.97%. At December 31, 1998
and 1997, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
June 1999, extending the maturity date to October 1, 2000.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-94
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $50,869, $80,000 and $80,295 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1996, the Partnership sold interests in various producing oil and
gas properties to Coral Reserves Energy Income Fund 1996 Limited
Partnership, an affiliated partnership, for aggregate consideration of
$84,064. The Partnership realized a gain of $25,620 on this transaction.
6. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $244,823.
Accordingly, a $245,000 reduction of the carrying value of such properties
was recorded.
7. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
F-95
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, Nine months ended
------------------------------------------ September 30,
-------------
1996 1997 1998 1998 1999
------- -------- ------- ------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs (proved) $ - $ - $ - $ - $ -
Development costs 30,698 317,038 24,423 21,345 4,429
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate overhead
and, therefore are not necessarily indicative of the contribution to net
earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION>
Year Ended December 31, Nine months ended September 30,
--------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
-------------- -------------- ------------- ---------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas $2,470,660 $2,368,201 $1,513,449 $1,203,877 $1,027,586
sales...................................
Production and operating (697,987) (689,193) (583,928) (440,940) (372,444)
expenses................................
Depreciation, depletion and (645,126) (539,825) (517,793) (370,898) (303,262)
amortization............................
Reduction of carrying value of oil and
gas assets.............................. - - (245,000) - -
---------- ---------- ---------- ---------- ----------
Results of operations for oil and gas
producing activities.................... $1,127,547 $1,139,183 $ 166,728 $ 392,039 $ 351,880
========== ========== ========== ========== ==========
Depreciation, depletion and amortization
per equivalent MCF of
production.............................. $ 0.60 $ 0.64 $0.66 $ 0.60 $ 0.61
========== ========== ========== ========== ==========
</TABLE>
8. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are
F-96
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
more imprecise than those of properties with a production history.
Accordingly, these estimates are subject to change as additional information
becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic conditions. Proved developed
oil and natural gas reserves are those reserves expected to be recovered
through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed reserves
of crude oil, including condensate and natural gas liquids, and natural gas,
as well as the changes in proved reserves during the periods indicated, are
set forth in the tables below. All reserves are located in the United States.
The Partnership prepared the estimated reserves as of December 31, 1995, 1996
and 1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates were
derived by analyzing actual historical production amounts and by adjusting the
reserves attributable to wells acquired or disposed of during the relevant
periods. In addition, in deriving the estimates as of December 31, 1995, 1996
and 1997, The Partnership used production costs based on actual costs incurred
during the years and actual oil and natural gas prices received on December
31, 1995, 1996 and 1997. The Partnership has estimated its reserves as of
December 31, 1995, 1996 and 1997 in this manner because the actual information
necessary to calculate estimated proved reserves and related information in
accordance with guidelines of the SEC as of each date is not available.
Because the reserve estimates as of December 31, 1998 are based on additional
information gained from the result of drilling, testing and production
subsequent to the dates of the estimated reserves, the reserve estimates as of
December 31, 1995, 1996 and 1997 are not necessarily reflective of quantities
that might have been estimated based on information available as of such dates
had estimates in accordance with SEC guidelines been made at such dates.
Management believes that, because of the methodology used, the reserve
information presented is more reflective of actual reserve quantities than
estimates that might have been generated as of such dates.
F-97
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
-------------------- --------------------
<S> <C> <C>
Proved Reserves as of December 31, 1995 303,000 6,152,000
Extensions and discoveries 1,000 133,000
Production (50,000) (775,000)
Sale of reserves (3,000) (261,000)
------- ---------
Proved Reserves as of December 31, 1996 251,000 5,249,000
Extensions and discoveries 3,000 87,000
Production (44,000) (573,000)
------- ---------
Proved Reserves as of December 31, 1997 210,000 4,763,000
Extensions and discoveries 40,000
Production (33,000) (591,000)
Sale of reserves (23,000) (140,000)
------- ---------
Proved Reserves as of December 31, 1998 154,000 4,072,000
======= =========
Proved developed reserves as of:
December 31, 1995 304,000 5,924,000
December 31, 1996 254,000 5,104,000
December 31, 1997 210,000 4,531,000
December 31, 1998 154,000 3,800,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future net
cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Future cash inflows $23,752,000 $13,837,000 $ 8,884,000
Future production costs (5,570,000) (4,469,000) (3,800,000)
Future development costs (330,000) (330,000) (330,000)
----------------- ----------------- -------------------
Future net cash flows 17,852,000 9,038,000 4,754,000
10% discount to reflect timing of cash flows (7,670,000) (3,883,000) (2,042,000)
----------------- ----------------- -------------------
Standardized measure of discounted future net cash
flows $10,182,000 $ 5,155,000 $ 2,712,000
================= ================= ===================
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging $9.99
per barrel of oil, adjusted for transportation and other charges, and $1.80
per Mcf of gas at December 31, 1998) to the year-end quantities of proved
reserves, except where fixed and determinable price changes are provided by
contractual arrangements in existence at year-end. Future development and
production costs are computed by estimating the expenditures to be incurred in
developing and producing proved oil and gas reserves at the end of the year,
based on year-end costs and assuming continuation of existing economic
conditions.
F-98
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND 1993 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future income tax expenses are computed by applying the appropriate statutory
rates to the future pre-tax net cash flows relating to proved reserves, net of
the tax basis of the properties involved. The future income tax expenses give
effect to permanent differences and tax credits, but do not reflect the impact
of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Beginning balance $ 5,915,000 $10,182,000 $ 5,155,000
Sales of oil and natural gas, net of production costs (1,773,000) (1,657,000) (900,000)
Net changes in prices and production costs 5,478,000 (4,176,000) (1,799,000)
Extensions, discoveries, and improved recovery, net of 202,000 93,000 25,000
future development costs
Sales of reserves in place (401,000) - (155,000)
Accretion of discount 592,000 1,018,000 515,000
Other, primarily changes in timing 169,000 (305,000) (129,000)
----------- ----------- -----------
Ending balance $10,182,000 $ 5,155,000 $ 2,712,000
=========== =========== ===========
</TABLE>
F-99
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves 1993 Institutional Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves 1993 Institutional
Limited Partnership as of December 31, 1997 and 1998 and the related statements
of operations, partners' equity and cash flows for each of the years in the
three year period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves 1993
Institutional Limited Partnership as of December 31, 1997 and 1998, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-100
<PAGE>
Coral Reserves 1993 Institutional Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------------ September 30,
1997 1998 1999
------------------- ---------------- ----------------
Assets (Unaudited)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 44,060 $ 25,260 $ 91,751
Accounts reveivable, net (Note 2) 162,495 178,634 122,242
------------------- ---------------- ---------------
Total currents assets 206,555 203,894 213,933
------------------- ---------------- ---------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 2,379,564 2,361,098 2,389,543
Accumulated depreciation, depletion and amortization (765,815) (1,015,158) (1,161,725)
------------------- ---------------- ---------------
1,613,749 1,345,940 1,227,818
------------------- ---------------- ---------------
Total assets $ 1,820,304 $ 1,549,834 $ 1,441,811
=================== ================ ===============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 35,733 $ 18,265 $ 17,025
Revenue and royalty distributions payable 1,821 3,224 4,211
------------------- ---------------- ---------------
Total current liabilities 37,554 21,489 21,236
------------------- ---------------- ---------------
Long-term debt (Note 3) 236,200 346,500 346,500
Partners' equity:
General partners 12,489 10,570 15,419
Limited partners 1,534,061 1,171,275 1,058,656
------------------- ---------------- ---------------
Total partners' equity 1,546,550 1,181,845 1,074,075
------------------- ---------------- ---------------
Total liablities and partners' equity $ 1,820,304 $ 1,549,834 $ 1,441,811
=================== ================ ===============
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE>
Coral Reserves 1993 Institutional Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
---------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Oil and gas sales $ 952,193 $ 938,252 $ 691,149 $ 527,876 $ 432,796
Other income 2,058 3,017 3,090 2,391 1,943
------------- ------------- -------------- -------------- --------------
Total revenues 954,251 941,269 694,239 530,267 434,739
------------- ------------- -------------- -------------- --------------
Costs and expenses:
Lease operating 142,385 122,434 119,979 94,773 79,758
Production taxes 70,826 74,213 69,161 45,394 31,613
Depreciation, depletion and
amortization\ 255,007 228,730 249,343 187,614 146,567
General and administrative 23,636 23,590 21,394 17,201 18,138
Interest\ 14,852 19,631 25,336 20,488 23,032
Reduction of carrying value of oil
and gas
Properties (Note 6) - - 100,000 - -
-------------- ------------ --------------- -------------- --------------
Total costs and expenses 506,706 468,598 585,213 365,470 299,108
-------------- ------------ --------------- -------------- --------------
Net earnings $ 447,545 $ 472,671 $ 109,026 $ 164,797 $ 135,631
============== ============ =============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE>
Coral Reserves 1993 Institutional Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net earnings $ 447,545 $ 472,671 $ 109,026 $ 164,797 $ 135,631
Adjustments to reconcile net earnings
to net Cash provided by operating
activities:
Depreciation, depletion and
amortization 255,007 228,730 249,343 187,614 146,567
Reduction in carrying value of
oil and gas properties - - 100,000 - -
Changes in operating assets and
liabilities:
Accounts receivable 53,602 (21,358) (16,139) 22,960 56,392
Increase (decrease) in:
Accounts payable and Revenue
and royalties payable (31,356) 3,627 (16,065) (32,516) (253)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 724,798 683,670 426,165 342,855 338,337
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of property and
equipment 53,176 - 47,257 47,257 -
Purchases of property and equipment (126,892) (99,020) (128,791) (132,799) (28,445)
---------- ---------- ---------- ---------- ----------
Net cash (used) provided by investing
activities (73,716) (99,020) (81,534) (85,542) (28,445)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Borrowings from long-term debt 137,200 137,000 151,800 139,800 -
Repayments of long-term debt (65,000) (60,000) (41,500) - -
Distributions to partners (688,944) (680,657) (473,731) (385,780) (243,401)
---------- ---------- ---------- ---------- ----------
Net cash (used) provided by financing
activities (616,744) (603,657) (363,431) (245,980) (243,401)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 34,338 (19,007) (18,800) 11,333 66,491
Cash and cash equivalents at beginning
of year 28,729 63,067 44,060 44,060 25,260
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year $ 63,067 $ 44,060 $ 25,260 $ 55,393 $ 91,751
========== ========== ========== ========== ==========
Supplemental cash flow information:
Cash payments for interest $ 14,852 $ 19,631 $ 25,336 $ 20,488 $ 23,032
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE>
Coral Reserves 1993 Institutional Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
------------ ---------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 9,896 $ 1,744,640 $ 1,754,536
Net Earnings 87,675 384,996 472,671
Distributions to partners (85,082) (595,575) (680,657)
------------ ---------------- -------------
Balance at December 31, 1997 12,489 1,534,061 1,546,550
Net Earnings 57,298 51,728 109,026
Distributions to partners (59,217) (414,514) (473,731)
------------ ---------------- -------------
Balance at December 31, 1998 10,570 1,171,275 1,181,845
Net Earnings (unaudited) 35,274 100,357 135,631
Distributions to partners (unaudited) (30,425) (212,976) (243,401)
------------ ---------------- -------------
Balance at September 30, 1999 (unaudited) $ 15,419 $ 1,058,656 $ 1,074,075
============ ================ =============
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE>
CORAL RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Natural Gas Income Fund 1993-I Limited Partnership
("Partnership") is organized as an Oklahoma limited partnership. Coral
Reserves, Inc., an Oklahoma corporation, and its two principal stockholders
serve as Managing General Partner and Additional General Partners,
respectively. The remaining 21 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 87.50% to the Limited Partners and 12.50%
to the General Partners.
The terms of the Partnership offering called for a subscription price of
$500,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 4.725 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Nebraska, Wyoming and New Mexico.
F-105
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
F-106
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996 and
1997 the Partnership's largest single purchaser accounted for approximately
10% and 20%, respectively, and during 1998 the Partnership's largest two
purchasers accounted for 30% of its oil and natural gas revenues. The
Partnership does not believe that the loss of any single customer would
have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk.
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
F-107
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31,
------------------ September 30,
1997 1998 1999
---------- ---------- ----------
(Unaudited)
Oil and natural gas revenue accruals..... $ 158,764 $ 160,187 $ 109,169
Other.................................... 3,731 18,447 13,073
---------- ---------- ----------
Total.................................... $ 162,495 $ 178,634 $ 122,242
========== ========== ==========
3. Long-Term Debt
The balances at December 31, 1998 and 1997 consist of a note payable to a
bank. These borrowings have been made against a revolving line of credit
maturing on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $500,000 and $300,000 at December
31, 1998 and 1997, respectively. Borrowings bear interest at 1% above a
specified prime rate and are collateralized by certain oil and gas
properties of the Partnership, as well as guarantees by the Managing and
Additional General Partners. The average interest rate under this credit
facility outstanding at December 31, 1998 was 7.57%. At December 31, 1998
and 1997, the balances of the revolving line of credit facility were
classified as long-term, based on the Partnership's continuing intent and
ability to refinance, as evidenced by the renewal of the credit facility in
June, 1999, extending the maturity date to October 1, 2000.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-108
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves, Inc., the Managing
General Partner of the Partnership, and certain affiliated partnerships,
whose Managing General Partner is Coral Reserves, Inc. or Coral Reserves
Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy Corp. have
common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff and
appropriate production supervisory personnel, or any other overhead expenses
which the Managing General Partner deems reasonable. The reimbursement for
overhead expenses is limited to a maximum of three percent (3%) of
"Distributable Cash", as defined in the Partnership Agreement. Such overhead
reimbursements amounted to $13,580, $20,611 and $21,722 for 1998, 1997 and
1996, respectively, and are included in "General and administrative"
expenses in the accompanying statements of operations.
During 1996, the Partnership sold interests in various producing oil and gas
properties to Coral Reserves Energy Income Fund 1996 Limited Partnership, an
affiliated partnership, for aggregate consideration of $26,712. The
Partnership realized a gain of $15,690 on this transaction.
Effective January 1, 1994, the Partnership purchased for $106,123 the rights
to consulting fees paid by Coral Reserves Natural Gas Income Fund 1991
Limited Partnership ("Coral 1991") to the Selling Agent of Coral 1991. The
fees are paid by Coral 1991 for services performed by the Selling Agent, and
consist of 1 1/2% of Coral 1991's gross annual revenues, plus 1% of monthly
distributable cash before payout and an additional 1% after payout. The sole
exception to this fee structure as purchased is that the Selling Agent will
retain the additional 1% after payout interest in Partnership monthly
distributable cash. Revenues received by the Partnership under this
arrangement totaled $18,603, $22,191 and $20,557 for the years ended
December 31, 1998, 1997 and 1996, respectively.
6. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be
F-109
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
reversed in a subsequent period even though higher oil and natural gas
prices may have increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $99,640.
Accordingly, a $100,000 reduction of the carrying value of such properties
was recorded.
7. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs (proved) $ - $ - $ - $ - $ -
Development costs 61,069 89,630 117,820 31,171 3,865
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate overhead
and, therefore are not necessarily indicative of the contribution to net
earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
------------------------------------------------- ---------------------
1996 1997 1998 1998 1999
----------------- -------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales $ 952,193 $ 938,252 $ 691,149 $ 527,876 $ 432,796
Production and operating expenses (213,211) (196,647) (189,140) (140,167) (111,371)
Depreciation, depletion and amortization (255,007) (228,730) (249,343) (187,614) (146,567)
Reduction of carrying value of oil and - - (100,000) - -
gas assets --------- --------- --------- --------- ---------
Results of operations for oil and gas $ 483,975 $ 512,875 $ 152,666 $ 200,095 $ 174,858
producing activities ========= ========= ========= ========= =========
Depreciation, depletion and amortization $ 0.69 $ 0.67 $0.72 $ 0.73 $ 0.69
per equivalent MCF of production ========= ========= ========= ========= =========
</TABLE>
F-110
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
8. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than those
of properties with a production history. Accordingly, these estimates are
subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected to
be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed reserves
of crude oil, including condensate and natural gas liquids, and natural gas,
as well as the changes in proved reserves during the periods indicated, are
set forth in the tables below. All reserves are located in the United
States.
The Partnership prepared the estimated reserves as of December 31, 1995,
1996 and 1997 based on geological and engineering evaluations performed as
of December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1995, 1996 and 1997, The Partnership used production costs based on
actual costs incurred during the years and actual oil and natural gas prices
received on December 31, 1995, 1996 and 1997. The Partnership has estimated
its reserves as of December 31, 1995, 1996 and 1997 in this manner because
the actual information necessary to calculate estimated proved reserves and
related information in accordance with guidelines of the SEC as of each date
is not available. Because the reserve estimates as of December 31, 1998 are
based on
F-111
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1995, 1996 and 1997 are not necessarily
reflective of quantities that might have been estimated based on information
available as of such dates had estimates in accordance with SEC guidelines
been made at such dates. Management believes that, because of the
methodology used, the reserve information presented is more reflective of
actual reserve quantities than estimates that might have been generated as
of such dates.
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
-------------------- --------------------
<S> <C> <C>
Proved Reserves as of December 31, 1995 108,000 2,462,000
Extensions and discoveries - 63,000
Production (16,000) (276,000)
Sale of reserves (2,000) (99,000)
------- ---------
Proved Reserves as of December 31, 1996 90,000 2,150,000
Extensions and discoveries - 216,000
Production (14,000) (260,000)
------- ---------
Proved Reserves as of December 31, 1997 76,000 2,106,000
Extensions and discoveries - 8,000
Production (11,000) (278,000)
Sale of reserves (8,000) (47,000)
------- ---------
Proved Reserves as of December 31, 1998 57,000 1,789,000
======= =========
Proved developed reserves as of:
December 31, 1995 108,000 2,694,000
December 31, 1996 90,000 2,320,000
December 31, 1997 76,000 2,060,000
December 31, 1998 57,000 1,735,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Future cash inflows $10,106,000 $ 6,113,000 $ 3,862,000
Future production costs (1,546,000) (1,409,000) (1,482,000)
Future development costs (102,000) (102,000) (102,000)
----------- ----------- -----------
Future net cash flows 8,458,000 4,602,000 2,278,000
10% discount to reflect timing of cash flows (3,462,000) (1,884,000) (932,000)
----------- ----------- -----------
Standardized measure of discounted future net cash
flows $ 4,996,000 $ 2,718,000 $ 1,346,000
=========== =========== ===========
</TABLE>
F-112
<PAGE>
CANAAN RESERVES 1993 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future cash inflows are computed by applying year-end prices (averaging
$9.90 per barrel of oil, adjusted for transportation and other charges, and
$1.84 per Mcf of gas at December 31, 1998) to the year-end quantities of
proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the expenditures
to be incurred in developing and producing proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions.
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future income
tax expenses give effect to permanent differences and tax credits, but do
not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1997 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
Beginning balance $2,884,000 $ 4,996,000 $ 2,718,000
Sales of oil and natural gas, net of production costs (739,000) (731,000) (490,000)
Net changes in prices and production costs 2,643,000 (2,071,000) (1,030,000)
Extensions, discoveries, and improved recovery, net of 117,000 225,000 6,000
future development costs
Sales of reserves in place (211,000) - (58,000)
Accretion of discount 288,000 500,000 272,000
Other, primarily changes in timing 14,000 (201,000) (72,000)
---------- ----------- -----------
Ending balance $4,996,000 $ 2,718,000 $ 1,346,000
========== =========== ===========
</TABLE>
F-113
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Energy Income Fund
1995 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Energy Income Fund
1995 Limited Partnership as of December 31, 1997 and 1998 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Energy Income
Fund 1995 Limited Partnership as of December 31, 1997 and 1998, and the results
of its operations and its cash flow for each of the years in the three year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-114
<PAGE>
Coral Reserves Energy Income Fund 1995 Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------------------
1997 1998 1999
------------------- -------------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 664,421 $ 522,748 $ 388,408
Accounts receivable, net (Note 2 ) 439,061 271,488 370,452
Inventories 3,731 4,251 2,192
------------------- -------------------- ----------------
Total current assets 1,107,213 798,487 761,052
------------------- -------------------- ----------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 4,712,485 4,847,201 5,013,721
Accumulated depreciation, depletion and
amortization (1,161,802) (1,635,657) (1,995,346)
------------------- -------------------- ----------------
3,550,683 3,211,544 3,018,375
------------------- -------------------- ----------------
Other assets 1,600 800 200
------------------- -------------------- ----------------
Total assets $ 4,659,496 $ 4,010,831 $ 3,779,627
=================== ==================== ================
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 50,471 $ 40,237 $ 35,209
Revenue and royalty distributions payable 23,863 23,874 24,321
------------------- -------------------- ----------------
Total current liabilities 74,334 64,111 59,530
------------------- -------------------- ----------------
Partners' equity:
General partners 29,968 13,606 26,971
Limited partners 4,555,194 3,933,114 3,693,126
------------------- -------------------- ----------------
Total partners' equity 4,585,162 3,946,720 3,720,097
------------------- -------------------- ----------------
Total liabilities and partners' equity $ 4,659,496 $ 4,010,831 $ 3,779,627
=================== ==================== ================
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE>
Coral Reserves Energy Income Fund 1995 Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------------------- --------------------------------------
1996 1997 1998 1998 1999
--------------- ----------------- ------------------- --------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,919,124 $2,142,877 $1,553,143 $1,208,836 $1,243,881
Other income 51,481 46,712 30,940 22,784 17,764
--------------- ----------------- ------------------- --------------- --------------
Total revenues 1,970,605 2,189,589 1,584,083 1,231,620 1,261,645
--------------- ----------------- ------------------- --------------- --------------
Costs and expenses:
Lease operating 348,252 371,371 342,852 254,868 252,701
Production taxes 130,104 153,336 110,949 78,074 92,958
Depreciation, depletion and 434,878 469,181 474,655 360,832 360,289
amortization
General and administrative 93,941 108,651 100,674 80,059 78,953
--------------- ----------------- ------------------- --------------- --------------
Total costs and expenses 1,007,175 1,102,539 1,029,130 773,833 784,901
--------------- ----------------- ------------------- --------------- --------------
Net earnings $ 963,430 $1,087,050 $ 554,953 $ 457,787 $ 476,744
=============== ================= =================== =============== ==============
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE>
Coral Reserves Energy Income Fund 1995 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
------------- ------------ ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 963,430 $ 1,087,050 $ 554,953 $ 457,787 $ 476,744
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 434,878 469,181 474,655 360,832 360,289
Changes in operating assets and liabilities:
Accounts receivable (190,206) 17,153 167,573 160,848 (98,964)
Inventories (12,809) 9,078 (520) (122) 2,059
Increase (decrease) in:
Accounts payable and Revenue and royalties
Payable (72,669) 20,937 (10,223) (42,385) (4,581)
------------- ------------ ----------- ------------ -------------
Net cash provided by operating activities 1,122,624 1,603,399 1,186,438 936,960 735,547
------------- ------------ ----------- ------------ -------------
Cash flows from investing activities:
Proceeds from sales of property and equipment 23,302 23,540 - - -
Purchases of property and equipment (1,098,497) (557,762) (134,716) (117,032) (166,520)
Increase in other assets - - - - -
------------- ------------ ----------- ------------ -------------
Net cash (used) provided by investing activities (1,075,195) (534,222) (134,716) (117,032) (166,520)
------------- ------------ ----------- ------------ -------------
Cash flows from financing activities:
Distributions to partners (1,210,056) (1,502,438) (1,193,395) (979,094) (703,367)
------------- ------------ ----------- ------------ -------------
Net cash (used) provided by financing activities (1,210,056) (1,502,438) (1,193,395) (979,094) (703,367)
------------- ------------ ----------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (1,162,627) (433,261) (141,673) (159,166) (134,340)
Cash and cash equivalents at beginning of year 2,260,309 1,097,682 664,421 664,421 522,748
------------- ------------ ----------- ------------ -------------
Cash and cash equivalents at end of year $ 1,097,682 $ 664,421 $ 522,748 $ 505,255 $ 388,408
============= ============ =========== ============ =============
</TABLE>
See accompanying notes to financial statements.
F-117
<PAGE>
Coral Reserves Energy Income Fund 1995 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
------------------- ------------------ --------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 24,588 $ 4,975,962 $ 5,000,550
Net Earnings 155,624 931,426 1,087,050
Distributions to partners (150,244) (1,352,194) (1,502,438)
------------------- ------------------ --------------
Balance at December 31, 1997 29,968 4,555,194 4,585,162
Net Earnings 102,977 451,976 554,953
Distributions to partners (119,339) (1,074,056) (1,193,395)
------------------- ------------------ --------------
Balance at December 31, 1998 13,606 3,933,114 3,946,720
Net Earnings (unaudited) 83,702 393,042 476,744
Distributions to partners (unaudited) (70,337) (633,030) (703,367)
------------------- ------------------ --------------
Balance at September 30, 1999 (unaudited) $ 26,971 $ 3,693,126 $ 3,720,097
=================== ================== ==============
</TABLE>
See accompanying notes to financial statements.
F-118
<PAGE>
CORAL RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Income Fund 1995 Limited Partnership ("Partnership")
is organized as an Oklahoma limited partnership. Coral Reserves Energy
Corp., an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 196 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and
1% to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to
the General Partners until payout is achieved. After payout, these
items are allocated 75% to the Limited Partners and 25% to the
General Partners. Payout occurs on an individual partner basis,
and is reached at the point in time when cash distributions to a
Limited Partner equal his or her capital contributions made to the
Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 68.050 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-119
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma, Arkansas and Wyoming.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance
F-120
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its
oil and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996 and
1997, the Partnership's largest single purchaser accounted for
approximately 50% in both years and, during 1998 the Partnership's largest
three purchasers accounted for 70% of its oil and natural gas revenues. The
Partnership does not believe that the loss of any single customer would
have a material effect on the results of its operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk. At December 31,
1998, a significant concentration of credit risk existed with respect to
$522,748 deposited with one financial institution.
F-121
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
December 31, September 30,
------------
1997 1998 1999
---- ---- ----
(Unaudited)
Oil and natural gas revenue accruals... $438,902 $267,961 $370,452
Other.................................. 159 3,527 -
-------- -------- --------
Total.................................. $439,061 $271,488 $370,452
======== ======== ========
3. Long-Term Debt
A revolving line of credit maturing on October 1, 2000, was established in
September 1999. Borrowings bear interest at 1% above a specified prime rate
and are collateralized by certain oil and gas properties of the
Partnership, as well as guarantees by the Managing and Additional General
Partners. The borrowing base available to the Partnership under this credit
facility is $2,000,000. No borrowings have been made under this line of
credit as of September 30, 1999.
4. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
5. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership
F-122
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $58,639, $78,659 and $67,684 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
6. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs (proved) $978,679 $ - $ - $ - $ -
Development costs 13,952 500,780 117,707 70,881 188,052
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales $1,919,124 $2,142,877 $1,553,143 $1,208,836 $1,243,881
Production and operating expenses (478,356) (524,707) (453,801) (332,942) (345,659)
Depreciation, depletion and amortization (434,878) (469,181) (474,665) (360,832) (360,289)
---------- ----------- ---------- ---------- ----------
Results of operations for oil and gas
producing activities $1,005,890 $1,148,989 $ 624,677 $ 515,602 $ 537,933
=========== =========== ========== ========== ==========
Depreciation, depletion and amortization
per equivalent MCF of production $ 0.52 $ 0.57 $ 0.59 $ 0.58 $ 0.61
=========== =========== ========== ========== ==========
</TABLE>
F-123
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
7. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1995,
1996 and 1997 based on geological and engineering evaluations performed as
of December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of
December 31, 1995, 1996 and 1997, The Partnership used production costs
based on actual costs incurred during the years and actual oil and natural
gas prices received on December 31, 1995, 1996 and 1997. The Partnership
has estimated its reserves as of December 31, 1995, 1996 and 1997 in this
manner because the actual information necessary to calculate estimated
proved reserves and related information in accordance with guidelines of
the SEC as of each date is not available. Because the reserve estimates as
of December 31, 1998 are based on
F-124
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1995, 1996 and 1997 are not necessarily
reflective of quantities that might have been estimated based on
information available as of such dates had estimates in accordance with SEC
guidelines been made at such dates. Management believes that, because of
the methodology used, the reserve information presented is more reflective
of actual reserve quantities than estimates that might have been generated
as of such dates.
Changes in Proved Reserves:
Oil (Bbls) Gas (Mcf)
---------- ----------
Proved Reserves as of December 31, 1995 183,000 5,368,000
Purchases of reserves 75,000 2,412,000
Production (26,000) (676,000)
Sale of reserves - (25,000)
---------- ----------
Proved Reserves as of December 31, 1996 232,000 7,079,000
Extensions and discoveries 18,000 132,000
Production (28,000) (655,000)
---------- ----------
Proved Reserves as of December 31, 1997 222,000 6,556,000
Production (26,000) (654,000)
---------- ----------
Proved Reserves as of December 31, 1998 196,000 5,902,000
========== ==========
Proved developed reserves as of:
December 31, 1995 199,000 5,064,000
December 31, 1996 246,000 6,116,000
December 31, 1997 217,000 5,461,000
December 31, 1998 191,000 4,806,000
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ 30,089,000 $17,704,000 $12,402,000
Future production costs (5,392,000) (4,420,000) (5,083,000)
Future development costs (930,000) (930,000) (930,000)
------------- ------------ ------------
Future net cash flows 23,767,000 12.354,000 6,389,000
10% discount to reflect timing of cash flows (10,307,000) (5,358,000) (2,771,000)
------------- ------------ ------------
Standardized measure of discounted future net cash
flows $ 13,460,000 $ 6,996,000 $ 3,618,000
============= ============ ============
</TABLE>
F-125
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1995 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future cash inflows are computed by applying year-end prices (averaging
$10.03 per barrel of oil, adjusted for transportation and other charges,
and $1.77 per Mcf of gas at December 31, 1998) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future
income tax expenses give effect to permanent differences and tax credits,
but do not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Beginning balance $ 4,556,000 $13,460,000 $ 6,996,000
Sales of oil and natural gas, net of production costs (1,441,000) (1,585,000) (1,046,000)
Net changes in prices and production costs 5,293,000 (5,816,000) (2,786,000)
Extensions, discoveries, and improved recovery, net of
future development costs - 251,000 -
Purchases of reserves, net of future development costs 4,466,000 - -
Sales of reserves in place (40,000) - -
Accretion of discount 456,000 1,346,000 700,000
Other, primarily changes in timing 170,000 (660,000) (246,000)
----------- ----------- -----------
Ending balance $13,460,000 $ 6,996,000 $ 3,618,000
=========== =========== ===========
</TABLE>
F-126
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves Energy Income Fund
1996 Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves Energy Income Fund
1996 Limited Partnership as of December 31, 1997 and 1998 and the related
statements of operations, partners' equity and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves Energy Income
Fund 1996 Limited Partnership as of December 31, 1997 and 1998, and the results
of its operations and its cash flow for each of the years in the three year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-127
<PAGE>
Coral Reserves Energy Income Fund 1996 Limited Partnership
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------------------
1997 1998 1999
--------------------- --------------------- -----------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $5,037,055 $1,274,867 $ 38,354
Accounts receivable, net (Note 2 ) 355,950 271,512 329,501
--------------------- --------------------- -----------------
Total current assets 5,393,005 1,546,379 367,855
--------------------- --------------------- -----------------
Property and equipment, at cost, based on the full cost
method of accounting for oil and gas properties 2,669,850 5,467,383 5,710,322
Accumulated depreciation, depletion and amortization (190,896) (699,904) (1,111,168)
--------------------- --------------------- -----------------
2,478,954 4,767,479 4,599,154
--------------------- --------------------- -----------------
Notes Receivable (Note 3) - - 2,990,000
Other assets 2,733 1,933 1,333
--------------------- --------------------- -----------------
Total assets $7,874,692 $6,315,791 $ 7,958,342
===================== ===================== =================
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 67,779 $ 59,158 $ 31,876
Revenue and royalty distributions payable 47,009 12,711 12,118
--------------------- --------------------- -----------------
Total current liabilities 114,788 71,869 43,994
--------------------- --------------------- -----------------
Long-term debt (Note 4) - - 2,214,000
Partners' equity:
General partners 24,006 13,175 3
Limited partners 7,735,898 6,230,747 5,700,345
--------------------- --------------------- -----------------
Total partners' equity 7,759,904 6,243,922 5,700,348
--------------------- --------------------- -----------------
Total liabilities and partners' equity $7,874,692 $6,315,791 $ 7,958,342
===================== ===================== =================
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE>
Coral Reserves Energy Income Fund 1996 Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- -------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $121,715 $641,810 $1,292,067 $ 979,614 $1,328,577
Other income 32,052 146,966 111,286 93,568 17,995
-------- -------- ---------- ---------- ----------
Total revenues 153,767 788,776 1,403,353 1,073,182 1,346,572
-------- -------- ---------- ---------- ----------
Costs and expenses:
Lease operating 9,144 84,617 249,675 159,225 267,008
Production taxes 11,249 48,733 128,663 88,122 101,939
Depreciation, depletion and amortization 26,069 166,094 509,808 334,861 411,864
General and administrative 11,315 32,526 98,635 86,543 105,718
Interest - - - - 86,123
Reduction of carrying value of oil and gas
properties (Note 7) - - 887,000 - -
-------- -------- ---------- ---------- ----------
Total costs and expenses 57,777 331,970 1,873,781 668,751 972,652
-------- -------- ---------- ---------- ----------
Net earnings (loss) $ 95,990 $456,806 $ (470,428) $ 404,431 $ 373,920
======== ======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE>
Coral Reserves Energy Income Fund 1996 Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
----------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---------- ----------- ------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 95,990 $ 456,806 $ (470,428) $ 404,431 $ 373,920
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 26,069 166,094 509,808 334,861 411,864
Reduction in carrying value of oil and gas
properties - - 887,000 - -
Changes in operating assets and liabilities:
Accounts receivable (80,800) (275,150) 84,438 49,751 (57,989)
Increase (decrease) in:
Accounts payable and Revenue and royalties
payable 4,867 109,921 (42,919) (51,032) (27,875)
---------- ----------- ------------ ------------ -----------
Net cash provided by operating activities 46,126 457,671 967,899 738,011 699,920
---------- ----------- ------------ ------------ -----------
Cash flows from investing activities:
Advances on notes receivable - - - - (3,200,000)
Repayments of notes receivable - - - - 210,000
Proceeds from sales of property and equipment - - 25,000 - -
Purchases of property and equipment (702,684) (1,967,166) (3,709,533) (2,515,366) (242,939)
Increase in other assets (4,000) - - - -
---------- ----------- ------------ ------------ -----------
Net cash (used) provided by investing activities (706,684) (1,967,166) (3,684,533) (2,515,366) (3,232,939)
---------- ----------- ------------ ------------ -----------
Cash flows from financing activities:
Borrowings on long-term debt - - - - 2,214,000
Contributed capital 3,912,500 5,695,100 - - -
Distributions to partners (87,606) (417,286) (1,034,692) (788,901) (917,494)
Cost of capital raised (766,500) (1,129,100) (10,862) - -
---------- ----------- ------------ ------------ -----------
Net cash (used) provided by financing activities 3,058,394 4,148,714 (1,045,554) (788,901) 1,296,506
---------- ----------- ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 2,397,836 2,639,219 (3,762,188) (2,566,256) (1,236,513)
Cash and cash equivalents at beginning of year - 2,397,836 5,037,055 5,037,055 1,274,867
---------- ----------- ------------ ------------ -----------
Cash and cash equivalents at end of year $2,397,836 $ 5,037,055 $ 1,274,867 $ 2,470,799 $ 38,354
========== =========== ============ ============ ===========
Supplemental cash flow information:
Cash payments for interest $ - $ - $ - $ - $ 86,123
========== =========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE>
Canaan Reserves Energy Income Fund 1996 Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
------------------------ ------------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 3,444 $ 3,150,940 $ 3,154,384
Net Earnings 62,291 394,515 456,806
Distributions to partners (41,729) (375,557) (417,286)
Contributions by partners - 5,695,100 5,695,100
Cost of capital raised - (1,129,100) (1,129,100)
------------------------ ------------------- ---------------
Balance at December 31, 1997 24,006 7,735,898 7,759,904
Net Earnings 92,638 (563,066) (470,428)
Distributions to partners (103,469) (931,223) (1,034,692)
Cost of capital raised - (10,862) (10,862)
------------------------ ------------------- ---------------
Balance at December 31, 1998 13,175 6,230,747 6,243,922
Net Earnings (unaudited) 78,577 295,343 373,920
Distributions to partners (unaudited) (91,749) (825,745) (917,494)
------------------------ ------------------- ---------------
Balance at September 30, 1999 (unaudited) $ 3 $ 5,700,345 $ 5,700,348
======================== =================== ===============
</TABLE>
See accompanying notes to financial statements.
F-131
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Income Fund 1996 Limited Partnership ("Partnership")
is organized as an Oklahoma limited partnership. Coral Reserves Energy
Corp., an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 226 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to the
General Partners until payout is achieved. After payout, these items
are allocated 75% to the Limited Partners and 25% to the General
Partners. Payout occurs on an individual partner basis, and is
reached at the point in time when cash distributions to a Limited
Partner equal his or her capital contributions made to the
Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 96.350 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
F-132
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance sheets. The Partnership accrues revenue
for only its net interest in its oil and natural gas properties.
F-133
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996 and
1997, the Partnership's largest five purchasers accounted for approximately
80%, and during 1998 the largest two purchasers accounted for 50% it's oil
and natural gas revenues. The Partnership does not believe that the loss of
any single customer would have a material effect on the results of its
operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk. At December 31,
1998, a significant concentration of credit risk existed with respect to
$1,274,867 deposited with two financial institutions.
F-134
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
-----------------------------
1997 1998 1999
------------ --------------- --------------
(Unaudited)
<S> <C> <C> <C>
Oil and natural gas revenue $344,589 $267,215 $327,271
accruals..............................................
Other................................................. 11,361 4,297 2,230
.............. -------- -------- --------
Total................................................. $355,590 $271,512 $329,501
...................................................... ======== ======== ========
</TABLE>
3. Notes Receivable
Effective February 1999, the Partnership made an advance of $3,200,000 to
Indian Oil Company (Indian). In return for the advance, the Partnership
receives a production payment payable from Indian in the amount of $30,000
per month.
4. Long-Term Debt
The balance at September 30, 1999 consists of a note payable to a bank.
These borrowings have been made against a revolving line of credit maturing
on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $2,400,000 at September 30,
1999. Borrowings bear interest at 1% above a specified prime rate and are
collateralized by certain oil and gas properties of the Partnership, as
well as guarantees by the Managing and Additional General Partners. The
average interest rate under this credit facility outstanding at September
30, 1999 was 8.04%.
5. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-135
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
6. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $53,583, $24,511 and $6,142 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1996, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, Coral Reserves Natural Gas Income Fund 1993 Limited
Partnership, and Coral Reserves 1993 Institutional Limited Partnership, all
affiliated partnerships, for aggregate consideration of $175,198.
During 1997, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, for aggregate consideration of $96,623.
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $886,779.
Accordingly, a $887,000 reduction of the carrying value of such properties
was recorded.
F-136
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Year Ended December 31, Nine months ended September 30,
-------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs (proved) $703,376 $ 936,095 $3,522,344 $2,250,722 $ -
Development costs - 1,002,947 113,261 70,881 186,620
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
---------------------------------------------------- ---------------------------------
1996 1997 1998 1998 1999
-------------- --------------- ------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales $121,715 $ 641,810 $1,292,067 $ 979,614 $1,328,577
Production and operating expenses (20,393) (133,350) (378,338) (247,347) (368,947)
Depreciation, depletion and (26,069) (166,094) (509,808) (334,861) (411,864)
amortization
Reduction of carrying value of oil - - (887,000) - -
and gas assets -------- --------- ---------- --------- ----------
Results of operations for oil and gas $ 342,366 ($483,079) $ 397,406 $ 547,766
producing activities $ 75,253
=============== ================ ============== =============== ===============
Depreciation, depletion and $ 0.43 $ 0.70 $0.77 $ 0.65 $ 0.65
amortization per equivalent MCF of
production
=============== ================ ============== =============== ===============
</TABLE>
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
Quantities of Oil and Gas Reserves
F-137
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas reserves for each of the years in the three-year period
ended December 31, 1998. The Partnership's proved reserves were calculated
by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1996 and
1997 based on geological and engineering evaluations performed as of
December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1996 and 1997, The Partnership used production costs based on actual
costs incurred during the years and actual oil and natural gas prices
received on December 31, 1996 and 1997. The Partnership has estimated its
reserves as of December 31, 1996 and 1997 in this manner because the actual
information necessary to calculate estimated proved reserves and related
information in accordance with guidelines of the SEC as of each date is not
available. Because the reserve estimates as of December 31, 1998 are based
on additional information gained from the result of drilling, testing and
production subsequent to the dates of the estimated reserves, the reserve
estimates as of December 31, 1996 and 1997 are not necessarily reflective
of quantities that might have been estimated based on information available
as of such dates had estimates in accordance with SEC guidelines been made
at such dates. Management believes that, because of the methodology used,
the reserve information presented is more reflective of actual reserve
quantities than estimates that might have been generated as of such dates.
F-138
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
-------------------- --------------------
<S> <C> <C>
Proved Reserves as of December 31, 1995
Purchases of reserves 23,000 2,465,000
Production (1,000) (53,000)
------- ---------
Proved Reserves as of December 31, 1996 22,000 2,412,000
Extensions and discoveries 14,000 182,000
Purchases of reserves 114,000 1,468,000
Production (9,000) (183,000)
------- ---------
Proved Reserves as of December 31, 1997 141,000 3,879,000
Purchases of reserves 62,000 4,286,000
Production (21,000) (537,000)
------- ---------
Proved Reserves as of December 31, 1998 182,000 7,628,000
======= =========
Proved developed reserves as of:
December 31, 1996 24,000 2,232,000
December 31, 1997 104,000 3,226,000
December 31, 1998 142,000 6,724,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Future cash inflows $ 9,398,000 $11,174,000 $15,843,000
Future production costs (1,437,000) (2,702,000) (6,489,000)
Future development costs (425,000) (830,000) (1,057,000)
----------- ----------- -----------
Future net cash flows 7,536,000 7,642,000 8,297,000
10% discount to reflect timing of cash flows (3,205,000) (3,250,000) (3,529,000)
----------- ------------ -----------
Standardized measure of discounted future net cash
flows $ 4,331,000 $ 4,392,000 $ 4,768,000
=========== =========== ===========
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging
$10.03 per barrel of oil, adjusted for transportation and other charges,
and $1.84 per Mcf of gas at December 31, 1998) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
F-139
<PAGE>
CANAAN RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future
income tax expenses give effect to permanent differences and tax credits,
but do not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Beginning balance $ - $ 4,331,000 $ 4,392,000
Sales of oil and natural gas, net of production costs (101,000) (504,000) (899,000)
Net changes in prices and production costs (49,000) (2,001,000) (1,869,000)
Extensions, discoveries, and improved recovery, net of 284,000
future development costs - -
Purchases of reserves, net of future development costs 4,438,000 2,068,000 2,761,000
Accretion of discount - 433,000 439,000
Other, primarily changes in timing 43,000 (219,000) (56,000)
---------- ----------- -----------
Ending balance $4,331,000 $ 4,392,000 $ 4,768,000
========== =========== ===========
</TABLE>
F-140
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coral Reserves 1996 Institutional Limited Partnership
Oklahoma City, Oklahoma
We have audited the balance sheets of Coral Reserves 1996 Institutional
Limited Partnership as of December 31, 1997 and 1998 and the related statements
of operations, partners' equity and cash flows for each of the years in the
three year period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's Managing General Partner. Our
responsibility is to express an opinion on these 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 audits to
obtain reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly,
in all material respects, the financial position of Coral Reserves 1996
Institutional Limited Partnership as of December 31, 1998 and 1997, and the
results of its operations and its cash flow for each of the years in the three
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
January 7, 2000
F-141
<PAGE>
Coral Reserves 1996 Institutional Limited Partnership
Balance Sheets
December 31,
----------------------- September 30,
1997 1998 1999
----------- ---------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 3,942,711 $ 1,052,042 $ 96,989
Accounts receivable, net (Note 2) 215,117 221,194 378,567
Inventories 727 779 -
----------- ----------- -----------
Total current assets 4,158,555 1,274,015 475,556
----------- ----------- -----------
Property and equipment, at cost,
based on the full cost method
of accounting and gas
properties 2,261,300 4,469,952 4,534,234
Accumulated depreciation,
depletion and amortization (319,699) (763,224) (1,190,746)
----------- ----------- -----------
1,941,601 3,706,728 3,343,488
----------- ----------- -----------
Notes Receivable (Note 3) - - 2,616,250
----------- ----------- -----------
Total assets $ 6,100,156 $ 4,980,743 $ 6,435,294
=========== =========== ===========
Limited and Partners' Equity
Current liabilities:
Accounts payable $ 20,901 $ 26,583 $ 38,676
Revenue and royalty
distributions payable 23,870 23,306 23,683
----------- ----------- -----------
Total current liabilities 44,771 49,889 62,359
----------- ----------- -----------
Long-term debt (Note 4) - - 1,900,000
Partners' equity:
General partners 30,783 26,782 22,983
Limited partners 6,024,602 4,904,072 4,449,952
----------- ----------- -----------
Total partners' equity 6,055,385 4,930,854 4,472,935
----------- ----------- -----------
Total liabilities and
partners' equity $ 6,100,156 $ 4,980,743 $ 6,435,294
=========== =========== ===========
See accompanying notes to financial statements.
F-142
<PAGE>
Coral Reserves 1996 Institutional Limited Partnership
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 378,712 $ 784,110 $1,213,718 $ 921,732 $1,184,397
Other income 43,444 83,885 96,543 80,495 15,767
---------- ---------- ---------- ---------- ----------
Total revenues 422,156 867,995 1,310,261 1,002,227 1,200,164
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Lease operating 30,998 73,996 153,701 99,910 183,960
Production taxes 29,867 58,538 103,393 65,927 83,948
Depreciation, depletion and amortization 93,896 225,803 443,525 253,403 427,522
General and administrative 9,381 19,162 47,349 36,704 50,484
Interest - - - - 76,990
Reduction of carrying value of oil and gas
Properties (Note 7) - - 649,000 - -
---------- ---------- ---------- ---------- ----------
Total costs and expenses 164,142 377,499 1,396,968 455,944 822,904
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 258,014 $ 490,496 $ (86,707) $ 546,283 $ 377,260
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
Coral Reserves 1996 Institutional Limited Partnership
Statements of Cash Flow
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 258,014 $ 490,496 $ (86,707) $ 546,283 $ 377,260
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation, depletion and amortization 93,896 225,803 443,525 253,403 427,522
Reduction in carrying value of oil and
gas properties - - 649,000 - -
Changes in operating assets and liabilities:
Accounts receivable (71,582) (95,086) (6,077) (31,332) (157,373)
Inventories - (727) (52) 727 779
Increase (decrease) in:
Accounts payable and Revenue and royalties
Payable 6,428 31,737 5,118 (11,921) 12,470
---------- --------- ----------- ---------- ----------
Net cash provided by operating activities 286,756 652,223 1,004,807 757,160 660,658
---------- --------- ----------- ---------- ----------
Cash flows from investing activities:
Advances on notes receivable - - - - (2,800,000)
Repayments of notes receivable - - - - 183,750
Proceeds from sales of property and equipment - - 15,500 - -
Purchases of property and equipment (557,387) (1,283,933) (2,873,152) (1,651,504) (64,282)
Increase in other assets - - - - -
---------- ---------- ----------- ---------- ----------
Net cash (used) provided by investing activities (557,387) (1,283,933) (2,857,652) (1,651,504) (2,680,532)
---------- ---------- ----------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt - - - - 1,900,000
Contributed capital 2,171,250 3,520,100 - - -
Distributions to partners (270,109) (533,207) (1,037,824) (814,947) (835,179)
Cost of capital raised (126,880) (187,670) - - -
---------- --------- ----------- ---------- ----------
Net cash (used) provided by financing activities 1,774,261 2,799,223 (1,037,824) (814,947) 1,064,821
---------- --------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,503,630 2,167,513 (2,890,699) (1,709,291) (955,053)
Cash and cash equivalents at beginning of year 271,568 1,775,198 3,942,711 3,942,711 1,052,042
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year $1,775,198 $3,942,711 $1,052,042 $2,233,420 $ 96,989
========== ========== ========== ========== ==========
Supplemental cash flow information:
Cash payments for interest $ - $ - $ - $ - $ 76,990
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-144
<PAGE>
Coral Reserves 1996 Institutional Limited Partnership
Statements of Partners' Equity
<TABLE>
<CAPTION>
General Limited Total
Partners' Partners' Partners'
Equity Equity Equity
---------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 7,898 $ 2,757,768 $ 2,765,666
Net Earnings 89,536 400,960 490,496
Distributions to partners (66,651) (466,556) (533,207)
Contributions by partners - 3,520,100 3,520,100
Cost of capital raised - (187,670) (187,670)
--------- ------------ ------------
Balance at December 31, 1997 30,783 6,024,602 6,055,385
Net Earnings 125,727 (212,434) (86,707)
Distributions to partners (129,728) (908,096) (1,037,824)
--------- ------------ ------------
Balance at December 31, 1998 26,782 4,904,072 4,930,854
Net Earnings (unaudited) 100,598 276,662 377,260
Distributions to partners (unaudited) (104,397) (730,782) (835,179)
--------- ------------ ------------
Balance at September 30, 1999 (unaudited) $ 22,983 $ 4,449,952 $ 4,472,935
========= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-145
<PAGE>
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, 1997 and 1998
(Information insofar as it relates to September 30, 1999
or the nine months ended September 30, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business Activity
Coral Reserves Energy Income Fund 1996 Limited Partnership ("Partnership")
is organized as an Oklahoma limited partnership. Coral Reserves Energy
Corp., an Oklahoma corporation, and its two principal stockholders serve as
Managing General Partner and Additional General Partners, respectively. The
remaining 226 participants are limited partners.
By the terms of the Amended and Restated Agreement of Limited Partnership
("Partnership Agreement"), revenues, costs and expenses are allocated among
the partners as follows:
. The allowance for cost depletion is allocated 99% to the Limited
Partners and 1% to the Managing General Partner.
. Depreciation of lease and well equipment and amortization of
organization costs are allocated 99% to the Limited Partners and 1%
to the Managing General Partner.
. All other items of income and expense, with certain limited
exceptions, are allocated 90% to the Limited Partners and 10% to the
General Partners until payout is achieved. After payout, these items
are allocated 75% to the Limited Partners and 25% to the General
Partners. Payout occurs on an individual partner basis, and is
reached at the point in time when cash distributions to a Limited
Partner equal his or her capital contributions made to the
Partnership.
The terms of the Partnership offering called for a subscription price of
$100,000 per unit. Fractional units could be sold at the discretion of the
Managing General Partner. Subscriptions were received for 96.350 units in
the Partnership.
The General Partners are not required to make any capital contributions to
the Partnership, unless there exists a deficit balance in their capital
accounts at the time of termination or dissolution of the Partnership. In
such case, the General Partners would be required to make a contribution
equal to such deficit.
F-146
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
The Partnership is engaged primarily in the acquisition and development of
producing oil and gas properties. These activities have occurred in the
states of Oklahoma and Texas.
Accounting policies employed by the Partnership reflect industry practices
and conform to generally accepted accounting principles. The more
significant of such policies are discussed below.
Uses 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
the 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 amounts could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
short-term debt securities purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
The Partnership follows the full cost method of accounting for its oil and
gas properties. Accordingly, all costs incidental to the acquisition,
exploration, and development of oil and gas properties, including costs of
undeveloped leasehold, dry holes and leasehold equipment, are capitalized.
Net capitalized costs are limited to the estimated future net revenues,
discounted at 10% per annum, from proved oil, natural gas and natural gas
liquids reserves. Capitalized costs are depleted by an equivalent unit-of-
production method, converting gas to oil at the ratio of one barrel ("Bbl")
of oil to six thousand cubic feet ("Mcf") of natural gas. No gain or loss
is recognized upon disposal of oil and gas properties unless such disposal
significantly alters the relationship between capitalized costs and proved
reserves.
Revenue and Royalty Distributions Payable
For certain oil and gas properties, the Partnership receives production
proceeds, from the purchaser and further distributes such amounts to other
revenue and royalty owners. Production proceeds applicable to other revenue
and royalty owners are reflected as revenue and royalty distributions
payable in the accompanying balance
F-147
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
sheets. The Partnership accrues revenue for only its net interest in its
oil and natural gas properties.
Gas Balancing
During the course of normal operations, the Partnership and other joint
interest owners of natural gas reservoirs will take more or less than their
respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are
depleted, cash settlements are made among the joint interest owners under a
variety of arrangements. The Partnership follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Partnership's excess takes of natural gas volumes exceeds its estimated
remaining recoverable reserves. No receivables are recorded for those wells
where the Partnership has taken less than its ownership share of gas
production.
Major Purchasers
The Partnership markets its oil and natural gas production to numerous
purchasers under a combination of short-term contracts. During 1996 and
1997, the Partnership's largest five purchasers accounted for approximately
80%, and during 1998 the largest two purchasers accounted for 50% it's oil
and natural gas revenues. The Partnership does not believe that the loss of
any single customer would have a material effect on the results of its
operations.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably estimated.
Concentration of Credit Risks
Financial investments that potentially subject the Partnership to credit
risk consist primarily of cash and cash equivalents and trade receivables.
The Partnership maintains its cash and cash equivalents with one major
financial institution. At times, such amounts may exceed the FDIC insured
limit. The Partnership has not experienced any losses in such accounts, and
believes it is not exposed to any significant credit risk. At December 31,
1998, a significant concentration of credit risk existed with respect to
$1,052,042 deposited with two financial institutions.
F-148
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Trade receivables subject the Partnership to the potential for credit risk
with customers within the oil and gas industry. To reduce risk, the
Partnership performs ongoing evaluations of its customers' financial
condition, but does not generally require collateral.
2. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1997 1998 1999
------------ --------------- --------------
<S> <C> <C> <C>
(Unaudited)
Oil and natural gas revenue accruals.................. $344,589 $267,215 $327,271
Other................................................. 11,361 4,297 2,230
-------- -------- --------
Total................................................. $355,590 $271,512 $329,501
======== ======== ========
</TABLE>
3. Notes Receivable
Effective February 1999, the Partnership made an advance of $2,800,000 to
Indian Oil Company (Indian). In return for the advance, the Partnership
receives a production payment payable from Indian in the amount of $26,400
per month.
4. Long-Term Debt
The balance at September 30, 1999 consists of a note payable to a bank.
These borrowings have been made against a revolving line of credit maturing
on October 1, 2000. The established borrowing base available to the
Partnership under this credit facility was $2,400,000 at September 30,
1999. Borrowings bear interest at 1% above a specified prime rate and are
collateralized by certain oil and gas properties of the Partnership, as
well as guarantees by the Managing and Additional General Partners. The
average interest rate under this credit facility outstanding at September
30, 1999 was 8.04%.
5. Income Taxes
The items of taxable income and expense generated by Partnership operations
are includable in the income tax returns of the partners, therefore, no
provision or liability for federal or state income taxes is reflected in
these financial statements. The Partnership income tax returns, the
qualifications of the Partnership as such for tax purposes, and the amount
of the Partnership's taxable income or loss are subject to examination by
federal and state taxing authorities. If such examinations resulted in
changes with respect to the partnership qualification or in changes to
taxable partnership income or loss, the tax liability of the partners could
change accordingly.
F-149
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
6. Related Party Transactions
During the years ended December 31, 1998, 1997 and 1996, the Partnership
engaged in certain transactions with Coral Reserves Energy Corp., the
Managing General Partner of the Partnership, and certain affiliated
partnerships, whose Managing General Partner is Coral Reserves, Inc. or
Coral Reserves Energy Corp. Coral Reserves, Inc. and Coral Reserves Energy
Corp. have common shareholders.
The Partnership is required to reimburse the Managing General Partner for
overhead expenses, including office rent and salaries for clerical staff
and appropriate production supervisory personnel, or any other overhead
expenses which the Managing General Partner deems reasonable. The
reimbursement for overhead expenses is limited to a maximum of five percent
(5%) of "Distributable Cash", as defined in the Partnership Agreement. Such
overhead reimbursements amounted to $53,583, $24,511 and $6,142 for 1998,
1997 and 1996, respectively, and are included in "General and
administrative" expenses in the accompanying statements of operations.
During 1996, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, Coral Reserves Natural Gas Income Fund 1993 Limited
Partnership, and Coral Reserves 1993 Institutional Limited Partnership, all
affiliated partnerships, for aggregate consideration of $175,198.
During 1997, the Partnership purchased interests in various producing oil
and gas properties from Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, for aggregate consideration of $96,623.
7. Reduction of Carrying Cost of Oil and Natural Gas Properties
Under the full cost method of accounting, the net book value of oil and
natural gas properties may not exceed a calculated "ceiling." The ceiling
limitation is the discounted estimated after-tax future net revenues from
proved oil and natural gas properties. In calculating future net revenues,
current prices and costs are generally held constant indefinitely. The net
book value is compared to the ceiling with any excess written off as an
expense. An expense recorded in one period may not be reversed in a
subsequent period even though higher oil and natural gas prices may have
increased the ceiling applicable to the subsequent period.
At December 31, 1998, the carrying value of the Partnership's oil and
natural gas properties exceeded the full cost ceiling by $886,779.
Accordingly, a $887,000 reduction of the carrying value of such properties
was recorded.
F-150
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
8. Oil and Gas Operations
Costs Incurred
The following table reflects the costs incurred in oil and gas property
acquisition, exploration, and development activities:
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Property acquisition costs (proved) $30,467 $ - $ - $ - $ -
Development costs 99,430 93,428 28,620 23,088 4,873
</TABLE>
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
the Partnership's oil and gas producing activities. They do not include any
allocation of the Partnership's interest costs or general corporate
overhead and, therefore are not necessarily indicative of the contribution
to net earnings of the Partnership's oil and gas operations.
<TABLE>
<CAPTION>
Nine months ended
Year Ended December 31, September 30,
----------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales 121,715 641,810 1,292,067 979,614 1,328,577
Production and operating expenses (20,393) (133,350) (378,338) (247,347) (368,947)
Depreciation, depletion and amortization (26,069) (166,094) (509,808) (334,861) (411,864)
Reduction of carrying value of oil and
gas assets - - (887,000) - -
-------- --------- ---------- --------- ----------
Results of operations for oil and gas
producing activities $ 75,253 $ 342,366 ($483,079) $ 397,406 $ 547,766
======== ========= ======== ========= ==========
Depreciation, depletion and amortization
per equivalent MCF of production $ 0.43 $ 0.70 $0.77 $ 0.65 $ 0.65
======== ========= ======== ========= ==========
</TABLE>
9. Supplemental Information on Oil and Gas Operations (Unaudited)
The following supplemental unaudited information regarding the oil and gas
activities of the Partnership presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission and
Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities".
F-151
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Quantities of Oil and Gas Reserves
Set forth below is a summary of the changes in the net quantities of crude
oil and natural gas and reserves for each of the years in the three-year
period ended December 31, 1998. The Partnership's proved reserves were
calculated by the independent petroleum consultants of Netherland, Sewell &
Associates, Inc. The Partnership cautions that there are many uncertainties
inherent in estimating reserve quantities, and in projecting future
production rates and the timing of future development cost expenditures. In
addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates
are subject to change as additional information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions.
Proved developed oil and natural gas reserves are those reserves expected
to be recovered through existing equipment and operating methods.
Estimates of net quantities of proved reserves and proved developed
reserves of crude oil, including condensate and natural gas liquids, and
natural gas, as well as the changes in proved reserves during the periods
indicated, are set forth in the tables below. All reserves are located in
the United States.
The Partnership prepared the estimated reserves as of December 31, 1995,
1996 and 1997 based on geological and engineering evaluations performed as
of December 31, 1998. The reserve estimates as of the prior year-end dates
were derived by analyzing actual historical production amounts and by
adjusting the reserves attributable to wells acquired or disposed of during
the relevant periods. In addition, in deriving the estimates as of December
31, 1995, 1996 and 1997, The Partnership used production costs based on
actual costs incurred during the years and actual oil and natural gas
prices received on December 31, 1995, 1996 and 1997. The Partnership has
estimated its reserves as of December 31, 1995, 1996 and 1997 in this
manner because the actual information necessary to calculate estimated
proved reserves and related information in accordance with guidelines of
the SEC as of each date is not available. Because the reserve estimates as
of December 31, 1998 are based on additional information gained from the
result of drilling, testing and production subsequent to the dates of the
estimated reserves, the reserve estimates as of December 31, 1995, 1996 and
1997 are not necessarily reflective of quantities that might have been
estimated based on information available as of such dates had estimates in
accordance with SEC guidelines been made at such dates. Management believes
that, because of the methodology used, the reserve information presented is
F-152
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
more reflective of actual reserve quantities than estimates that might have
been generated as of such dates.
Changes in Proved Reserves:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (MMcf)
---------- ----------
<S> <C> <C>
Proved Reserves as of December 31, 1995
Purchases of reserves 23,000 2,465,000
Production (1,000) (53,000)
-------- ----------
Proved Reserves as of December 31, 1996 22,000 2,412,000
Extensions and discoveries 14,000 182,000
Purchases of reserves 114,000 1,468,000
Production (9,000) (183,000)
-------- ----------
Proved Reserves as of December 31, 1997 141,000 3,879,000
Purchases of reserves 62,000 4,286,000
Production (21,000) (537,000)
-------- ----------
Proved Reserves as of December 31, 1998 182,000 7,628,000
======== ==========
Proved developed reserves as of:
December 31, 1995
December 31, 1996 24,000 2,232,000
December 31, 1997 104,000 3,226,000
December 31, 1998 142,000 6,724,000
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the standardized measure of discounted future
net cash flows relating to the Partnership's interest in proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Future cash inflows $ 8,730,000 $ 7,223,000 $11,927,000
Future production costs (1,056,000) (1,311,000) (5,065,000)
Future development costs (355,000) (355,000) (619,000)
----------- ----------- -----------
Future net cash flows 7,319,000 5,557,000 6,243,000
10% discount to reflect timing of cash flows (2,973,000) (2,257,000) (2,536,000)
----------- ----------- -----------
Standardized measure of discounted future net cash
flows $ 4,346,000 $ 3,300,000 $ 3,707,000
=========== =========== ===========
</TABLE>
Future cash inflows are computed by applying year-end prices (averaging
$10.03 per barrel of oil, adjusted for transportation and other charges,
and $1.84 per Mcf of gas at December 31, 1998) to the year-end quantities
of proved reserves, except where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end. Future
development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
F-153
<PAGE>
CANAAN RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved. The future
income tax expenses give effect to permanent differences and tax credits,
but do not reflect the impact of future operations.
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Partnership's proved reserves are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ - $ 4,331,000 $ 4,392,000
Sales of oil and natural gas, net of production costs (101,000) (504,000) (899,000)
Net changes in prices and production costs (49,000) (2,001,000) (1,869,000)
Extensions, discoveries, and improved recovery, net of
future development costs - 284,000 -
Purchases of reserves, net of future development costs 4,438,000 2,068,000 2,761,000
Accretion of discount - 433,000 439,000
Other, primarily changes in timing 43,000 (219,000) (56,000)
---------- ----------- -----------
Ending balance $4,331,000 $ 4,392,000 $ 4,768,000
========== =========== ===========
</TABLE>
F-154
<PAGE>
APPENDIX A
Reserve Reports of Netherland, Sewell & Associates, Inc.
Reserve Values
as of
September 30, 1999
INDEX
<TABLE>
<CAPTION>
Combining Entity Page
---------------- ----
<S> <C>
1990 Partnership A-2
1991 Partnership A-5
1992 Partnership A-8
1993 Partnership A-11
1993-I Partnership A-14
1995 Partnership A-17
1996 Partnership A-21
1996-I Partnership A-24
Canaan Energy Corporation A-27
Coral Group Without Operating Rights A-30
Indian Oil Company A-33
All Combining Entities A-36
Definitions of Reserves A-39
</TABLE>
A-1
<PAGE>
[LETTERHEAD OF NSAI]
November 18, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1999, to the Coral Reserves Natural Gas
Income Fund 1990 Limited Partnership (1990 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the 1990 LP interest, as
of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 10,729 1,745,316 $2,957,900 $1,905,700
Non-Producing 470 124,332 160,200 61,700
Proved Undeveloped 2,262 273,792 302,800 110,100
-------------- ----------- ----------- --------------
Total Proved 13,461 2,143,440 $3,420,900 $2,077,500
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category along with one-line summaries of reserves, economics, and basic
data by lease. For the purposes of this report, the term "lease" refers to a
single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1990 LP interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1990 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1990 LP interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on the 1990 LP receiving its net revenue interest share of estimated
future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from Coral
Reserves, other interest owners, various operators of the properties, and the
nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted
as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
--------------------
Fredric D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 16, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Coral Reserves Natural Gas
Income Fund 1991 Limited Partnership (1991 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. This report has been prepared using constant prices and costs
specified by Coral Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the 1991 LP interest,
as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- ---------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 53,624 2,131,729 $3,992,900 $2,478,700
Non-Producing 258 138,343 163,400 63,400
Proved Undeveloped 942 277,936 338,400 127,300
---------- ----------- ----------- --------------
Total Proved 54,824 2,548,008 $4,494,700 $2,669,400
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for
each reserve category along with one-line summaries of reserves, economics, and
basic data by lease. For the purposes of this report, the term "lease" refers to
a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1991 LP interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records of
Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1991 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the 1991 LP
interest. Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on the 1991 LP receiving its net revenue interest share of estimated future
gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from Coral
Reserves, other interest owners, various operators of the properties, and the
nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted
as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 18, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Coral Reserves Natural Gas
Income Fund 1992 Limited Partnership (1992 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the 1992 LP interest,
as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- ------------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ------------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 184,554 4,254,042 $ 8,387,500 $ 4,851,200
Non-Producing 4,517 414,381 748,700 247,400
Proved Undeveloped 5,932 1,102,577 1,398,600 399,200
--------- --------- ----------- -------------
Total Proved 195,003 5,771,000 $10,534,800 $ 5,497,800
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for
each reserve category along with one-line summaries of reserves, economics, and
basic data by lease. For the purposes of this report, the term "lease" refers to
a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1992 LP interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1992 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1992 LP interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on the 1992 LP receiving its net revenue interest share of estimated
future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 18, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1999, to the Coral Reserves Natural Gas
Income Fund 1993 Limited Partnership (1993 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the 1993 LP interest, as
of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 257,633 4,000,585 $7,853,000 $4,560,300
Non-Producing 2,873 59,394 217,500 75,000
Proved Undeveloped 45,102 343,730 703,100 116,100
-------------- ----------- ----------- --------------
Total Proved 305,608 4,403,709 $8,773,600 $4,751,400
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category along with one-line summaries of reserves, economics, and basic
data by lease. For the purposes of this report, the term "lease" refers to a
single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1993 LP interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1993 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1993 LP interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on the 1993 LP receiving its net revenue interest share of estimated
future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 19, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1999, to the Coral Reserves 1993
Institutional Limited Partnership (1993-I LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the 1993-I LP interest,
as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 90,208 1,612,620 $3,500,200 $2,052,000
Non-Producing 1,134 56,228 97,400 29,600
Proved Undeveloped 19,554 56,951 219,500 17,700
-------------- ----------- ----------- --------------
Total Proved 110,896 1,725,799 $3,817,100 $2,099,300
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category along with one-line summaries of reserves, economics, and basic
data by lease. For the purposes of this report, the term "lease" refers to a
single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1993-I LP interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1993-I LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1993-I LP interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on the 1993-I LP receiving its net revenue interest share
of estimated future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 19, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1999, to the Coral Reserves Energy Income
Fund 1995 Limited Partnership (1995 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the 1995 LP interest, as
of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil GAS Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 182,812 5,010,743 $ 8,762,500 $ 5,253,800
Non-Producing 55,366 285,426 1,250,500 362,100
Proved Undeveloped 13,821 1,218,505 1,585,700 700,100
-------------- ----------- ----------- --------------
Total Proved 251,999 6,514,674 $11,598,700 $ 6,316,000
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category along with one-line summaries of reserves, economics, and basic
data by lease. For the purposes of this report, the term "lease" refers to a
single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1995 LP interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1995 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1995 LP interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on the 1995 LP receiving its net revenue interest share of estimated
future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NSAI]
November 22, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1999, to the Coral Reserves Energy Income
Fund 1996 Limited Partnership (1996 LP) interest in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. As requested, lease and well operating costs for all properties
include the per-well overhead expenses allowed under joint operating agreements.
This report has been prepared using constant prices and costs specified by Coral
Reserves (Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the 1996 LP interest, as
of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 145,940 5,867,587 $10,150,500 $ 6,227,800
Non-Producing 8,131 1,148,505 2,018,200 975,200
Proved Undeveloped 45,779 898,715 1,487,800 746,500
-------------- ----------- ----------- --------------
Total Proved 199,850 7,914,807 $13,656,500 $ 7,949,500
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category along with one-line summaries of reserves, economics, and basic
data by lease. For the purposes of this report, the term "lease" refers to a
single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LETTERHEAD OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1996 LP interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records of
Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1996 LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the 1996 LP
interest. Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on the 1996 LP receiving its net revenue interest share of estimated future
gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NDSI]
November 22, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Coral Reserves 1996
Institutional Limited Partnership (1996-I LP) interest in certain oil and gas
properties located in Oklahoma as listed in the accompanying tabulations. As
requested, lease and well operating costs for all properties include the
per-well overhead expenses allowed under joint operating agreements. This report
has been prepared using constant prices and costs specified by Coral Reserves
(Coral) as set forth in this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the 1996-I LP
interest, as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
--------------------------------- ---------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 132,423 4,424,652 $ 8,138,300 $ 5,004,500
Non-Producing 32,415 413,683 1,046,000 384,600
Proved Undeveloped 52,436 780,886 1,424,400 763,500
-------------- -------------- -------------- --------------
Total Proved 217,274 5,619,221 $10,608,700 $ 6,152,600
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for
each reserve category along with one-line summaries of reserves, economics, and
basic data by lease. For the purposes of this report, the term "lease" refers to
a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the 1996-I LP interest is prior to deducting
state production taxes. Future net revenue is after deducting these taxes,
future capital costs, and operating expenses, but before consideration of
federal income taxes. The future net revenue has been discounted at an annual
rate of 10 percent to determine its "present worth." The present worth is shown
to indicate the effect of time on the value of money and should not be construed
as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of 1996-I LP or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
1996-I LP interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on the 1996-I LP receiving its net revenue interest share
of estimated future gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of properties, and the
nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted
accurate. We are independent petroleum engineers, geologists, and geophysicists;
we do not own interest in these properties and are not employed on a contingent
basis. Basic geologic and field performance data together with our engineering
work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
<PAGE>
[LETTERHEAD OF NSAI]
November 29, 1999
Mr. Leo E. Woodard
Coral Reserves
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Coral Reserves Group, LTD.
(Coral LTD) interest in certain oil and gas properties located in the United
States as listed in the accompanying tabulations. As requested, lease and well
operating costs for all properties include the per-well overhead expenses
allowed under joint operating agreements. This report has been prepared using
constant prices and costs specified by Coral Reserves (Coral) as set forth in
this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the Coral LTD
interest, as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
--------------------------------- ---------------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- --------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 7,717 372,341 $772,900 $410,000
Non-Producing 2,267 8,797 36,500 16,400
Proved Undeveloped 4,313 118,750 177,900 64,500
-------------- -------------- -------------- --------------
Total Proved 14,297 499,888 $987,300 $490,900
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
This report includes summary projections of reserves and revenue for
each reserve category along with one-line summaries of reserves, economics, and
basic data by lease. As requested, also included is a table showing future net
revenue and present worth at 10 percent attributable to the per-well overhead
expenses received from other working interest owners for those properties
operated by Coral LTD. For the purposes of this report, the term "lease" refers
to a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the Coral LTD interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records of
Coral. These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. Headquarters general and administrative overhead
expenses of Coral LTD or Coral are not included. Lease and well operating costs
are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the Coral LTD
interest. Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on Coral LTD receiving its net revenue interest share of estimated future gross
gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NSAI]
November 15, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Coral Reserves (Coral)
interest in certain oil and gas properties located in the United States as
listed in the accompanying tabulations. As requested, lease and well operating
costs do not include the per-well overhead expenses allowed under the joint
operating agreements for those properties operated by Coral. This report has
been prepared using constant prices and costs specified by Coral as set forth in
this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the Coral interest,
as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 1,185,229 31,052,012 $62,256,800 $35,976,100
Non-Producing 107,597 2,616,494 6,032,400 2,314,800
Proved Undeveloped 190,141 5,071,842 8,232,100 3,234,800
-------------- ----------- ----------- --------------
Total Proved 1,482,967 38,740,348 $76,521,300 $41,525,700
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
As shown in the Table of Contents, this report includes summary
projections of reserves and revenue for each reserve category along with
one-line summaries of reserves, economics, and basic data by lease. For the
purposes of this report, the term "lease" refers to a single economic
projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the Coral interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records of
Coral. For non-operated properties these costs include the per-well overhead
expenses allowed under joint operating agreements along with costs estimated to
be incurred at and below the district and field levels. As requested, lease and
well operating costs for the operated properties include only direct lease and
field level costs. Headquarters general and administrative overhead expenses of
Coral are not included. Lease and well operating costs are held constant
throughout the life of the properties. Capital costs are included as required
for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the Coral
interest. Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on Coral receiving its net revenue interest share of estimated future gross gas
production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
<PAGE>
[LOGO OF NSAI]
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, other interest owners, various operators of the properties, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NSAI]
November 15, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the Indian Oil Company (Indian)
interest in certain oil and gas properties located in the United States as
listed in the accompanying tabulations. This report has been prepared using
constant prices and costs specified by Coral Reserves as set forth in this
letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the Indian interest,
as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 517,748 34,642,743 $58,301,700 $33,993,500
Non-Producing 13,622 1,786,364 2,667,500 1,384,100
Proved Undeveloped 129,504 19,669,359 26,658,500 10,090,200
-------------- ----------- ----------- --------------
Total Proved 660,874 56,098,466 $87,627,700 $45,467,800
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
As shown in the Table of Contents, this report includes summary
projections of reserves and revenue for each reserve category along with
one-line summaries of reserves, economics, and basic data by lease. For the
purposes of this report, the term "lease" refers to a single economic
projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those tracts for which undeveloped reserves have been estimated.
Definitions of all reserve categories are presented immediately following this
letter.
<PAGE>
[LETTERHEAD OF NSAI]
Future gross revenue to the Indian interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral Reserves. Oil prices are based on a West Texas Intermediate
posted price of $18.10 per barrel, adjusted by lease for gravity, transportation
fees, and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records
of Indian. For non-operated properties these costs include the per-well overhead
expenses allowed under joint operating agreements along with costs estimated to
be incurred at and below the district and field levels. As requested, lease and
well operating costs for the operated properties include only direct lease and
field level costs. Headquarters general and administrative overhead expenses of
Indian are not included. Lease and well operating costs are held constant
throughout the life of the properties. Capital costs are included as required
for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
Indian interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on Indian receiving its net revenue interest share of estimated future
gross gas production.
The reserves included in this report are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more or
less than the estimated amounts. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties
<PAGE>
[LOGO OF NSAI]
inherent in the interpretation of engineering and geological data; therefore,
our conclusions necessarily represent only informed professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Indian Oil Company, other interest owners, various operators of the properties,
and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NSAI]
November 15, 1999
Mr. Leo E. Woodard
Coral Reserves
Suite 600
119 North Robinson
Oklahoma City, Oklahoma 73102
Dear Mr. Woodard:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of September 30, 1999, to the combined interests of Coral
Reserves (Coral) and Indian Oil Company (Indian) in certain oil and gas
properties located in the United States as listed in the accompanying
tabulations. This report has been prepared using constant prices and costs
specified by Coral as set forth in this letter.
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the combined
interests of Coral and Indian, as of September 30, 1999, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ----------------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 1,702,977 65,694,755 $120,558,500 $ 69,969,600
Non-Producing 121,219 4,402,858 8,699,900 3,698,900
Proved Undeveloped 319,645 24,741,201 34,890,600 13,325,000
-------------- ----------- ------------ --------------
Total Proved 2,143,841 94,838,814 $164,149,000 $ 86,993,500
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes
are expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
As shown in the Table of Contents, this report includes summary
projections of reserves and revenue for each reserve category along with
one-line summaries of reserves, economics, and basic data by lease. For the
purposes of this report, the term "lease" refers to a single economic
projection. Computer printouts of the projections for the individual leases are
provided under separate cover.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. As requested, value for probable or possible reserves
which exist for these properties has not been included. This report does not
include any value which could be attributed to interests in undeveloped acreage
beyond those
<PAGE>
[LOGO OF NSAI]
tracts for which undeveloped reserves have been estimated. Definitions of all
reserve categories are presented immediately following this letter.
Future gross revenue to the Coral and Indian interests is prior to
deducting state production taxes and ad valorem taxes. Future net revenue is
after deducting these taxes, future capital costs, and operating expenses, but
before consideration of federal income taxes. The future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, this report has been prepared using oil and gas prices
specified by Coral. Oil prices are based on a West Texas Intermediate posted
price of $18.10 per barrel, adjusted by lease for gravity, transportation fees,
and regional posted price differentials. Gas prices are based on $2.52 per
MMBTU, adjusted by lease for transportation fees, BTU content, and regional
price differentials. Oil and gas prices are held constant throughout the life of
the properties.
Lease and well operating costs are based on operating expense records of
Coral and Indian. For non-operated properties these costs include the per-well
overhead expenses allowed under joint operating agreements along with costs
estimated to be incurred at and below the district and field levels. As
requested, lease and well operating costs for the operated properties include
only direct lease and field level costs. Headquarters general and administrative
overhead expenses of Coral or Indian are not included. Lease and well operating
costs are held constant throughout the life of the properties. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the Coral or
Indian interests. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on Coral and Indian receiving their net revenue interest share of
estimated future gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
<PAGE>
[LOGO OF NSAI]
In evaluating the information at our disposal concerning this report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
Coral Reserves, Indian Oil Company, other interest owners, various operators of
the properties, and the nonconfidential files of Netherland, Sewell &
Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
/s/ Frederic D. Sewell
----------------------
Frederic D. Sewell
SMC:KAH
<PAGE>
[LETTERHEAD OF NSAI]
DEFINITIONS OF RESERVES
-----------------------
PROVED RESERVES
Proved reserves are the estimated quantities of crude oil, natural gas, and
- ---------------
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved reserves are limited to
those quantities of oil and gas which can be expected, with little doubt, to be
recoverable commercially at current prices and costs, under existing regulatory
practices and with existing conventional equipment and operating methods.
Proved developed producing reserves are those reserves which are expected to be
- -----------------------------------
produced from existing completion intervals now open for production in existing
wells.
Proved developed non-producing reserves are (1) those reserves expected to be
- ---------------------------------------
produced from existing completion intervals in existing wells, but due to
pending pipeline connections or other mechanical or contractual requirements
hydrocarbon sales have not yet commenced, and (2) other non-producing reserves
which exist behind the casing of existing wells, or at minor depths below the
present bottom of such wells, which are expected to be produced through these
wells in the predictable future, where the cost of making such oil and gas
available for production should be relatively small compared to the cost of a
new well.
Proved undeveloped reserves are those reserves which are expected to be
- ---------------------------
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion. Proved reserves on
undrilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled.
PROBABLE RESERVES
Probable reserves are those reserves which geological and engineering data
- -----------------
demonstrate to be potentially recoverable, but where some element of risk or
insufficient data prevent classification as proved.
POSSIBLE RESERVES
Possible reserves are those speculative reserves estimated beyond proved and
- -----------------
probable reserves where geologic and engineering data suggest the presence of
additional reserves, but where the risk is relatively high.
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND
1990 LIMITED PARTNERSHIP
(the "1990 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ______, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1990
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships but
will receive no cash distributions or dividends in the foreseeable future
from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling costs deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page ____
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 16.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57.
This cash election provides the opportunity for limited partners
who are unwilling to take market risks with respect to Canaan
common stock the opportunity to receive cash in an amount which
Canaan and the General Partners believe approximates fair value.
In addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for
the 1990 Partnership assuming a closing of the
combination transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation
and cash distribution history from the 1990
partnership for the three most recent fiscal years
and the nine months ended September 30, 1999.
. Table C - The amount of the limited partners' cash
distributions for the five most recent fiscal
years and the nine months ended September 30,
1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves Natural Gas Income Fund
1990 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
<TABLE>
<CAPTION>
Amount
----------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties(1)................................... $2,077,500
Bank Debt as of Effective Date..................... 655,454
Working Capital as of Effective Date:
Cash and cash equivalents....................... 75,749
Accounts receivable............................. 118,176
Accounts payable................................ 43,166
Subtotal - Working Capital......................... 150,759
Estimated Cash Distributions Before
Closing(3)...................................... 364,595 Shares of Percent of
Estimated Interest Expense Before Canaan Stock
Closing(3)...................................... 44,645 Common Stock(2) Outstanding(2)
--------------- --------------
Estimated Exchange Value
at Closing(4)................................... 1,075,381 104,500 2.09%
Allocated to:
Limited Partners................................ 761,297 75,488 1.51%
General Partner................................. 243,030 23,972 0.48%
Additional General Partners..................... 10,150 1,020 0.02%
Canaan Securities............................... 10,150 1,020 0.02%
Placing Brokers................................. 50,753 3,000 0.06%
Limited Partner per $1000 Investment............... 196 19 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Broker shares based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%
-13-
<PAGE>
Table B
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Nine Months Ended
1996 1997 1998 September 30, 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner................... $ 36,239 $ 40,086 $ 30,676 $ 15,391
Operating fees paid to Canaan......... 4,506 4,831 5,347 4,177
Cash distributions paid to
General Partner...................... 111,595 182,809 146,809 69,293
Cash distributions paid to
Additional General Partners.......... 6,700 7,616 6,117 2,887
</TABLE>
Table C
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Nine Months Ended
1994 1995 1996 1997 1998 September 30, 1990
-------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to limited
partners(1) $632,042 $537,136 $551,661 $571,275 $458,774 $216,537
Cash distributions to limited
partners per $1,000 investment 160 138 142 147 118 56
</TABLE>
________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND
1991 LIMITED PARTNERSHIP
(the "1991 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _____________________________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1991
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships but
will receive no cash distributions or dividends in the foreseeable future
from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 16.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57. This
cash election provides the opportunity for limited partners who
are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan
and the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for
the 1991 Partnership assuming a closing of the
combination transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation
and cash distribution history from the 1991
Partnership for the three most recent fiscal years
and the nine months ended September 30, 1999.
. Table C - The amount of the limited partners' cash
distributions for the five most recent fiscal
years and the nine months ended September 30,
1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves Natural Gas Income Fund
1991 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
<TABLE>
<CAPTION>
Amount
----------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties(1)............................ $2,669,400
Bank Debt as of Effective Date.................. 742,734
Working Capital as of Effective Date:
Cash and cash equivalents.................. 79,068
Accounts receivable........................ 205,597
Accounts payable........................... 66,705
Subtotal - Working Capital...................... 217,960
Estimated Cash Distributions Before
Closing(3)................................. 409,676 Shares of Percent of
Estimated Interest Expense Before Canaan Stock
Closing(3)................................. 48,603 Common Stock (2) Outstanding (2)
---------------- ---------------
Estimated Exchange Value
at Closing(4).............................. 1,609,496 156,500 3.13%
Allocated to:
Limited Partners........................... 1,159,495 114,766 2.30%
General Partner............................ 341,782 34,174 0.68%
Additional General Partners................ 15,460 1,530 0.03%
Canaan Securities.......................... 15,460 1,530 0.03%
Placing Brokers............................ 77,300 4,500 0.09%
Limited Partner per $1000 Investment............ 259 26 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Brokers shares based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%.
-13-
<PAGE>
Table B
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Nine Months Ended
1996 1997 1998 September 30, 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner................ $ 51,302 $ 42,908 $ 39,606 $ 25,050
Operating fees paid to Canaan..... -- -- -- --
Cash distributions paid to General
Partner........................... 125,540 187,026 189,177 116,843
Cash distributions paid to
Additional General Partners....... 9,558 8,078 7,882 4,868
</TABLE>
Table C
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Nine Months Ended
1994 1995 1996 1997 1998 September 30, 1999
-------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to limited
partners(1)....................... $878,886 $903,162 $820,632 $612,723 $591,182 $365,131
Cash distributions to limited
partners per $1,000 investment.... 196 202 183 137 132 82
</TABLE>
____________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND
1992 LIMITED PARTNERSHIP
(the "1992 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _____________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has
been prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1992
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is
not intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being
exposed to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57. This
cash election provides the opportunity for limited partners who
are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan
and the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for the
1992 Partnership assuming a closing of the combination
transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation and
cash distribution history from the 1992 Partnership for
the three most recent fiscal years and the nine months
ended September 30, 1999.
. Table C - The amount of the limited partners' cash distributions
for the five most recent fiscal years and the nine
months ended September 30, 1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves Natural Gas Income Fund
1992 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
<TABLE>
<CAPTION>
Shares of Percent of
Canaan Stock
Amount Common Stock (2) Outstanding (2)
---------- ---------------- ---------------
<S> <C> <C> <C>
Reserve Value of Oil and Gas Properties (1)......... $5,497,800
Bank Debt as of Effective Date...................... 558,000
Working Capital as of Effective Date:
Cash and cash equivalents........................ 106,800
Accounts receivable.............................. 248,264
Accounts payable................................. 87,489
Subtotal - Working Capital.......................... 267,575
Estimated Cash Distributions Before Closing (3)..... 717,495
Estimated Interest Expense Before Closing (3)....... 38,425
Estimated Exchange Value at Closing(4).............. 4,291,423 417,000 8.34%
Allocated to:
Limited Partners................................. 3,079,233 303,772 6.08%
General Partner.................................. 775,151 76,705 1.53%
Additional General Partners...................... 41,131 4,064 0.08%
Canaan Securities................................ 233,005 22,859 0.46%
Placing Brokers.................................. 162,903 9,600 0.19%
Limited Partner per $1000 Investment................ 411 40 (5)
</TABLE>
- ------------------------
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Broker shares based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%.
-13-
<PAGE>
Table B
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------------
1996 1997 1998 September 30, 1999
------------ ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner............. $ 74,022 $ 74,405 $ 50,165 $ 28,711
Operating fees paid to Canaan... 9,175 10,658 13,346 10,513
Cash distributions paid to
General Partner................ 123,423 126,905 92,497 48,037
Cash distributions paid to
Additional General Partners.... 13,714 14,100 10,278 5,178
</TABLE>
Table C
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------------
1994 1995 1996 1997 1998 September 30, 1999
--------- ----------- ------------ ------------ ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to
limited partners(1)............ 856,143 $927,447 $ 1,234,237 $ 1,269,050 $ 924,978 $ 464,594
Cash distributions to limited
partners per $1,000 investment.. 114 124 165 169 123 62
</TABLE>
- ---------------------------------
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES NATURAL GAS INCOME FUND
1993 LIMITED PARTNERSHIP
(the "1993 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ______________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has
been prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1993
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is
not intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57. This
cash election provides the opportunity for limited partners who
are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan
and the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for the
1993 Partnership assuming a closing of the combination
transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation and
cash distribution history from the 1993 Partnership for
the three most recent fiscal years and the nine months
ended September 30, 1999.
. Table C - The amount of the limited partners' cash distributions
for the five most recent fiscal years and the nine
months ended September 30, 1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on
page 86.
-12-
<PAGE>
Table A
Coral Reserves Natural Gas Income Fund
1993 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
<TABLE>
<CAPTION>
Shares of Percent of
Canaan Stock
Amount Common Stock (2) Outstanding (2)
------------- ----------------- ---------------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties (1).................................. $ 4,751,400
Bank Debt as of Effective Date..................... 479,800
Working Capital as of Effective Date:
Cash and cash equivalents....................... 103,297
Accounts receivable............................. 269,446
Accounts payable................................ 90,684
Subtotal - Working Capital......................... 282,059
Estimated Cash Distributions Before
Closing (3)..................................... 711,173
Estimated Interest Expense Before
Closing (3)..................................... 32,099
Estimated Exchange Value
at Closing(4)................................... 3,673,401 357,000 7.14%
Allocated to:
Limited Partners................................ 2,663,273 262,915 5.26%
General Partner................................. 640,632 62,937 1.26%
Additional General Partners..................... 35,152 3,553 0.07%
Canaan Securities............................... 203,127 19,795 0.40%
Placing Brokers................................. 131,218 7,800 0.15%
Limited Partner per $1000 Investment............... 408 40 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Brokers shares based on 40% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%
-13-
<PAGE>
Table B
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
---------------------------------
1996 1997 1998 September 30, 1999
-------- --------- ---------- --------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner..................... $ 80,295 $ 80,000 $ 50,869 $ 27,311
Operating fees paid to Canaan........... 80,395 78,583 105,624 80,339
Cash distributions paid to
General Partner........................ 137,668 139,082 94,622 42,988
Cash distributions paid to
Additional General Partners............ 15,296 15,454 10,514 4,776
</TABLE>
Table C
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
-------------------------------------------------------------------
1994 1995 1996 1997 1998 September 30, 1999
----------- ----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to
limited partners(1).............. $ 397,494 $ 875,590 $1,376,677 $ 1,390,822 $ 946,226 $429,875
Cash distributions to limited
partners per $1,000 investment... 61 134 211 213 145 66
</TABLE>
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES 1993 INSTITUTIONAL
LIMITED PARTNERSHIP
(the "1993-I Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _____________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has
been prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1993-I
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in
each of those partnerships in which payout has not already occurred as to all
limited partners as of the Effective Date, the Reserve Value was allocated first
among the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of
their Exchange Value and their share of Canaan common stock will be determined
based on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57.
This cash election provides the opportunity for limited partners
who are unwilling to take market risks with respect to Canaan
common stock the opportunity to receive cash in an amount which
Canaan and the General Partners believe approximates fair value.
In addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for
the 1993-I Partnership assuming a closing of the
combination transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation
and cash distribution history from the 1993-I
Partnership for the three most recent fiscal years
and the nine months ended September 30, 1999.
. Table C - The amount of the limited partners' cash
distributions for the five most recent fiscal
years and the nine months ended September 30,
1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves 1993 Institutional
Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash
distributions and interest expense or a change in the closing date will result
in a change in the Exchange Value for the partnership and will similarly change
Exchange Values for other Combining Entities.
<TABLE>
<CAPTION>
Shares of Percent of
Canaan Stock
Amount Common Stock (2) Outstanding (2)
---------- ----------------- ----------------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties (1)............................. $ 2,099,300
Bank Debt as of Effective Date................. 346,500
Working Capital as of Effective Date:
Cash and cash equivalents.................. 91,751
Accounts receivable........................ 111,989
Accounts payable........................... 10,985
Subtotal - Working Capital..................... 192,755
Estimated Cash Distributions Before
Closing (3)................................ 387,232
Estimated Interest Expense Before
Closing (3)................................ 23,444
Estimated Exchange Value
at Closing(4).............................. 1,542,280 150,000 3.00%
Allocated to:
Limited Partners........................... 1,326,976 130,053 2.61%
General Partner............................ 136,297 13,610 0.27%
Additional General Partners................ 7,453 504 0.01%
Canaan Securities.......................... 41,740 4,033 0.08%
Placing Brokers............................ 29,814 1,800 0.03%
Limited Partner per $1000 Investment....... 562 55 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Brokers shares based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%
-13-
<PAGE>
Table B
Coral Reserves 1993 Institutional Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
-----------------------------------------
1996 1997 1998 September 30, 1999
--------- ------------ -------------- ---------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner............... $ 21,722 $ 20,611 $ 13,580 $ 10,399
Operating fees paid to Canaan.... 3,797 3,193 4,175 3,289
Cash distributions paid to
General Partner.................. 82,673 81,678 56,849 29,208
Cash distributions paid to
Additional General Partners...... 3,444 3,404 2,368 1,217
</TABLE>
Table C
Coral Reserves 1993 Institutional Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
-----------------------------------------
1994 1995 1996 1997 1998 September 30, 1999
--------- ---------- --------- ------------ -------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to limited
partners(1)......................... $123,229 $389,575 $ 602,827 $ 595,575 $ 414,514 $ 212,976
Cash distributions to limited
partners per $1,000 investment..... 52 165 255 252 175 90
</TABLE>
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES ENERGY INCOME FUND
1995 LIMITED PARTNERSHIP
(the "1995 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _____________________________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1995
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships
but will receive no cash distributions or dividends in the foreseeable
future from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being
exposed to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash distributions
from production subsequent to the Effective Date and before the closing
date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57. This
cash election provides the opportunity for limited partners who
are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan
and the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for the
1995 Partnership assuming a closing of the
combination transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation and
cash distribution history from the 1995 Partnership
for the three most recent fiscal years and the nine
months ended September 30, 1999.
. Table C - The amount of the limited partners' cash
distributions for the five most recent fiscal years
and the nine months ended September 30, 1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves Energy Income Fund
1995 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
<TABLE>
<CAPTION>
Amount
----------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties (1).................................. $6,316,000
Bank Debt as of Effective Date............................ --
Working Capital as of Effective Date:
Cash and cash equivalents....................... 388,408
Accounts receivable............................. 372,644
Accounts payable................................ 59,528
Subtotal - Working Capital................................ 701,524
Estimated Cash Distributions Before Closing (3)
999,011 Shares of Percent of
Estimated Interest Expense Before Closing (3)............. Canaan Stock
-- Common Stock (2) Outstanding (2)
--------------- --------------
Estimated Exchange Value at Closing(4)
5,802,144 564,000 11.28%
Allocated to:
Limited Partners................................ 4,324,150 427,489 8.55%
General Partner................................. 961,216 94,545 1.89%
Additional General Partners..................... 55,964 5,592 0.11%
Canaan Securities............................... 230,879 22,874 0.46%
Placing Brokers................................. 229,935 13,500 0.27%
Limited Partner per $1000 Investment...................... 635 63 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Brokers shares based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%
-13-
<PAGE>
Table B
Coral Reserves Energy Income Fund 1995 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Nine Months Ended
1996 1997 1998 September 30, 1999
---------------------------- -------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner.............................. $ 67,684 $ 78,659 $ 58,639 $39,235
Operating fees paid to Canaan................... 92,068 87,611 125,383 97,573
Cash distributions paid to
General Partner................................. 108,906 135,220 107,405 63,303
Cash distributions paid to
Additional General Partners..................... 12,100 15,024 11,934 7,034
</TABLE>
Table C
Coral Reserves Energy Income Fund 1995 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
Nine Montyhs Ended
1994 1995 1996 1997 1998 September 30, 1998
---------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
Cash distributions paid to
limited partners(1)........................ $ - $ 406,954 $1,089,050 $1,352,194 $1,074,056 $ 633,030
Cash distributions to limited
partners per $1,000 investment............. - 60 199 160 199 93
</TABLE>
_________________________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES ENERGY INCOME FUND
1996 LIMITED PARTNERSHIP
(the "1996 Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated ________________, 2000
The date of this Supplement is __________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1996
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships but
will receive no cash distributions or dividends in the foreseeable future
from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57. This
cash election provides the opportunity for limited partners who
are unwilling to take market risks with respect to Canaan common
stock the opportunity to receive cash in an amount which Canaan
and the General Partners believe approximates fair value. In
addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for the
1996 Partnership assuming a closing of the combination
transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation and
cash distribution history from the 1996 Partnership for
the three most recent fiscal years and the nine months
ended September 30, 1999.
. Table C - The amount of the limited partners' cash distributions
for the five most recent fiscal years and the nine
months ended September 30, 1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves Energy Income Fund
1996 Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
<TABLE>
<CAPTION>
Amount
------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties (1)........................... $7,949,500
Bank Debt as of Effective Date................ 2,214,000
Working Capital as of Effective Date:
Cash and cash equivalents................ 38,354
Accounts receivable...................... 3,319,500
Accounts payable......................... 43,995
Subtotal - Working Capital.................... 3,313,859
Estimated Cash Distributions Before
Closing (3).............................. 1,248,542 Shares of Percent of
Estimated Interest Expense Before Canaan Stock
Closing (3).............................. 147,557 Common Stock (2) Outstanding (2)
---------------- ---------------
Estimated Exchange Value
at Closing(4)............................ 8,920,601 867,500 17.35%
Allocated to:
Limited Partners......................... 7,539,617 737,112 14.74%
General Partner.......................... 850,436 83,466 1.67%
Additional General Partners.............. 58,643 5,531 0.11%
Canaan Securities........................ 347,490 34,191 0.68%
Placing Brokers.......................... 124,414 7,200 0.15%
Limited Partner per $1000 Investment.......... 783 77 (5)
</TABLE>
_______________________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Broker share based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%.
-13-
<PAGE>
Table B
Coral Reserves Energy Income Fund 1996 Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
Nine Months Ended
1996 1997 1998 September 30,1999
--------- --------- ---------- --------------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner............................ $ 6,142 $ 24,511 $ 53,583 $54,020
Operating fees paid to Canaan................. 265 4,665 41,144 56,355
Cash distributions paid to
General Partner............................... 7,885 37,555 93,121 82,575
Cash distributions paid to
Additional General Partners................... 876 4,174 10,348 9,174
</TABLE>
Table C
Coral Reserves Energy Income Fund 1996 Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
Nine Months Ended
1994 1995 1996 1997 1998 September 30, 1999
--------- --------- ---------- -------- --------- --------------------
<S> <C> <C> <C> <C>
Cash distributions paid to limited
partners(1).................................... $ - $ - $ 78,845 $375,557 $ 931,223 $825,745
Cash distributions to limited
partners per $1,000 investment................. - - 8 39 97 86
</TABLE>
_______________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
CORAL RESERVES 1996 INSTITUTIONAL
LIMITED PARTNERSHIP
(the "1996-I Partnership")
SUPPLEMENT TO CANAAN ENERGY CORPORATION
PROSPECTUS/PROXY STATEMENT
Dated _____________________________, 2000
The date of this Supplement is _______________, 2000
General
This Supplement relates to the proposed "combination transactions"
involving Canaan Energy Corporation. In the proposed combination transactions:
. Canaan will acquire all of the limited partners' interests in the
eight oil and gas limited partnerships previously sponsored by
the Coral Companies;
. Canaan will acquire 100% of the stock of the Coral Companies, the
General Partners of the partnerships;
. Canaan will acquire 100% of the stock of Indian Oil Company, an
unaffiliated oil and gas company;
. Canaan will acquire 100% of the stock of Canaan Securities, Inc.,
an unaffiliated broker/dealer which has previously participated
in the marketing of the limited partnership interests and
provides ongoing reporting services to limited partners; and
. Existing owners of Canaan's common stock will receive additional
shares of common stock based on Canaan's share of the total
"Exchange Value" as described below.
We refer to Canaan, the partnerships, the Coral Companies, Indian Oil
Company and Canaan Securities as the "Combining Entities". We refer to the
Combining Entities other than Indian Oil Company as the Coral Group. A total of
5,000,000 shares of Canaan common stock will be issued and be outstanding after
the combination transactions, less the number of shares otherwise issuable to
limited partners who elect to receive cash or exercise dissenters' rights. The
owners of each of the Combining Entities will receive shares of Canaan common
stock in proportion to the "Exchange Value" of such entity relative to the total
Exchange Value of all Combining Entities. The Exchange Value is based primarily
on the proved oil and gas reserve values determined by Netherland, Sewell &
Associates, Inc. an independent petroleum engineering and consulting firm, using
the same price, cost, effective date and discount rate
<PAGE>
assumptions for each entity. A limited partner in any partnership who votes in
favor of the plan of combination may elect to receive cash in lieu of Canaan
common stock equal to 75% of such partner's Exchange Value. The aggregate amount
of cash payable to limited partners electing to receive cash or to exercise
dissenter's rights is limited to $5 million.
The effects of the combination transactions may be different for
limited partners in the various partnerships. Accordingly, a supplement has been
prepared for each of the eight partnerships eligible to participate in the
combination transactions. This Supplement provides information regarding the
effects of the combination transactions on the limited partners of the 1996-I
Partnership. The General Partner will promptly mail a copy of any supplement
relating to other partnerships, without charge, upon request by any limited
partner or his representative who has been so designated in writing, addressed
to: Canaan Energy Corporation, 119 N. Robinson, Suite 600, Oklahoma City,
Oklahoma 73102.
Before voting on the plan of combination, limited partners should
carefully consider the following factors in addition to the other information
included in the Prospectus/Proxy Statement.
RISK FACTORS
There are numerous risks associated with the combination transactions
which are summarized below. For a more complete description of these risk
factors, please see:
. "Risk Factors and Material Considerations" beginning on Page 34
of the Prospectus/Proxy Statement.
. "Comparison of Security Holder Rights" beginning on Page 152 of
the Prospectus/Proxy Statement.
Risks Related to the Combination Transactions
. Limited partners will own stock in a corporation with perpetual existence
rather than a partnership interest in a limited partnership with a limited
life resulting in material changes in the nature of their investment.
. Limited partners have received cash distributions from the partnerships but
will receive no cash distributions or dividends in the foreseeable future
from Canaan.
. There has been no prior market for our common stock and there is no
assurance that a market will develop. There is no assurance that the value
of the common stock received by a limited partner will be equal to the
Exchange Value. The Exchange
-2-
<PAGE>
Values are being used solely to determine the relative ownership of Canaan
by each Combining Entity and do not represent the fair value of Canaan or
its net assets.
. The consideration to be received by the limited partners and the general
partners and Canaan and the other terms of the combination transactions
were determined by Canaan and the Coral Companies, which have inherent
conflicts of interest, and may not reflect the value of the net assets of
the respective partnership if sold to an unaffiliated third party in an
arms length negotiation.
. The Exchange Values were based primarily on estimates of reserves and
future net cash flows which has inherent uncertainties. Exchange Values do
not represent fair market value.
. The price assumptions used to calculate the Reserve Value will not be
modified for changes in prices which could alter the relative values of the
Combining Entities or the relative share of the limited partners and
General Partners in partnerships which have not achieved payout.
. The alternative of continuing the partnerships or liquidating their assets
could potentially be more beneficial to limited partners than the
combination transactions.
. No independent representative was engaged to represent the limited partners
in negotiating the terms of the combination transactions which may be
inferior to those that could have been negotiated by an independent
representative. No fairness opinion has been obtained regarding the
fairness of the combination transactions to limited partners.
. For partnerships in which the combination transaction is approved by
partners holding 75% or more of the partnership interest, there will be no
dissenters rights of appraisal.
. The cash being offered to limited partners who elect to receive cash is not
intended to represent the fair market value of their interests in a
partnership, but is offered as a method for limited partners to receive
cash if they desire to do so. A limited partner electing to receive cash
may not receive all cash if the $5 million limit on cash payable to limited
parties is reached.
. The combination transactions will reduce and dilute a limited partner's
voting rights.
. The combination transactions will result in a limited partner being exposed
to risks of a larger enterprise without restrictions on leverage.
. For the 1996 and 1996-I partnerships, failure to approve the combination
transactions may result in a material adverse effect on returns to limited
partners due to a $3 million downward adjustment in the Indian Contingent
Production Payment.
-3-
<PAGE>
. We have not requested a ruling from the IRS on the tax consequences of the
combination transactions and the IRS may disagree with the opinion of our
counsel on the tax consequences.
Risks Related to Canaan
. Our future performance depends upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable.
. Our initial property base will not include a significant number of
exploratory or development prospects.
. We are subject to anti-takeover provisions in our charter that could delay
or prevent an acquisition of our company, even if such an acquisition would
be beneficial to our shareholders.
. We depend on the continued services of our senior management.
. Investors will be relying on our board and management judgment regarding
the future direction and activities of the Company
. We will need additional financing to grow and our ability to raise further
financing is uncertain.
Risks Related to the Oil and Gas Industry
. A substantial decrease in oil and gas prices would have a material impact
on us.
. Estimating our reserves and future net cash flows is difficult to do with
any certainty.
. We may incur write downs of the net book value of our oil and gas
properties which would adversely affect our shareholders' equity and
earnings.
. Operational risks in our business are numerous and could materially impact
us.
. Governmental and environmental regulations could adversely affect our
business.
. Competition in the oil and gas industry is strong and can harm our
business.
-4-
<PAGE>
TAX CONSEQUENCES
Crowe & Dunlevy, counsel to Canaan, has rendered an opinion that:
. No gain or loss should be recognized by a limited partner as a
result of the receipt solely of Canaan common stock in connection
with the combination transactions.
. The basis of the Canaan common stock received by each limited
partner who does not recognize gain in the combination
transactions will be equal to the basis of his partnership
interest exchanged for such stock.
. The holding period for the Canaan common stock for purposes of
computing eligibility for long-term capital gain or loss will
include the period of a limited partner's ownership of his
partnership interest exchanged for such stock and, to the extent
the Canaan common stock received is attributable to certain
ordinary income assets of the partnership, may begin on the day
after the closing of the combination transactions.
. A limited partner who receives solely cash or exercises
dissenters rights will recognize gain or loss equal to the
difference between the cash received and his adjusted tax basis
of his limited partnership interest on the date of the closing of
the combination transactions. Gain recognized by a limited
partner will be capital except to the extent of such limited
partner's share of ordinary income assets, including recapture of
depletion, depreciation and intangible drilling cost deductions
previously allocated to a limited partner.
For additional information please see:
. "Certain Federal Income Tax Consequences" beginning on Page 82
of the Prospectus/Proxy Statement.
METHOD OF DETERMINING COMBINATION EXCHANGE VALUES
General
The Exchange Values for each of the Combining Entities was determined
primarily based on the proved oil and gas reserve values as estimated by
Netherland, Sewell & Associates, Inc. an independent petroleum engineering and
consulting firm. Netherland Sewell estimated the proved reserves, future net
revenues therefrom, and the present value of such future net revenues for each
Combining Entity as of September 30, 1999 using the same price, cost and
discount rate assumption for each Combining Entity.
-5-
<PAGE>
We refer to the evaluation date of September 30, 1999 as the
"Effective Date" and we refer to the present value of the estimated future net
revenues from proved reserves as of the Effective Date as the "Reserve Value"
for each Combining Entity. A summary of the reserve report prepared by
Netherland, Sewell & Associates showing the Reserve Value for each Combining
Entity is included in Appendix A to the Prospectus/Proxy Statement.
The Reserve Value for each Combining Entity will be reduced by any
bank debt owed by the entity at the Effective Date. No adjustments for principal
payments subsequent to the Effective Date are made because such payments would
be offset by a reduction in Reserve Value which would otherwise be used to make
such payments.
The Exchange Value for each Combining Entity will also include an
amount attributable to its "working capital" as of the Effective Date. Working
capital includes cash, short term investments, oil and gas sales receivables and
other accounts receivable and other current assets less any current liabilities
other than bank debt. All of these assets and liabilities were valued at book
value, which in the opinion of Canaan and the General Partners represents fair
market value.
The Reserve Value of the properties for each Combining Entity has been
established as of the Effective Date. Interest paid or accrued on bank debt
subsequent to the Effective Date up to the closing date will be a reduction to
Exchange Value. The Exchange Value for limited partners, Additional General
Partners, Canaan Securities and the Placing Brokers will also be adjusted by
reducing the Exchange Value for their share of cash distributions after the
Effective Date and before the closing date. No similar adjustments are being
made for the other Combining Entities including the General Partners because the
revenues received by them will not be distributed to owners or lenders and will
be retained and used in their respective businesses between the Effective Date
and the closing date. It is currently anticipated that substantially all net
revenues of each partnership received prior to the closing will be distributed
to partners consistent with past practice.
Finally, an adjustment will be made at the closing for any gas
imbalances. If a Combining Entity is overproduced, its Exchange Value will be
reduced by the estimated value of the overproduction and if it is underproduced,
its Exchange Value will be increased by the estimated value of the
underproduction. Canaan does not expect the amount of this adjustment to have a
material effect on the relative Exchange Values of all Combining Entities.
Certain other adjustments will be made to the value of certain of the
Combining Entities for purposes of determining the Exchange Value. These are
described below.
Accordingly, the "Exchange Value" for each Combining Entity will be
equal to:
. Reserve Value as of the Effective Date.
. Less bank debt at the Effective Date.
-6-
<PAGE>
. Plus or minus working capital at the Effective Date.
. Minus interest paid or accrued on bank debt from the Effective
Date to the closing date.
. For limited partners, Additional General Partners, Canaan
Securities and Placing Brokers, minus their share of cash
distributions from production subsequent to the Effective Date
and before the closing date.
. An adjustment for gas imbalances.
. Plus or minus other adjustments.
Partnership Exchange Values and Allocation to Partners, Canaan Securities and
Placing Brokers
The Exchange Value for each of the partnerships will first be
determined as described above.
As between the limited partners and the General Partner and the
Additional General Partners in each partnership, the Exchange Value will
generally be allocated among them in the ratio in which net revenues and cash
distributions are shared. In each of the partnerships except 1993-I and 1996-I,
the General Partners' share of the net revenues and cash distributions increases
when "payout" occurs as to each individual limited partner. Accordingly, in each
of those partnerships in which payout has not already occurred as to all limited
partners as of the Effective Date, the Reserve Value was allocated first among
the partners in their respective before payout sharing ratios until payout
occurred and any remaining Exchange Value was allocated in after payout sharing
ratios.
In the partnerships other than 1990, 1991, 1993-I and 1996-I, Canaan
Securities receives a fee for providing reporting services to the partnership
which is equal to 1.5% of partnership gross revenues. In each of these
partnerships, a portion of the Reserve Value (calculated based on gross
revenues) will be allocated to Canaan Securities representing its rights to
receive such fee adjusted for any payments for such fee subsequent to the
Effective Date and before the closing date. This allocation will be made prior
to the allocation of the remaining Exchange Value to the limited partners and
the General Partners.
The Exchange Value for the General Partner and Additional General
Partners of the partnerships will be determined based on their share of the
Exchange Value for each of the partnerships as described above.
-7-
<PAGE>
The marketing arrangements entered into in connection with the sale of
interests in partnerships provided for certain fees to be paid to Canaan
Securities and Placing Brokers. Such fees are payable out of the cash
distributions otherwise distributable to the General Partner in such
partnerships. Accordingly, the Exchange Value allocated to the General Partner
in these partnerships will be reduced to take into consideration the amount of
the Exchange Value allocable to the rights of Canaan Securities and the Placing
Brokers to receive future distributions of net cash flow out of the General
Partner's share. The Placing Brokers will receive cash equal to the 40% of their
Exchange Value and their share of Canaan common stock will be determined based
on the balance of their Exchange Value.
As discussed above, for the limited partners, the Additional General
Partners, Canaan Securities and the Placing Brokers, an adjustment to their
Exchange Values will be made for cash distributions from production subsequent
to the Effective Date and before the closing date.
If the allocation of Exchange Value within a partnership does not
produce an "assumed return" of 115% for the limited partners as a group, the
Exchange Value shall be first allocated to limited partners until this assumed
return is achieved and the balance of the Exchange Value will be allocated based
on revenue sharing percentages. The assumed return is based on the sum of
historical cash distributions to limited partners as a group through the closing
date plus allocated Exchange Value as a percentage of the original capital
contributions of all limited partners. Canaan and the General Partners believe
that the 1996 partnership will be the only partnership in which this priority
allocation of Exchange Value will be necessary.
Canaan Securities Exchange Value
The Exchange Value for Canaan Securities will be determined in the
same manner as described above and will include an allocation to it attributable
to its rights to receive cash distributions from the partnerships and the
General Partners, less the Exchange Value allocated to Placing Brokers, as
described above under "Partnership Exchange Values and Allocation to Partners,
Canaan Securities and Placing Brokers".
Canaan Exchange Value
The Exchange Value for Canaan will be determined based on its Reserve
Value, bank debt and working capital in the same manner as other entities as
described above:
Canaan's Exchange Value within the Coral Group will be further
adjusted to take into account its operating rights. Canaan serves as operator of
113 of the total 134 wells in which the partnerships own interests. As such,
Canaan receives monthly operating fees which represent a source of additional
income to Canaan. For purposes of calculation of Canaan's Exchange Value within
the Coral Group, the future cash flows attributable to these operating fees,
based on existing reimbursement rights without escalation will be determined and
the present value thereof as of the Effective Date will be an additional
component of its Exchange Value. The amount of this adjustment is $5.0 million.
-8-
<PAGE>
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
Indian Exchange Value
The Exchange Value for Indian will be determined using the Reserve
Value, bank debt and working capital in the same manner as described above.
In connection with the negotiation of the acquisition agreement
between Indian and the Coral Companies, Indian agreed that its Exchange Value
would be reduced by its production payment obligation to the 1996 and 1996-I
partnerships, in consideration of such partnerships advancing to Indian a total
of $6 million in exchange for a "Contingent Production Payment" from Indian to
the partnerships payable at the rate of $56,250 per month until paid in full.
The Contingent Production Payment is $9 million if the combination transactions
are consummated and $6 million if they are not. Accordingly, Indian's Exchange
Value will be adjusted downward by the remaining amount of the Contingent
Production Payment obligation as of the Effective Date, $5,602,250, plus the
additional $3 million as a result of the combination transactions, and the
Exchange Values for the 1996 and 1996-I partnerships will be adjusted upward by
the same amount. As between the 1996 and 1996-I partnerships, the Contingent
Production Payment adjustment will be shared in the same percentages as their
original advances to Indian of 53% and 47%, respectively.
For additional information please see the following sections of the
Prospectus/Proxy Statement:
. "Summary - Method of Determining Combination Exchange Values" on
page 9.
. "Summary - Summary of Estimated Exchange Values" on page 14.
. "Method of Determining Combination Exchange Values" on page 66.
-9-
<PAGE>
FAIRNESS OF THE COMBINATION TRANSACTIONS
Canaan and the General Partners believe that the proposed combination
transactions are fair to the limited partners of each of the partnerships.
The principal structural element affecting the limited partners and
the other parties to the combination transactions is the determination of the
Exchange Values. As noted elsewhere, the Exchange Values are based primarily on
the Reserve Value based on Netherland Sewell's independent valuations. See
"Method of Determining Combination Exchange Values". By using Reserve Values
calculated in a consistent manner by a single engineer based on the same price,
cost and discount assumptions, Canaan and the General Partners believe that the
relative value of each of the Combining Entities has been fairly determined for
purposes of determining its relative ownership of Canaan after the combination
transactions. Further, Canaan and the General Partners believe the following
facts support the fairness of transaction to limited partners:
. Owners of all of the Combining Entities in the combination
transactions are receiving the same form of consideration,
consisting of common stock of Canaan, except limited partners who
elect to receive cash, and the relative number of shares to be
received by the owners of each entity is being calculated on a
consistent basis for each Combining Entity.
. All of the partnerships had similar investment objectives and all
own similar properties, principally non-operating interests in
proved developed producing gas properties located primarily in
Oklahoma in the Mid-Continent basin. Therefore, Canaan and the
General Partners do not believe that there are material
differences in the assets of the partnerships that would cause
their values to vary based on quality of reserves or differences
in commodity prices for gas or oil.
. The use of Reserve Value to evaluate the Combining Entities is a
commonly used method in valuing oil and gas properties.
. As between the General Partners and the limited partners, the
allocation of Exchange Value in each partnership is based on the
profit sharing percentages provided in the partnership agreements
and there is no additional consideration being allocated to the
General Partners or Canaan which is not currently being received.
. The actual market value of the Canaan common stock received by
limited partners may be more or less than their Exchange Value,
but the owners of Canaan, the General Partners and Indian will
all be similarly affected by any differences.
-10-
<PAGE>
. The methodology for determining Exchange Values as between Indian
and the Coral Group was agreed to by the owners of Indian in an
arms length negotiated transaction between Indian and Canaan.
. The combination transactions will not be approved unless the
holders of a majority of the interests in each partnership
approve the combination transactions. Further, all partnerships
are required to be included in the combination transactions for
it to be consummated so it is not possible that any one
partnership will be excluded.
. A limited partner of a partnership who votes in favor of the
combination transactions may elect to receive cash in lieu of
Canaan common stock in an amount equal to 75% of the exchange
value of such limited partner's interest. See "The Combination
Transactions - Limited Partner Cash Election" on page 57.
This cash election provides the opportunity for limited partners
who are unwilling to take market risks with respect to Canaan
common stock the opportunity to receive cash in an amount which
Canaan and the General Partners believe approximates fair value.
In addition, if a limited partner believes that the cash election
does not represent the fair market value of his interests, he may
vote against the combination transactions and elect to exercise
dissenters rights in those partnerships receiving less than 75%
approval and be paid cash based on an independent appraisal of
the partnership assets.
. In each partnership, the General Partner is entitled to receive a
reimbursement for a portion of its overhead expenses, including
office rent and salaries for clerical staff and appropriate
production supervisory personnel and any other overhead expenses
which the General Partner deems reasonable. The amount of the
overhead reimbursement is limited to 5% of the amount of
distributable cash. This overhead reimbursement amount is not
being taken into consideration in the calculation of the General
Partner's share of the Exchange Value. However, if the
partnerships were to continue to operate, the General Partner
would continue to be entitled to such reimbursement. Thus, the
present value of future cash distributable to limited partners,
if the partnerships were continued, based on the same projections
of future net revenues used to calculate the Exchange Values
would be less than the Exchange Value allocated to limited
partners.
For purposes of determining the relative Exchange Value of Canaan
within the Coral Group, Canaan's Exchange Value includes, in addition to the
valuation of its oil and gas properties, a value attributable to its operating
rights of $5.0 million. The allocation of value to Canaan for its operating
rights recognizes that Canaan is entitled to receive fees for these activities
from the partnerships and other nonoperating owners which Canaan would be
entitled
-11-
<PAGE>
to continue to receive if the combination transactions did not occur. This
allocation of Exchange Value to Canaan is intended to recognize the economic
benefits that Canaan currently receives in connection with the operation of
wells and is not intended to allocate additional new economic benefits to
Canaan.
For purposes of determining relative Exchange Values between Indian
and the Coral Group as a whole, the operating rights value allocated to Canaan
is disregarded because the combination of the Coral Group essentially results in
the elimination of these intercompany items. Further, Canaan and Indian have
agreed that neither of them will be allocated value for operating rights for
purposes of determining the Exchange Value.
COMBINATION EXCHANGE VALUE AND COMPENSATION
AND DISTRIBUTION INFORMATION
Set forth below are the following tables:
. Table A - Calculation of estimated Exchange Values and the
allocation of shares of Canaan common stock for
the 1996-I Partnership assuming a closing of the
combination transactions on June 30, 2000.
. Table B - The General Partners' and Canaan's compensation
and cash distribution history from the 1996-I
Partnership for the three most recent fiscal years
and the nine months ended September 30, 1999.
. Table C - The amount of the limited partners' cash
distributions for the five most recent fiscal
years and the nine months ended September 30,
1999.
For additional information, see the following sections of the
Prospectus/Proxy Statement:
. "Information Concerning the Partnerships' Selected Historical
Financial and Operating Data of Individual Partnerships"
beginning on page 119; and
. "Unaudited Pro Forma Financial Information" beginning on page 86.
-12-
<PAGE>
Table A
Coral Reserves 1996 Institutional
Limited Partnership
Calculation of Estimated Exchange Value
The Exchange Value is estimated based on Canaan's estimate of cash
distributions and interest expense from the September 30, 1999 Effective Date to
an assumed closing date of June 30, 2000. Variances in actual cash distributions
and interest expense or a change in the closing date will result in a change in
the Exchange Value for the partnership and will similarly change Exchange Values
for other Combining Entities.
<TABLE>
<CAPTION>
Amount
------
<S> <C> <C> <C>
Reserve Value of Oil and Gas
Properties(1)............................. $6,152,600
Bank Debt as of Effective Date................... 1,900,000
Working Capital as of Effective Date:
Cash and cash equivalents................... 96,989
Accounts receivable......................... 2,994,818
Accounts payable............................ 62,360
Subtotal - Working Capital....................... 3,029,447
Estimated Cash Distributions Before
Closing (3)................................. 1,032,069 Shares of Percent of
Estimated Interest Expense Before Canaan Stock
Closing(3).................................. 126,377 Common Stock(2) Outstanding(2)
--------------- --------------
Estimated Exchange Value
at Closing(4)............................... 7,253,123 705,000 14.10%
Allocated to:
Limited Partners............................ 6,293,660 616,094 12.32%
General Partner............................. 589,154 57,932 1.16%
Additional General Partners................. 35,267 3,527 0.07%
Canaan Securities........................... 203,141 19,647 0.39%
Placing Brokers............................. 131,900 7,800 0.16%
Limited Partner per $1000 Investment............. 965 94 (5)
</TABLE>
_______________________
(1) As determined by Netherland, Sewell & Associates, Inc. See "Method of
Determining Combination Exchange Values" in the Prospectus/Proxy Statement.
No partnerships own an individual property representing more than 10% of
the Reserve Value or from which the partnership derived more than 10% of
its cash flow or net income for the nine months ended September 30, 1999.
(2) Assumes no limited partners elect to receive cash or exercise dissenters
rights. Placing Brokers shows based on 60% of Exchange Value.
(3) Assumes closing on June 30, 2000, and uses Netherland, Sewell reserve
report to estimate property revenues and expenses and estimated interest
rate on bank debt for purposes of calculating interest expense.
(4) The "Estimated Exchange Value at Closing" for all of the partnerships and
Canaan set forth in the table is approximately 96.4% of the sum of their
respective components of Exchange Value because the operating rights
adjustment to Canaan's Exchange Value within the Coral Group is excluded
for purposes of computing the relative Exchange Value between the Coral
Group and Indian.
(5) Less than 0.01%
-13-
<PAGE>
Table B
Coral Reserves 1996 Institutional Limited Partnership
Summary of Compensation and Cash Distributions
Paid to the General Partners and Affiliates
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Nine Months Ended
1996 1997 1998 September 30, 1999
---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Reimbursement of expenses paid
to General Partner................... $ 9,339 $ 19,019 $ 30,268 $ 28,006
Operating fees paid to Canaan........ 3,168 7,812 30,050 41,779
Cash distributions paid to General
Partner.............................. 32,413 63,985 124,538 100,221
Cash distributions paid to
Additional General Partners.......... 1,350 2,666 5,190 4,176
</TABLE>
Table C
Coral Reserves 1996 Institutional Limited Partnership
Summary of Cash Distributions Paid to Limited Partners
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
Nine Months Ended
1994 1995 1996 1997 1998 September 30, 1999
---------- ---------- ---------- --------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Cash distributions paid to limited
partners(1).......................... $ - $ 16,510 $ 236,346 $ 466,556 $ 908,096 $730,782
Cash distributions to limited
partners per $1,000 investment....... - 3 36 72 139 112
</TABLE>
___________________________
(1) Because of depletion (which is usually higher in the early years of
production), a portion of every distribution of revenues from properties
represents a return of a limited partner's original investment. Until a
limited partner receives cash distributions equal to his original
investment, 100% of such distributions may be deemed to be a return of
capital.
-14-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation provides that, pursuant to
Oklahoma law, its directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to the Registrant and its stockholders.
The provision in the Certificate of Incorporation does not eliminate the duty of
care and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Oklahoma law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, as well as for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Oklahoma law. The provision also does not
affect a director's responsibilities under any other law, such as the state or
federal securities laws.
Under Section 1031 of the Oklahoma General Corporation Act, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation provides that the Registrant
shall indemnify its directors and officers to the fullest extent permitted by
Oklahoma law. The Certificate of Incorporation requires the Registrant to
indemnify such person against expenses, judgments, fines, settlements and other
amounts incurred in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or an officer of the Registrant or any of
its affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. However, in the case
of a derivative action, an officer or director will not be entitled to
indemnification in respect of any claim, issue or matter as to which such person
is adjudged to be liable to the Registrant, unless and only to the extent that
the court in which the action was brought determines that such person is fairly
and reasonably entitled to indemnity for expenses.
The Registrant has entered into Indemnification Agreements with each non-
employee director of the Registrant that require the Registrant to indemnify
such persons against certain liabilities and expenses incurred by any such
persons by reason of their status or service as directors of the Registrant.
The Indemnification Agreements also set forth procedures that will apply in the
event of a claim for indemnification under such agreements. In addition, the
Indemnification Agreements require that the Registrant use commercially
reasonable efforts to maintain policies of directors' liability insurance.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
Item 21. Exhibits and Financial Statements Schedules.
Exhibit No. Description
- ----------- -----------
2.1 Plan of Combination, dated as of February 14, 2000, by and between the
Registrant, Coral Reserves, Inc., Coral Reserves Energy Corp., Indian
Oil Company, Canaan Securities, Inc. and the partnerships.
2.2 Agreement and Plan of Merger dated February 15, 1999, between
Registrant, Indian Oil Company, Coral Reserves, Inc. and Coral
Reserves Energy Corp. and First Amendment dated February 15, 1999.
2.3 Management Agreement dated February 15, 1999, between Coral Reserves
Group, Ltd. and Indian Oil Company.
3.1(a) Amended and Restated Certificate of Incorporation of Registrant.
<PAGE>
3.1(b) Amended and Restated Bylaws of Registrant.
3.2(a) Amended and Restated Certificate of Incorporation of Indian Oil
Company.
3.2(b) Amended and Restated Bylaws of Indian Oil Company.
3.3(a) Certificate of Incorporation of Canaan Securities, Inc.
3.3(b) Bylaws of Canaan Securities, Inc.
3.4(a) Certificate of Incorporation of Coral Reserves, Inc.
3.4(b) Bylaws of Coral Reserves, Inc.
3.5(a) Certificate of Incorporation of Coral Reserves Energy Corp.
3.5(b) Bylaws of Coral Reserves Energy Corp.
3.6(a)/(1)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves Energy Income Fund 1996 Limited Partnership.
3.6(b)/(2)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves 1996 Institutional Limited Partnership.
5.1 Opinion of Crowe & Dunlevy, A Professional Corporation, regarding
the legality of the securities being registered.
8.1 Opinion of Crowe & Dunlevy, A Professional Corporation, with
respect to certain tax matters.
10.1 Stock Option Plan of the Registrant.
10.2 Form of Indemnification Agreement by and between the Registrant
and non-employee directors.
10.3/(3)/ Form of Change of Control Agreement by and between the Registrant
and executive officers.
10.4 Shareholders Agreement between Registrant and shareholders of
Registrant and of Indian Oil Company.
10.5(a) Credit Agreement between Indian Oil Company and Bank One,
Oklahoma, N.A. dated December 22, 1997.
10.5(b) First Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated August 10, 1998.
10.5(c) Second Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated February 26, 1999.
10.5(d) Third Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated March 31, 1999.
10.5(e) Fourth Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.5(f) Intercreditor Agreement by and among Bank One, Oklahoma, N.A.,
MidFirst Bank and Indian Oil Company dated March 31, 1999.
<PAGE>
10.5(g) Intercreditor Agreement by and among BankOne, Oklahoma, N.A.,
Coral Reserves, Inc., Coral Reserves Energy Corp., Coral Reserves
Group, Ltd., Coral Reserves Energy Income Fund 1996 Limited
Partnership and Indian Oil Company.
10.5(h) Fifth Amendment to Credit Agreement by and Between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.6(a) Credit Agreement among Indian Oil Company, Cibola Corporation and
MidFirst Bank dated March 31, 1999.
10.6(b) First Amendment to Credit Agreement among Indian Oil Company,
Cibola Corporation, Richard R. Dunning, Larry D. Hartzog, Michael
C. Black, Dunning Family Limited Partnership, and Michael C.
Black, Trustee of the Michael C. Black Revocable Trust and
MidFirst Bank dated as of May 1999.
10.6(c) Intercreditor Agreement dated March __, 1999 by and among
MidFirst Bank, Coral Reserves, Inc., Coral Reserves Energy Corp,
Coral Reserves Group, Ltd. and Indian Oil Company.
10.6(d) Second Amendment to Credit Agreement dated February __, 2000, by
Indian Oil Company, Cibola Corporation, Richard R. Dunning, Larry
D. hartzon, Michael C. Black, Dunning Family Limited Partnership
and Michael C. Black, Trustee of The Michael C. Black Revocable
Trust and MidFirst Bank.
10.6(e) First Amendment to Intercreditor Agreement dated February __,
2000, by and among MidFirst Bank, Coral Reserves, Inc., Coral
Reserves Energy Corp., Canaan Energy Corporation and Indian Oil
Company.
10.7(a) Promissory Note of Indian Oil Company in favor of Larry D.
Hartzog dated January 20, 1993.
10.7(b) Promissory Note of Indian Oil Company in favor of Richard R.
Dunning dated January 20, 1993.
10.7(c) Promissory Note of Indian Oil Company in favor of Michael C.
Black dated January 20, 1993.
10.8 Amended and Restated Promissory Notes of Indian Oil Company in
favor of Cibola Corporation dated January 2000.
10.9/(4)/ Asset Purchase Agreement between Indian Oil Company and Indco,
L.L.C.
10.10 Stock Purchase Agreement among Coral Reserves Group, Ltd., Coral
Reserves, Inc., Coral Reserves Energy Corp. and Michael Mewbourn
dated November 30, 1998.
10.11(a) Consulting Agreement dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(b) Stock Rights Certificate dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(c) Letter agreement dated September 29, 1999 between Anthony
"Skeeter" Lasuzzo and Richard R. Dunning.
23.1 Consent of Crowe & Dunlevy, A Professional Corporation (included
in Exhibits 5.1 and 8.1).
23.2 Consent of KPMG, L.L.P.
23.3 Consent of William T. Zumwalt, Inc.
23.4 Consent of Netherland, Sewell and Associates, Inc.
27 Financial Data Schedule.
<PAGE>
99.1 Reserve Report of Netherland, Sewell & Associates, Inc. (included
in Appendix A to proxy statement)
99.2 Form of Proxy and Cash Election Form.
99.3 Form of Letter of Transmittal.
99.4 Consent of Thomas H. Henson to be named director.
____________________
(1) Agreements of limited partnership for the 1990, 1991, 1992, 1993 and 1995
Partnerships are substantially identical to the 1996 Partnership agreement
and are not being filed.
(2) Agreement of limited partnership for the 1993-I Partnership is
substantially identical to the 1996-I Partnership agreement and is not
being filed.
(3) To be entered into with Messrs. Woodard, Penton, Mewbourn, Henson and
Lasuzzo.
(4) To be filed by amendment.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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 the 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 director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Joint Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 herein, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration statement through the date of responding to the request.
<PAGE>
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oklahoma City, State of
Oklahoma on February 14, 2000.
CANAAN ENERGY CORPORATION
By: /s/ Leo E. Woodard
-------------------------------------------
Leo E. Woodard, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Leo E. Woodard Chairman and Chief Executive Officer February 14, 2000
- ---------------------------
Leo E. Woodard
/s/ John Penton President and Director February 14, 2000
- ---------------------------
John Penton
/s/ Michael S. Mewbourn Sr. Vice President, Chief Financial Officer
- ---------------------------
Michael S. Mewbourn and Director February 14, 2000
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Plan of Combination, dated as of February 14, 2000, by and
between the Registrant, Coral Reserves, Inc., Coral Reserves
Energy Corp., Indian Oil Company, Canaan Securities, Inc. and the
partnerships.
2.2 Agreement and Plan of Merger dated February 15, 1999, between
Registrant, Indian Oil Company, Coral Reserves, Inc. and Coral
Reserves Energy Corp. and First Amendment dated February 15,
1999.
2.3 Management Agreement dated February 15, 1999, between Coral
Reserves Group, Ltd. and Indian Oil Company.
3.1(a) Amended and Restated Certificate of Incorporation of Registrant.
3.1(b) Amended and Restated Bylaws of Registrant.
3.2(a) Amended and Restated Certificate of Incorporation of Indian Oil
Company.
3.2(b) Amended and Restated Bylaws of Indian Oil Company.
3.3(a) Certificate of Incorporation of Canaan Securities, Inc.
3.3(b) Bylaws of Canaan Securities, Inc.
3.4(a) Certificate of Incorporation of Coral Reserves, Inc.
3.4(b) Bylaws of Coral Reserves, Inc.
3.5(a) Certificate of Incorporation of Coral Reserves Energy Corp.
3.5(b) Bylaws of Coral Reserves Energy Corp.
3.6(a)/(1)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves Energy Income Fund 1996 Limited Partnership.
3.6(b)/(2)/ Amended and Restated Agreement of Limited Partnership of Coral
Reserves 1996 Institutional Limited Partnership.
5.1 Opinion of Crowe & Dunlevy, A Professional Corporation, regarding
the legality of the securities being registered.
8.1 Opinion of Crowe & Dunlevy, A Professional Corporation, with
respect to certain tax matters.
10.1 Stock Option Plan of the Registrant.
10.2 Form of Indemnification Agreement by and between the Registrant
and non-employee directors.
10.3/(3)/ Form of Change of Control Agreement by and between the Registrant
and executive officers.
10.4 Shareholders Agreement between Registrant and shareholders of
Registrant and of Indian Oil Company.
10.5(a) Credit Agreement between Indian Oil Company and Bank One,
Oklahoma, N.A. dated December 22, 1997.
10.5(b) First Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated August 10, 1998.
10.5(c) Second Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated February 26, 1999.
10.5(d) Third Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A. dated March 31, 1999.
10.5(e) Fourth Amendment to Credit Agreement by and between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.5(f) Intercreditor Agreement by and among Bank One, Oklahoma, N.A.,
MidFirst Bank and Indian Oil Company dated March 31, 1999.
<PAGE>
10.5(g) Intercreditor Agreement by and among BankOne, Oklahoma, N.A.,
Coral Reserves, Inc., Coral Reserves Energy Corp., Coral Reserves
Group, Ltd., Coral Reserves Energy Income Fund 1996 Limited
Partnership and Indian Oil Company.
10.5(h) Fifth Amendment to Credit Agreement by and Between Indian Oil
Company and Bank One, Oklahoma, N.A.
10.6(a) Credit Agreement among Indian Oil Company, Cibola Corporation and
MidFirst Bank dated March 31, 1999.
10.6(b) First Amendment to Credit Agreement among Indian Oil Company,
Cibola Corporation, Richard R. Dunning, Larry D. Hartzog, Michael
C. Black, Dunning Family Limited Partnership, and Michael C.
Black, Trustee of the Michael C. Black Revocable Trust and
MidFirst Bank dated as of May 1999.
10.6(c) Intercreditor Agreement dated March __, 1999 by and among
MidFirst Bank, Coral Reserves, Inc., Coral Reserves Energy Corp,
Coral Reserves Group, Ltd. and Indian Oil Company.
10.6(d) Second Amendment to Credit Agreement dated February __, 2000, by
Indian Oil Company, Cibola Corporation, Richard R. Dunning, Larry
D. hartzon, Michael C. Black, Dunning Family Limited Partnership
and Michael C. Black, Trustee of The Michael C. Black Revocable
Trust and MidFirst Bank.
10.6(e) First Amendment to Intercreditor Agreement dated February __,
2000, by and among MidFirst Bank, Coral Reserves, Inc., Coral
Reserves Energy Corp., Canaan Energy Corporation and Indian Oil
Company.
10.7(a) Promissory Note of Indian Oil Company in favor of Larry D.
Hartzog dated January 20, 1993.
10.7(b) Promissory Note of Indian Oil Company in favor of Richard R.
Dunning dated January 20, 1993.
10.7(c) Promissory Note of Indian Oil Company in favor of Michael C.
Black dated January 20, 1993.
10.8 Amended and Restated Promissory Notes of Indian Oil Company in
favor of Cibola Corporation dated January 2000.
10.9/(4)/ Asset Purchase Agreement between Indian Oil Company and Indco,
L.L.C.
10.10 Stock Purchase Agreement among Coral Reserves Group, Ltd., Coral
Reserves, Inc., Coral Reserves Energy Corp. and Michael Mewbourn
dated November 30, 1998.
10.11(a) Consulting Agreement dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(b) Stock Rights Certificate dated April 1, 1999 between Anthony
"Skeeter" Lasuzzo and Indian Oil Company.
10.11(c) Letter agreement dated September 29, 1999 between Anthony
"Skeeter" Lasuzzo and Richard R. Dunning.
23.1 Consent of Crowe & Dunlevy, A Professional Corporation (included
in Exhibits 5.1 and 8.1).
23.2 Consent of KPMG, L.L.P.
23.3 Consent of William T. Zumwalt, Inc.
23.4 Consent of Netherland, Sewell and Associates, Inc.
27 Financial Data Schedule.
99.1 Reserve Report of Netherland, Sewell & Associates, Inc. (included
in Appendix A to proxy statement)
99.2 Form of Proxy and Cash Election Form.
99.3 Form of Letter of Transmittal.
99.4 Consent of Thomas H. Henson to be named director.
____________________
(1) Agreements of limited partnership for the 1990, 1991, 1992, 1993 and 1995
Partnerships are substantially identical to the 1996 Partnership agreement
and are not being filed.
(2) Agreement of limited partnership for the 1993-I Partnership is
substantially identical to the 1996-I Partnership agreement and is not
being filed.
(3) To be entered into with Messrs. Woodard, Penton, Mewbourn, Henson and
Lasuzzo.
(4) To be filed by amendment.
<PAGE>
EXHIBIT 2.1
PLAN OF COMBINATION
Combination of
Coral Reserves, Inc.,
Coral Reserves Energy Corporation,
Indian Oil Company,
Cancaan Securities, Inc.,
into
Canaan Energy Corporation, f/k/a
Coral Reserves Group, Ltd.
and
Canaan 1990 Acquisition Corporation
Canaan 1991 Acquisition Corporation
Canaan 1992 Acquisition Corporation
Canaan 1993 Acquisition Corporation
Canaan 1993I Acquisition Corporation
Canaan 1995 Acquisition Corporation
Canaan 1996 Acquisition Corporation
Canaan 1996I Acquisition Corporation
into
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership,
Coral Reserves 1993 Institutional Limited Partnership,
Coral Reserves Energy Income Fund 1995 Limited Partnership,
Coral Reserves Energy Income Fund 1996 Limited Partnership,
Coral Reserves 1996 Institutional Limited Partnership
February 14, 2000
<PAGE>
PLAN OF COMBINATION
Table of Contents
-----------------
Page
ARTICLE I
DEFINITIONS.............................................................2
1.01 Defined Terms.....................................................2
-------------
1.02 References and Titles.............................................5
---------------------
ARTICLE II
ACQUISITION OF INDIAN BY CEC AND
RECLASSIFICATION OF CEC COMMON STOCK....................................5
2.01 The Share Acquisition; Effective Time............................5
--------------------------------------
2.02 Certificate of Incorporation......................................5
----------------------------
2.03 Bylaws............................................................6
------
2.04 Effect on Securities of Indian....................................6
------------------------------
2.05 Exchange of Certificates..........................................6
------------------------
2.06 Reclassification of CEC Common Stock..............................6
------------------------------------
2.07 Modification to Exchange Value....................................6
------------------------------
ARTICLE III
ACQUISITION OF CORAL CORP., CORAL, INC.
AND CANAAN SECURITIES COMMON STOCK......................................7
3.01 Transfer of Coral Corp., Coral, Inc. and
----------------------------------------
Canaan Securities Shares..........................................7
------------------------
3.02 Issuance of CEC Common Stock......................................7
----------------------------
3.03 Effects of Contribution of Canaan Securities Shares...............7
---------------------------------------------------
3.04 Certificate of Incorporation......................................7
----------------------------
3.05 Bylaws............................................................7
------
ARTICLE IV
PARTNERSHIP MERGERS.....................................................7
4.01 Partnership Votes.................................................7
-----------------
4.02 Partnership Mergers...............................................8
-------------------
4.03 Effect on Partnership Interests of Partnerships...................8
-----------------------------------------------
4.04 Treatment of Dissenting Partners..................................9
--------------------------------
4.05 Treatment of Cash Electing Partners...............................9
-----------------------------------
4.06 Issuance of Certificates.........................................10
------------------------
ARTICLE V
REPRESENTATIONS AND WARRANTIES OFCORAL CORP. AND CORAL, INC............10
-i-
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INDIAN...............................10
6.01 Ownership of Shares..............................................10
-------------------
6.02 Approval and Adoption of Agreements..............................11
-----------------------------------
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF CANAAN SECURITIES....................11
7.01 Organization, Standing and Qualification.........................11
----------------------------------------
7.02 Execution, Delivery and Performance of Agreement; Authority......11
-----------------------------------------------------------
7.03 Capitalization...................................................12
--------------
7.04 Financial Statements.............................................12
--------------------
7.05 Absence of Undisclosed Liabilities...............................12
----------------------------------
7.06 Absence of Material Adverse Effect Since.........................13
Interim Balance Sheet Date
--------------------------
7.07 Compliance with Laws, Material...................................13
Agreements and Permits
----------------------
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS.....................13
8.01 Organization, Standing and Qualification.........................13
----------------------------------------
8.02 Execution, Delivery and Performance of...........................14
Agreement; Authority
--------------------
8.03 Capitalization...................................................14
--------------
8.04 Financial Statements.............................................14
--------------------
8.05 Absence of Undisclosed Liabilities...............................15
----------------------------------
8.06 Absence of Material Adverse Effect Since.........................15
Interim Balance Sheet Date
--------------------------
8.07 Compliance with Laws, Material...................................15
Agreements and Permits
----------------------
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF CEC..................................15
9.01 Capitalization...................................................16
--------------
9.02 Acquisition Subs.................................................16
----------------
ARTICLE X
COVENANTS 16
10.01 Access to Records and Properties;................................16
Operation of the Business
-------------------------
10.02 Announcements....................................................17
-------------
10.03 Shareholder and Director Approval................................17
---------------------------------
10.04 Indian Shareholder Debt..........................................17
-----------------------
10.05 Amendment of Coral/Indian Merger.................................17
Agreement
---------
10.06 Securities Law Matters...........................................18
----------------------
10.07 Agreements of Affiliates.........................................18
------------------------
10.08 Restrictions on CEC Common Stock.................................18
--------------------------------
10.09 Canaan Securities Intra-Company..................................18
Indebtedness
------------
10.10 Release of Guarantees............................................19
---------------------
-ii-
<PAGE>
10.11 Cancellation of Canaan Securities................................19
Agreements
----------
10.12 Reports under the Securities Exchange............................19
Act of 1934
-----------
10.13 Indemnification..................................................19
---------------
ARTICLE XI
CONDITIONS.............................................................20
11.01 Conditions to Obligations of all Parties.........................20
----------------------------------------
ARTICLE XII
TERMINATION............................................................22
12.01 Termination of Agreement.........................................22
------------------------
12.02 Obligations Upon Termination.....................................22
----------------------------
ARTICLE XIII
CLOSING................................................................22
13.01 Time and Place...................................................22
--------------
13.02 Certificates of Acquisition and Exchanges........................22
-----------------------------------------
13.03 Further Assurances...............................................23
------------------
13.04 Concurrent Conditions............................................23
---------------------
ARTICLE XIV
GENERAL PROVISIONS.....................................................23
14.01 Nonsurvival of Representations,..................................23
Warranties and Covenants
------------------------
14.02 Entire Agreement; Amendment and Waiver...........................23
--------------------------------------
14.03 Severability.....................................................24
------------
14.04 Applicable Law...................................................24
--------------
14.05 Assignment.......................................................24
----------
14.06 Notices..........................................................24
-------
14.07 Incorporation of Exhibits and Schedules..........................25
by Reference
------------
14.08 Multiple Counterparts............................................25
---------------------
14.09 Expenses.........................................................26
--------
ATTACHMENTS
EXHIBITS:
10.07 -- Agreements of Affiliates
10.08 -- Restrictions on CEC Common Stock
-iii-
<PAGE>
PLAN OF COMBINATION
This Plan of Combination (the "Agreement") is entered into on this 14th day
of February, 2000 ("Execution Date"), by and among (i) Canaan Energy
Corporation, an Oklahoma corporation, f/k/a Coral Reserves Group, Ltd. ("CEC"),
(ii) Coral Reserves, Inc., an Oklahoma corporation ("Coral, Inc."), (iii) Coral
Reserves Energy Corporation, an Oklahoma corporation ("Coral Corp.") (CEC,
Coral, Inc. and Coral Corp are sometimes collectively referred to herein as the
"Coral Companies"), (iv) Indian Oil Company, an Oklahoma corporation ("Indian"),
(v) Canaan Securities, Inc., a Delaware corporation ("Canaan Securities"), (vi)
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership, an Oklahoma
limited partnership ("1990"), (vii) Coral Reserves Natural Gas Income Fund 1991
Limited Partnership, an Oklahoma limited partnership ("1991"), (viii) Coral
Reserves Natural Gas Income Fund 1992 Limited Partnership, an Oklahoma limited
partnership ("1992"), (ix) Coral Reserves Natural Gas Income Fund 1993 Limited
Partnership, an Oklahoma limited partnership ("1993"), (x) Coral Reserves 1993
Institutional Limited Partnership, an Oklahoma limited partnership ("1993-I"),
(xi) Coral Reserves Energy Income Fund 1995 Limited Partnership, an Oklahoma
limited partnership ("1995"), (xii) Coral Reserves Energy Income Fund 1996
Limited Partnership, an Oklahoma limited partnership ("1996"); (xiii) Coral
Reserves 1996 Institutional Limited Partnership, an Oklahoma limited partnership
("1996-I") (1990, 1991, 1992, 1993, 1993-I, 1995, 1996 and 1996-I are sometimes
collectively referred to herein as the "Partnerships"); and (xiv) Indco, L.L.C.
and certain shareholders of CEC, Indian and Canaan Securities .
RECITALS
WHEREAS, Coral Corp., Coral, Inc., Indian, Canaan Securities, and the
Partnerships have determined to engage in a strategic business combination
pursuant to which all the outstanding capital stock of Indian, Coral Corp.,
Coral, Inc. and Canaan Securities shall be acquired by CEC, and the Acquisition
Subs shall be merged into the Partnerships, in exchange for capital stock of CEC
and other consideration set forth herein, in interdependent steps of a
transaction (the "Combination Transactions") intended to qualify under Section
351 of the Code (as hereinafter defined); and
WHEREAS, the Coral Companies and Indian entered into an Agreement and Plan
of Merger dated February 15, 1999 (the "Coral/Indian Merger Agreement") in which
all the parties thereto made certain representations and warranties and agreed
to certain conditions and covenants;
WHEREAS, the Coral Companies and Indian agree that this Agreement is
intended in part to supplement and enlarge the terms of the Coral/Indian Merger
Agreement to more specifically define the terms of the "Reorganization"
contemplated by the Coral/Indian Merger Agreement; and
WHEREAS, the parties hereto desire to evidence the terms, provisions,
representations, warranties and conditions upon which the Combination
Transactions will be consummated by this binding Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the benefits to be
derived from the mutual observance of the terms and conditions set forth below,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 Defined Terms. For purposes of this Agreement, in addition to
--------------
the terms defined elsewhere herein, the following terms shall have the meanings
set forth in this Article I or in the Section referred to below:
"Acquisition Subs" means (i) Canaan 1990 Acquisition Corporation
----------------
("1990 Sub"), (ii) Canaan 1991 Acquisition Corporation ("1991 Sub"), (iii)
Canaan 1992 Acquisition Corporation ("1992 Sub"), (iv) Canaan 1993 Acquisition
Corporation ("1993 Sub"), (v) Canaan 1993-I Acquisition Corporation ("1993-I
Sub"), (vi) Canaan 1995 Acquisition Corporation ("1995 Sub"), (vii) Canaan 1996
Acquisition Corporation ("1996 Sub"), (viii) Canaan 1996-I Acquisition
Corporation ("1996-I Sub")
"Agreement" means this Plan of Combination and the Exhibits and
---------
Schedules attached hereto and by this reference made a part hereof for all
purposes.
"Canaan Securities" has the meaning set forth in the preface
-----------------
above.
"CEC" means Canaan Energy Corporation, an Oklahoma corporation,
---
f/k/a Coral Reserves Group Ltd.
"Closing" means the taking of the actions contemplated by
-------
Article XIII of this Agreement in order to consummate the transactions
contemplated thereby.
"Closing Date" means the date on which the Closing occurs as set
------------
forth in Section XIII hereof.
"Code" means the Internal Revenue Code as in effect on the date
----
hereof.
"Coral Companies" means Coral Corp., Coral Inc., and CEC.
---------------
"Coral Corp." has the meaning set forth in the preface above.
-----------
"Coral, Inc." has the meaning set forth in the preface above.
-----------
"Coral/Indian Merger Agreement" means the Agreement and Plan of
-----------------------------
Merger dated February 15, 1999 by and between the Coral Companies and
Indian.
-2-
<PAGE>
"Disclosure Schedule" means the Disclosure Schedule attached
-------------------
hereto and any documents listed on such Disclosure Schedule and expressly
incorporated therein by reference, including any supplement thereof
delivered at or before the Closing.
"Effective Time" shall mean the time that a certificate of acquisition
--------------
for the Share Acquisition (as defined in Section 2.01) and certificates of
merger for the Partnership Mergers (as defined in Section 4.02) are
simultaneously filed with the Oklahoma Secretary of State pursuant to the
OGCA and the ORULPA.
"Exchange Value" means the value of each of the parties to this
--------------
Agreement determined in the manner as described in the Prospectus.
"GAAP" means generally accepted accounting principles as recognized by
----
the U.S. Financial Accounting Standards Board.
"Governmental Authority" means any national, state, county or
----------------------
municipal government, domestic or foreign, any agency, board, bureau,
commission, court, department or other instrumentality of any such
government, or any arbitrator in any case that has jurisdiction over any of
the parties hereto.
"Indian" has the meaning set forth in the preface above.
------
"Material Adverse Effect" means a result or consequence that would
-----------------------
materially adversely affect the condition (financial or otherwise), results
of operations or business of any of the parties hereto or the aggregate
value of their individual assets, or would materially impair the ability of
any such parties to own, hold, develop and operate a material portion of
their assets, or would impair any such parties' ability to perform their
individual obligations hereunder or consummate the transactions
contemplated hereby. Changes in the prices of oil or gas no matter how
large shall not be considered a Material Adverse Effect.
"OGCA" means the Oklahoma General Corporation Act.
----
"ORULPA" means the Oklahoma Revised Uniform Limited Partnership Act.
------
"Placing Broker" means those brokers having agreements with Canaan
--------------
Securities entitling them to receive a share of cash distributions from a
Partnership as a result of their sale of units in such Partnership.
"Prospectus" means the prospectus included in the S-4 Registration
----------
Statement in the initial filing thereof.
-3-
<PAGE>
"S-4 Registration Statement" means the registration statement to be
--------------------------
filed by CEC with the SEC pursuant to Section 10.06 hereof and the
Coral/Indian Merger Agreement providing for the registration of all of the
shares of CEC Common Stock to be issued pursuant to this Agreement.
"Tax" means any federal, state, or local gross receipts, license,
---
payroll, employment, excise, severance, income, franchise, property, ad
valorem, sales and use or other tax of any kind, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
----------
or information return or statement relating to Taxes, including any
schedule or attachment thereto.
"1990" has the meaning set forth in the preface above.
----
"1991" has the meaning set forth in the preface above.
----
"1992" has the meaning set forth in the preface above.
----
"1993" has the meaning set forth in the preface above.
----
"1993-I" has the meaning set forth in the preface above.
------
"1995" has the meaning set forth in the preface above.
----
"1996" has the meaning set forth in the preface above.
----
"1996-I" has the meaning set forth in the preface above.
------
"1990 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1990 in accordance with
Section 4.02 hereof.
"1991 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1991 in accordance with
Section 4.02 hereof.
"1992 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1992 in accordance with
Section 4.02 hereof.
"1993 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1993 in accordance with
Section 4.02 hereof.
"1993-I Sub" has the meaning set forth in Acquisition Subs above and
----------
shall be the Acquisition Sub which shall merge into 1993-I in accordance
with Section 4.02 hereof.
-4-
<PAGE>
"1995 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1995 in accordance with
Section 4.02 hereof.
"1996 Sub" has the meaning set forth in Acquisition Subs above and
--------
shall be the Acquisition Sub which shall merge into 1996 in accordance with
Section 4.02 hereof.
"1996-I Sub" has the meaning set forth in Acquisition Subs above and
----------
shall be the Acquisition Sub which shall merge into 1996-I in accordance
with Section 4.02 hereof.
1.02 References and Titles. All references in this Agreement to
---------------------
Exhibits, Schedules, Articles, Sections, subsections and other subdivisions
refer to the corresponding Exhibits, Schedules, Articles, Sections, subsections
and other subdivisions of or to this Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any Articles, Sections,
subsections or other subdivisions of this Agreement are for convenience only, do
not constitute any part of this Agreement, and shall be disregarded in
construing the language hereof. The words "this agreement," "herein," "hereby,"
"hereunder" and "hereof," and words of similar import, refer to this Agreement
as a whole and not to any particular subdivision unless expressly so limited.
The words "this article," "this section" and "this subsection," and words of
similar import, refer only to the Article, Section or Subsection hereof in which
such words occur. The word "or" is not exclusive, and the word "including" (in
its various forms) means "including without limitation." Pronouns in masculine,
feminine or neuter genders shall be construed to state and include any other
gender, and words, terms and titles (including terms defined herein) in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise requires.
As used in the representations and warranties contained in this Agreement,
the phrase "to the knowledge" of the representing party shall mean that such
individual party(ies) or the senior officers of such representing corporate
party, individually or collectively, either (i) know that the matter being
represented and warranted is true and accurate or (ii) have no reason, after
reasonable inquiry, to believe that the matter being represented and warranted
is not true and accurate.
ARTICLE II
ACQUISITION OF INDIAN BY CEC AND
RECLASSIFICATION OF CEC COMMON STOCK
2.01 The Share Acquisition; Effective Time. Subject to the terms and
--------------------------------------
conditions of this Agreement, CEC shall acquire the shares of Indian in
accordance with the provisions of Section 1090.1 of the OGCA (the "Share
Acquisition"). The Share Acquisition shall become effective at the Effective
Time.
2.02 Certificate of Incorporation. The respective certificate of
----------------------------
incorporation of CEC and Indian in effect immediately prior to the Effective
Time shall remain in effect thereafter unless and until amended as provided by
law and such certificate of incorporation.
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<PAGE>
2.03 Bylaws. The respective bylaws of CEC and Indian in effect
------
immediately prior to the Effective Time shall remain in effect thereafter unless
and until amended or repealed as provided by applicable law.
2.04 Effect on Securities of Indian. At the Effective Time, by virtue
------------------------------
of the Share Acquisition and without any action on the part of the holder of any
shares of Common Stock of Indian:
(a) Cancellation of Common Stock in Treasury. All shares of
----------------------------------------
Common Stock of Indian and any of the shares of preferred stock of Indian
that are held in the treasury of Indian shall be canceled and no
consideration shall be delivered in exchange therefor.
(b) Exchange for CEC Common Stock. Each of the holders of shares
-----------------------------
of Common Stock of Indian issued and outstanding immediately prior to the
Effective Time shall receive his proportionate share of the total shares,
rounded to the nearest whole share, of CEC Common Stock allocated to
Indian based on its Exchange Value as described in the Prospectus.
2.05 Exchange of Certificates. On and after the Effective Time, CEC
------------------------
shall deliver certificates representing the shares of CEC Common Stock as
determined above in Section 2.04(b) to be issued in the Share Acquisition
against surrender by the holders of certificates representing the shares of such
Common Stock of Indian (the "Certificates"). Until surrendered and exchanged as
contemplated by this Section 2.05, each Certificate shall be deemed at any time
after the Effective Time to represent solely the right to receive upon such
surrender shares of CEC Common Stock, as provided by this Article II.
2.06 Reclassification of CEC Common Stock. Immediately prior to the
------------------------------------
Effective Time, the shares of CEC Common Stock shall be reclassified into the
number of shares of CEC Common Stock allocated to CEC based on its Exchange
Value as described in the Prospectus and, at the Closing, each shareholder shall
surrender his certificates representing his pre-Combination Transactions shares
of common stock of CEC in exchange for his pro rata number of total shares of
CEC Common Stock allocated to CEC.
2.07 Modification to Exchange Value. The Exchange Value for Indian or
------------------------------
any other party or the method of calculation of the Exchange Value will not be
modified in any way that reduces Indian's Exchange Value or its relative
Exchange Value compared to the other parties without the consent of Indian.
-6-
<PAGE>
ARTICLE III
ACQUISITION OF CORAL CORP., CORAL, INC.
AND CANAAN SECURITIES COMMON STOCK
3.01 Transfer of Coral Corp., Coral, Inc. and Canaan Securities
----------------------------------------------------------
Shares. Subject to the terms and conditions of this Agreement, at the Effective
- ------
Time, the shareholders of Coral Corp. and Coral, Inc. and the sole shareholder
of Canaan Securities shall sell, assign, transfer, convey, contribute to the
capital of, and deliver to CEC, and CEC shall acquire, purchase and receive from
the shareholders of Coral Corp. and Coral, Inc. and the sole shareholder of
Canaan Securities, at the Closing hereunder, all right, title and interest in
and to all of the shares of Common Stock of Coral Corp., Coral, Inc. and Canaan
Securities, free and clear of all liabilities, obligations, liens and
encumbrances whatsoever.
3.02 Issuance of CEC Common Stock. The shareholders of Coral Corp.
-----------------------------
and Coral, Inc. and the sole shareholder of Canaan Securities shall receive the
total shares, rounded to the nearest whole share, of CEC Common Stock allocated
to such entities based on their relative Exchange Values as described in the
Prospectus.
3.03 Effects of Contribution of Canaan Securities Shares. After
---------------------------------------------------
giving effect to the transfer and purchase as contemplated by Sections 3.01 and
3.02, Coral Corp., Coral, Inc. and Canaan Securities shall be direct wholly-
owned subsidiaries of CEC.
3.04 Certificate of Incorporation. The respective Articles of
----------------------------
Incorporation of Coral Corp., Coral, Inc. and Canaan Securities in effect
immediately prior to the Effective Time shall remain in effect thereafter,
unless and until amended as provided by applicable law and such Articles of
Incorporation.
3.05 Bylaws. The respective bylaws of Coral Corp., Coral, Inc. and
------
Canaan Securities in effect immediately prior to the Effective Time shall remain
in effect thereafter, unless and until amended or repealed as provided by
applicable law.
ARTICLE IV
PARTNERSHIP MERGERS
4.01 Partnership Votes. Prior to the Effective Time, each of the
-----------------
Partnerships shall solicit the vote of the holders of partnership interests in
such Partnerships to approve this Agreement and the resulting Partnership
Mergers discussed below in Section 4.02 (the "Partnership Vote"). Approval of
this Agreement by each Partnership requires the approval of each General Partner
and Additional General Partner and the approval of holders of more than fifty
percent (50%) of the partnership interests owned by the limited partners
calculated based on the limited partners' share in the profits of the
Partnership determined based on the profit sharing ratio in effect on the date
the vote is taken. The Partnerships shall engage an independent third party to
receive and tabulate all votes and dissents in connection with the Partnership
Votes and such tabulation shall be available
-7-
<PAGE>
to the General Partner and any limited partners upon request at any time during
and after voting occurs.
4.02 Partnership Mergers.
-------------------
(a) The Partnership Mergers. Subject to the approval of this
-----------------------
Agreement by the Partnerships as provided in Section 4.01 and subject to
the terms and conditions of this Agreement, the Acquisition Subs shall be
merged into the Partnerships, with each Acquisition Sub merging into the
Partnership with the like numerical description in such Acquisition Sub's
name as the corresponding Partnership in accordance with the provisions of
Section 1090.2 of the OGCA (the "Partnership Mergers"). Following the
Partnership Mergers, the separate existence of the Acquisition Subs shall
thereupon cease, and the respective merged Partnerships shall be the
surviving entities (the "Surviving Entities") of the Partnership Mergers
and shall continue in existence under the laws of the State of Oklahoma.
(b) Effective Time of the Partnership Mergers. The Partnership
-----------------------------------------
Mergers shall become effective at the Effective Time.
(c) Certificates of Merger. Certificates of Merger evidencing
----------------------
the transactions contemplated in this Section 4.02 shall be filed with the
Oklahoma Secretary of State at the Effective Time.
(d) Partnership Agreement. The respective Partnership Agreement
---------------------
of each Partnership as in effect immediately prior to the Effective Time
shall be the governing document of the Surviving Entities and thereafter
may be amended in accordance with their respective terms and as provided by
law.
4.03 Effect on Partnership Interests of Partnerships. At the
-----------------------------------------------
Effective Time, by virtue of the Partnership Mergers and without any action on
the part of partners of the Partnership, each limited partner, and each
additional General Partner in a Partnership, shall receive such partner's
proportionate share of CEC Common Stock allocated to such Partnership based on
the Exchange Value of such Partnership, as calculated as described in the
Prospectus. The relative number of shares each partner is entitled to receive
shall be computed in the manner described in the Prospectus. The number of
shares issuable to each Partnership in the Partnership Mergers shall be rounded
to the nearest whole share. The Partnership Mergers shall have no effect on the
General Partners', Canaan Securities' or the Placing Brokers' interests in the
Partnerships. The Exchange Value for each Partnership shall be first allocated
to limited partners until the limited partners' collective "Return" is 115% of
their aggregate investment. For this purpose, Return shall mean (x) the sum of
historical cash distributions to limited partners prior to the Closing Date plus
Exchange Value allocated to limited partners, divided by (y) the aggregate
original capital contributions of limited partners.
-8-
<PAGE>
4.04 Treatment of Dissenting Partners.
--------------------------------
(a) Demand for Dissenter's Rights of Appraisal. If a Partnership
------------------------------------------
receives approval of this Agreement by holders of less than seventy-five
percent (75%) (based on the percentage interests in profits) of the
partnership interests, including the interests of the General Partner and
the additional General Partners, the limited partners in such Partnership
will be entitled to exercise dissenter's rights of appraisal. In order to
exercise the right to dissent, a limited partner must not vote in favor of
this Agreement and must deliver to the General Partner of the Partnership
prior to the Partnership Vote a written notice stating his name and that he
demands dissenters rights of appraisal. A proxy or vote against this
Agreement will not be sufficient demand for such dissenter's rights of
appraisal.
(b) Procedure for Dissenter's Rights of Appraisal. A dissenting
---------------------------------------------
limited partner will be entitled to receive a cash payment for shares of
CEC Common Stock issued to him at a price equal to the value of his
partnership interests in the Partnership exchanged therefrom determined as
provided in this Section 4.04. Within ten (10) days after the Closing, CEC
will notify any dissenting limited partners who have properly perfected
their dissenter's rights of appraisal of this fact (the "Dissenting
Partners"). For a period of thirty (30) days after the date of the notice,
either CEC or any Dissenting Partner can propose and thereafter negotiate a
price that will be paid for the Dissenting Partner's interest in the
Partnership, provided that in no event shall the price paid to Dissenting
Partners in the same Partnership be computed in a different manner. If CEC
and all Dissenting Partners are unable to reach an agreement within such
thirty (30) day period, Madison Energy Advisors (or such other independent
appraiser as CEC may select if Madison Energy Advisors is unable or
unwilling to serve) (the "Appraiser") will determine the value of a
Dissenting Partner's interest in the Partnership based on appraisal of the
Partnership assets which will value the Partnership assets as if sold in an
orderly manner in a reasonable period of time and in a manner consistent
with appropriate industry practice. The Appraiser shall have ninety (90)
days to determine the value of the Dissenting Partners' partnership
interests. The determination of the Appraiser shall be final. CEC shall
pay the Dissenting Partners the amount determined by the Appraiser within
fifteen (15) days of such determination, with interest from the Closing
Date to the payment date at the "prime rate" as published in the Wall
Street Journal from time to time between the Closing Date and the payment
date. All fees of the Appraiser shall be borne by CEC.
4.05 Treatment of Cash Electing Partners. Any limited partner in a
-----------------------------------
Partnership which approves this Agreement and who votes in favor of such
approval may elect to receive cash in an amount equal to seventy-five percent
(75%) of such limited partner's share of the Exchange Value allocated to such
limited partner pursuant to Section 4.03 (a "Cash Electing Partner"). The
maximum amount of cash available in the aggregate to pay Dissenting Partners and
the Cash Electing Partners is $5,000,000 ("Cash Limit"). However, the
Dissenting Partners will receive priority over the Cash Electing Partners in the
allocation of the Cash Limit. Therefore, if there are more claims by Dissenting
Partners and Cash Electing Partners than the Cash Limit after estimated
-9-
<PAGE>
claims of Dissenting Partners, such Cash Electing Partners shall receive a pro-
rata share of the remaining cash available and any remaining amount due the Cash
Electing Partners shall be paid in the form of CEC Common Stock, rounded to the
nearest whole share. If a limited partner elects to become a Cash Electing
Partner, he will be deemed to have received such limited partner's relative
share of the CEC Common Stock he would have received under Section 4.03 and
immediately thereafter sold such shares to CEC for the amount due for such cash
election under this Section 4.05. If a limited partner fails to make an election
to receive cash, such limited partner will be deemed to have elected to receive
his proportionate share of CEC Common Stock as provided in Section 4.03. CEC
shall make payments to all Cash Electing Partners within five (5) days after the
Effective Time.
4.06 Issuance of Certificates. Within five (5) business days after
------------------------
the receipt of properly completed and executed letters of transmittal, CEC shall
deliver or cause to be delivered certificates representing the shares of CEC
Common Stock issuable in the Partnership Mergers to all parties. Certificates
for shares issuable to Dissenting Partners and Cash Electing Partners shall be
issued in the name of an exchange agent designated by CEC with instructions to
deliver to CEC upon receipt of evidence from CEC that payments required under
this Agreement to be made to such parties have been made.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
CORAL CORP. AND CORAL, INC.
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article V,
Coral Corp. and Coral, Inc. represent and warrant to the other parties hereto as
of the date of this Agreement that its representations and warranties in the
Coral/Indian Merger Agreement are true and correct.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INDIAN
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article VI,
Indian represents and warrants to the other parties hereto as of the date of
this Agreement and as of the Closing Date that its representations or warranties
contained in the Coral/Indian Merger Agreement, except as modified herein, are
true and correct, taking into consideration any materiality, knowledge or other
similar standards in the Coral/Indian Merger Agreement. Furthermore, Indian and
each of the Indian shareholders, individually as to himself only and not
jointly, represent and warrant to the other parties hereto as of the date of
this Agreement and as of the Closing Date as follows:
6.01 Ownership of Shares. The shareholders of Indian as set forth on
-------------------
the signature pages hereof are all the shareholders of record of Indian and each
such shareholder listed thereon owns all right, title and interest in the shares
of Indian listed next to his name free and clear of all liens, claims,
encumbrances, options, pledges, trusts, voting trusts and restrictions of any
kind whatsoever
-10-
<PAGE>
except for restrictions on the transfer under the certificate of incorporation
and bylaws of Indian and restrictions and claims under the Lasuzzo Agreements.
Except for the ownership described on the signature page of this Agreement, each
shareholder has no record or direct or indirect beneficial ownership whatsoever
in capital stock of Indian or in rights to acquire any such capital stock,
except for shares issuable pursuant to Section 10.04 hereof or under the Lasuzzo
Agreements. Without in any way limiting the generality of the foregoing, each
shareholder of Indian hereby waives, releases and extinguishes any and all
rights and options which each shareholder has or may have to purchase shares
from Indian or shares held by any other shareholder or to require Indian or any
other shareholder to first offer to sell shares to Indian or the shareholders,
or otherwise with respect to the offer, purchase or sale of shares, except any
such rights as may be contained in the certificate of incorporation or bylaws of
Indian, or in the Lasuzzo Agreements. The Lasuzzo Agreements shall mean (i) the
Stock Rights Certificate between Indian and Lasuzzo dated April 1, 1999; and
(ii) the letter agreement dated September 29, 1999 between Richard R. Dunning
and Lasuzzo.
6.02 Approval and Adoption of Agreements. The execution and delivery
-----------------------------------
by Indian and the shareholders of Indian of this Agreement and the Coral/Indian
Merger Agreement and the documents to be delivered on or before the Closing
pursuant to such agreements ("Indian Closing Documents") have been duly and
validly authorized by all the necessary corporate actions of Indian, including
approval by Indian's shareholders. Assuming the due authorization, execution
and delivery by each of the other parties hereto, and the binding effect
thereon, this Agreement and the Coral/Indian Merger Agreement constitute, and
the Indian Closing Documents when executed and delivered by Indian and Indian's
shareholders will constitute, legal, valid and binding obligations of Indian and
Indian's shareholders enforceable against them in accordance with their
respective terms.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF CANAAN SECURITIES
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article VII,
Canaan Securities represents and warrants to the other parties hereto as of the
date of this Agreement and as of the Closing Date as follows:
7.01 Organization, Standing and Qualification. Canaan Securities is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Canaan Securities has all requisite corporate power
and authority to carry on its business as now being conducted and to own, lease
or operate its properties as and in the places where such business is now
conducted and such properties are now owned, leased or operated. Canaan
Securities is qualified and in good standing to do business in all states in
which the nature of its business requires it to be qualified.
7.02 Execution, Delivery and Performance of Agreement; Authority.
-----------------------------------------------------------
Canaan Securities has full corporate power and authority to enter into this
Agreement, perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and
-11-
<PAGE>
performance of this Agreement by Canaan Securities will not, with or without the
giving of notice or the passage of time, or both, conflict with, result in a
default, right to accelerate or loss of rights under, or result in the creation
of any lien, charge or encumbrance pursuant to, any provision of Canaan
Securities' certificate of incorporation or bylaws or any franchise, mortgage,
deed of trust, lease, license, agreement, understanding, or to the knowledge of
Canaan Securities, any law, ordinance, rule or regulation or any order, judgment
or decree to which Canaan Securities is a party or by which it may be bound or
affected. The execution and delivery by Canaan Securities of this Agreement and
the documents to be delivered by Canaan Securities on or before Closing pursuant
to this Agreement ("Canaan Securities Closing Documents") have been duly and
validly authorized by all necessary corporate actions of Canaan Securities,
including all of its shareholders. Assuming the due authorization, execution and
delivery by each of the other parties, and the binding effect thereon, this
Agreement constitutes, and the Canaan Securities Closing Documents when executed
and delivered by Canaan Securities will constitute, legal, valid and binding
obligations of Canaan Securities enforceable against it in accordance with their
respective terms.
7.03 Capitalization. The authorized capital stock of Canaan
--------------
Securities consists of 1,000 shares of common stock, par value $0.01 per share,
of which 500 shares are issued and outstanding as of the date hereof. Except as
set forth in the Disclosure Schedule, there are no outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments, convertible
securities or other agreements or arrangements of any character or nature
whatsoever under which Canaan Securities may become obligated to issue, assign,
transfer or repurchase any shares of the capital stock or other equity interest
of Canaan Securities. All of the Canaan Securities Common Stock outstanding
has been validly issued and is fully paid and nonassessable.
7.04 Financial Statements. Canaan Securities has furnished or made
--------------------
available to the other parties hereto (i) its audited consolidated financial
statements for each of the fiscal years in the three-year period ended December
31, 1998, including balance sheets as of the end of 1997 and 1998 and statements
of income, cash flows and shareholders' equity for each of the three years then
ended (collectively, the "Canaan Securities Audited Financial Statements") and
(ii) its unaudited balance sheet as of September 30, 1999 (the "Canaan
Securities Unaudited Interim Balance Sheet") and unaudited statements of income,
cash flows and shareholders' equity for the nine month period ended September
30, 1999 (collectively the "Canaan Securities Unaudited Interim Financial
Statements.") (The Canaan Securities Audited Financial Statements and the Canaan
Securities Unaudited Interim Financial Statements are sometimes collectively
referred to herein as the "Canaan Securities Financial Statements"). The Canaan
Securities Financial Statements which are incorporated into this Agreement for
all purposes are complete and correct in all material respects, have been
prepared in accordance with GAAP; provided, however, that the Canaan Securities
Unaudited Interim Financial Statements are subject to normal year-end
adjustments (which will not be material individually or in the aggregate) and
lack footnotes.
7.05 Absence of Undisclosed Liabilities. Canaan Securities has no
----------------------------------
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become
-12-
<PAGE>
due, including liability for Taxes), except for (i) liabilities set forth on the
face of the Canaan Securities Financial Statements, (ii) liabilities which have
arisen after the date of the Canaan Securities Unaudited Interim Balance Sheet
in the ordinary course of business and consistent with past experience and
practice, and (iii) liabilities under this Agreement.
7.06 Absence of Material Adverse Effect Since Interim Balance Sheet
--------------------------------------------------------------
Date. Since September 30, 1999, no event has occurred that would have a
- ----
Material Adverse Effect on Canaan Securities.
7.07 Compliance with Laws, Material Agreements and Permits. Canaan
-----------------------------------------------------
Securities is not in violation of, or in default in any material respect under,
and no event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under, (i) its articles of incorporation or
by-laws, (ii) any applicable law, rule, regulation, order, writ, decree or
judgment of any Governmental Authority, or (iii) any agreement to which Canaan
Securities is a party or to which any of their respective assets is subject or
bound, except (in the case of clause (ii) and (iii) above) for any violation or
default that would not, individually or in the aggregate, have a Material
Adverse Effect on Canaan Securities. Canaan Securities has obtained and holds
all permits, licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the lawful conduct
of its business or the lawful ownership, use and operation of its assets
("Canaan Securities Permits"), except for Canaan Securities Permits which the
failure to obtain or hold would not, individually or in the aggregate, have a
Material Adverse Effect on Canaan Securities. Canaan Securities is in
compliance with the terms of its Canaan Securities Permits, except where the
failure to comply would not, individually or in the aggregate, have a Material
Adverse Effect on Canaan Securities. No investigation or review by any
Governmental Authority with respect to Canaan Securities is pending or, to the
knowledge of Canaan Securities, threatened, other than those the outcome of
which would not, individually or in the aggregate, have a Material Adverse
Effect on Canaan Securities.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article
VIII, the Partnerships represent and warrant to the other parties hereto as of
the date of this Agreement and as of the Closing Date as follows:
8.01 Organization, Standing and Qualification. The Partnerships are
----------------------------------------
limited partnerships duly organized, validly existing and in good standing under
the laws of the State of Oklahoma. The Partnerships have all requisite power
and authority to carry on their businesses as now being conducted and to own,
lease or operate its properties as and in the places where such businesses are
now conducted and such properties are now owned, leased or operated. The
Partnerships are qualified and in good standing to do business in all states in
which the nature of their businesses requires them to be qualified.
-13-
<PAGE>
8.02 Execution, Delivery and Performance of Agreement; Authority. The
-----------------------------------------------------------
Partnerships have full power and authority to enter into this Agreement, perform
their obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by the
Partnerships will not, with or without the giving of notice or the passage of
time, or both, conflict with, result in a default, right to accelerate or loss
of rights under, or result in the creation of any lien, charge or encumbrance
pursuant to, any provision of the Partnerships' respective partnership
agreements or any franchise, mortgage, deed of trust, lease, license, agreement,
understanding, or to the knowledge of the General Partners of the Partnerships,
any law, ordinance, rule or regulation or any order, judgment or decree to which
any of the Partnerships are a party or by which they may be bound or affected.
The execution and delivery by the Partnerships of this Agreement and the
documents to be delivered by the Partnerships on or before Closing pursuant to
this Agreement (the "Partnership Closing Documents") have been duly and validly
authorized by all necessary actions of the General Partners of the Partnerships,
subject to receipt of necessary approval of the limited partners. Assuming the
due authorization, execution and delivery by each of the other parties, and the
binding effect thereon, this Agreement constitutes, and the Partnership Closing
Documents when executed and delivered by the General Partners of the Partnership
will constitute, legal, valid and binding obligations of the Partnerships
enforceable against them in accordance with their respective terms.
8.03 Capitalization. Except as set forth in the Disclosure Schedule,
--------------
there are no outstanding subscriptions, options, warrants, calls, contracts,
demands, commitments, convertible securities or other agreements or arrangements
of any character or nature whatsoever under which the Partnerships may become
obligated to issue, assign, transfer or repurchase any partnership interests of
the Partnership.
8.04 Financial Statements. The General Partners of the Partnerships
--------------------
have furnished or made available to the other parties hereto (i) their audited
consolidated financial statements for each of the fiscal years in the three-year
period ended December 31, 1998, including balance sheets as of the end of 1997
and 1998 and statements of income, cash flows and shareholders' equity for each
of the three years then ended (collectively, the "Partnership Audited Financial
Statements") and (ii) their unaudited balance sheet as of September 30, 1999
(the "Partnership Unaudited Interim Balance Sheet") and unaudited statements of
income, cash flows and shareholders' equity for the nine month period ended
September 30, 1999 (collectively the "Partnership Unaudited Interim Financial
Statements.") (The Partnership Audited Financial Statements and the Partnership
Unaudited Interim Financial Statements are sometimes collectively referred to
herein as the "Partnership Financial Statements"). The Partnership Financial
Statements which are incorporated into this Agreement for all purposes are
complete and correct in all material respects, have been prepared in accordance
with GAAP; provided, however, that the Partnership Unaudited Interim Financial
Statements are subject to normal year-end adjustments (which will not be
material individually or in the aggregate) and lack footnotes.
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<PAGE>
8.05 Absence of Undisclosed Liabilities. The Partnerships have no
----------------------------------
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due, including liability for
Taxes), except for (i) liabilities set forth on the face of the Partnership
Financial Statements, (ii) liabilities which have arisen after the date of the
Partnership Unaudited Interim Balance Sheet in the ordinary course of business
and consistent with past experience and practice, and (iii) liabilities under
this Agreement.
8.06 Absence of Material Adverse Effect Since Interim Balance Sheet
--------------------------------------------------------------
Date. Since September 30, 1999, no event has occurred that would have a
- ----
Material Adverse Effect on a Partnership.
8.07 Compliance with Laws, Material Agreements and Permits. The
-----------------------------------------------------
Partnerships are not in violation of, or in default in any material respect
under, and no event has occurred that (with notice or the lapse of time or both)
would constitute a violation of or default under, (i) their respective
certificates of limited partnership, (ii) any applicable law, rule, regulation,
order, writ, decree or judgment of any Governmental Authority, or (iii) any
agreement to which the Partnerships are a party or to which any of their
respective assets are subject or bound, except (in the case of clause (ii) and
(iii) above) for any violation or default that would not, individually or in the
aggregate, have a Material Adverse Effect on any of the Partnerships. The
General Partners of the Partnerships have obtained and hold all permits,
licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the lawful conduct
of their businesses or the lawful ownership, use and operation of their assets
("Partnership Permits"), except for Partnership Permits which the failure to
obtain or hold would not, individually or in the aggregate, have a Material
Adverse Effect on the Partnerships. The Partnerships are in compliance with the
terms of their Partnership Permits, except where the failure to comply would
not, individually or in the aggregate, have a respective Material Adverse Effect
on any of the Partnerships. No investigation or review by any Governmental
Authority with respect to any of the Partnerships is pending or, to the
knowledge of the General Partners of the Partnerships, threatened, other than
those the outcome of which would not, individually or in the aggregate, have a
respective Material Adverse Effect on any of the Partnerships.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF CEC
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article IX,
CEC represents and warrants to the other parties hereto as of the date of this
Agreement and as of the Closing Date that its representations and warranties in
the Coral/Indian Merger Agreement are true and correct, taking into
consideration any materiality, knowledge or other similar standards in the
Coral/Indian Merger Agreement, and further represents and warrants as follows:
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<PAGE>
9.01 Capitalization. The authorized capital stock of CEC consists of
--------------
(i) 50,000,000 shares of common stock, par value $0.01 per share, of which 632
shares are issued and outstanding as of the date hereof, and (ii) 1,000,000
shares of preferred stock, par value $0.01 per share, none of which are
outstanding. Except as set forth in the Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of any
character or nature whatsoever under which CEC may become obligated to issue,
assign, transfer or repurchase any shares of the capital stock or other equity
interest of CEC. All of the CEC Common Stock outstanding has been validly
issued and is fully paid and nonassessable. All of the CEC Common Stock
issuable pursuant to this Agreement shall when issued be validly issued, fully
paid and nonassessable.
9.02 Acquisition Subs. Each of the Acquisition Subs will be prior to
----------------
the Effective Time validly existing and in good standing under the laws of
Oklahoma and 100% owned by CEC.
ARTICLE X
COVENANTS
10.01 Access to Records and Properties; Operation of the Business.
-----------------------------------------------------------
Except to the extent limited by agreement with third parties, between the date
of this Agreement and the Closing Date, the Coral Companies, Indian, and the
Partnerships shall continue to comply with the provisions of Section 5 of the
Coral/Indian Merger Agreement. Canaan Securities shall give CEC full access to
all its respective premises, properties and books and records and will cause its
employees, agents and representatives to furnish CEC with financial and
operating data and other information with respect to Canaan Securities as CEC
from time to time reasonably requests. Except as required by law, all
information furnished pursuant hereto shall not be disclosed without the consent
of Canaan Securities and shall be kept confidential from all third parties. In
the event of any termination of this Agreement, CEC will return all documents,
work papers and other materials (including all copies thereof) obtained pursuant
hereto and in connection with the transactions contemplated hereby, and after
such termination (i) will use all reasonable efforts to keep confidential any
information obtained pursuant to this Agreement, except to the extent required
by law or unless such information is readily ascertainable from public or
published information or trade sources, and (ii) will not use any of the
information obtained in connection with the transactions contemplated by this
Agreement, except in connection with such transactions. From the date hereof to
the Closing Date, except to the extent that CEC shall otherwise consent, Canaan
Securities hereto shall operate its business substantially as presently operated
and only in the ordinary course, and, consistent with such operation, shall use
its best efforts to preserve intact their respective present business
organizations and relationships with persons having dealings with them. The
provisions of this Section 10.01 shall be read to be consistent with and in
addition to any other agreements by, among or between the parties hereto
relating to restrictions on the operation of their respective businesses.
-16-
<PAGE>
10.02 Announcements. All pre-Closing and post-Closing press releases,
-------------
and other public announcements with respect to this Agreement and the
transactions contemplated by this Agreement shall be approved by CEC prior to
the issuance thereof.
10.03 Shareholder and Director Approval. By execution hereof, all of
---------------------------------
the shareholders and directors of CEC, Coral Corp., Coral, Inc., Indian and
Canaan Securities, do hereby consent to and approve of this Agreement and all
transactions related thereto and all such respective corporate transactions
required to give effect to such consent and approval.
10.04 Indian Shareholder Debt. On or before the Closing Date, all
-----------------------
indebtedness of Indian to its shareholders or their affiliates (other than
Indco, L.L.C.) will be canceled, which will be considered as partial or full
debt forgiveness or contributions to capital of Indian by each shareholder or
their affiliates (other than Indco, L.L.C.), any of whom may be issued such
additional shares of common stock of Indian at such prices for each dollar of
debt contributed or forgiven immediately before the Closing of the Share
Acquisition as the shareholders of Indian or their affiliates may agree, so that
such shares will be taken into consideration in dividing the shares of CEC to be
delivered to the shareholders of Indian. On or before the Closing Date, the
obligations of Indco, L.L.C. to Indian will be distributed as a dividend so that
Indco will have no further obligation to Indian. CEC will use its best efforts
to cause any existing obligation of Indian to Indco, L.L.C. for funds advanced
to Indian to be paid in full on or before the Closing, but if Indian is unable
to do so, Indco agrees that such obligation may be satisfied by CEC delivering
additional shares of CEC Common Stock valued at the Indian Exchange Value per
share.
10.05 Amendment of Coral/Indian Merger Agreement. By execution of this
------------------------------------------
Agreement, the parties agree to the following amendments to the Coral/Indian
Merger Agreement:
(a) the March 1, 2000 date contained in Section 1.14(d)(ii) shall
be amended to be September 1, 2000;
(b) The word "less" in the third sentence of Section 1.01 is
amended to be "plus" for purposes of calculating the adjustment to Indian's
Exchange Value caused by the payment of the Contingent Production Payment;
and
(c) The last sentence of Section 1.04 requiring Indian to
maintain $750,000 in Net Working Capital is deleted.
Otherwise, the Coral/Indian Merger Agreement shall remain in full force and
effect except to the extent of any inconsistency between this Agreement and the
Coral/Indian Merger Agreement, in which event this Agreement shall control.
-17-
<PAGE>
10.06 Securities Law Matters.
----------------------
(a) All the parties hereto shall cooperate with CEC in its prompt
preparation of the S-4 Registration Statement. CEC shall file the S-4
Registration Statement as soon as practicable after the Execution Date
hereof. CEC shall use its best efforts, and the other parties hereto shall
cooperate with CEC, to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing.
(b) CEC will cause the S-4 Registration Statement (including the
Prospectus) at the time it becomes effective under the Securities Act, to
comply as to form in all material respects with the applicable provision of
the Securities Act, the Exchange Act and the Rules and Regulations of the
SEC thereunder. CEC will comply with all provisions of the Securities Act,
the Exchange Act and the Rules and Regulations of the SEC thereunder, and
all applicable state securities laws in connection with the transactions
contemplated by this Agreement.
10.07 Agreements of Affiliates. At least 30 days prior to the
------------------------
Effective Time, all the parties hereto shall cause to be prepared and delivered
to CEC a list identifying all Persons who, at the time of the Effective Time,
may be deemed to be "affiliates" of such parties as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act. All such parties
shall use their best efforts to cause each Person who is identified as an
affiliate of such party in such list to execute and deliver to CEC, on or prior
to the Closing Date, a written agreement, in the form attached hereto as Exhibit
-------
10.07 (if such Person has not executed and delivered an agreement) substantially
- -----
to the same effect contemporaneously with the execution of this Agreement. CEC
shall be entitled to place legends as specified in such agreements on the CEC
Certificates representing any Common Stock to be issued to such Persons in the
Combination Transactions.
10.08 Restrictions on CEC Common Stock. At the Effective Time, the
--------------------------------
shareholders of the Coral Companies, and Canaan Securities and certain
shareholders of Indian shall enter into an agreement in substantially the form
set forth in Exhibit 10.08 hereto restricting such shareholders' ability to
-------------
sell, transfer and acquire shares of CEC Common Stock and granting each such
shareholder certain rights regarding such shares of CEC Common Stock as
contemplated by the Coral/Indian Merger Agreement.
10.09 Canaan Securities Intra-Company Indebtedness. At or before the
--------------------------------------------
Effective Time, the sole shareholder of Canaan Securities shall repay all the
indebtedness due to Canaan Securities from the sole shareholder, and as of the
Effective Time, there shall be no indebtedness due from Canaan Securities to, or
to Canaan Securities from, any of the officers, directors, employees, agents or
its sole shareholder, or any relative of any such persons, or any trust,
corporation or other entity in which any such persons or any relatives of such
persons has any interest (collectively, "Related Parties"), other than amounts
due from Canaan Securities to employees for salary, bonuses or expenses
reflected in the financial statements of Canaan Securities or arising after the
date thereof
-18-
<PAGE>
in the ordinary course of business. All indebtedness due to Canaan Securities
from any of the Related Parties shall be paid in full prior to the Effective
Time.
10.10 Release of Guarantees. At the Closing, CEC shall cause the
----------------------
release of the personal guarantees and pledges or security agreements of Cibola
Corporation, Indco and the shareholders of Indian and the Coral Companies with
respect to any bank debt of Indian, the Coral Companies or the Partnerships. At
the Closing, CEC shall also cause the release of any security interests in the
notes of Indco, L.L.C. to Indian.
10.11 Cancellation of Canaan Securities Agreements. At the Closing, all
--------------------------------------------
of the dealer manager agreements between the Partnerships and Canaan Securities
shall be canceled and terminated and CEC agrees to issue to the Placing Brokers
shares of CEC Common Stock and cash calculated as described in the Prospectus to
satisfy the obligations of Canaan Securities to the Placing Brokers under the
terms of its existing selling agreements with the Placing Brokers.
10.12 Reports under the Securities Exchange Act of 1934. With a view
-------------------------------------------------
to making available to all persons who may be deemed to be "affiliates" as that
term is used in Paragraphs (c) and (d) of Rule 145 under the Securities Act the
benefits of Rule 144 promulgated under the Securities Act and any other rule or
regulation of the SEC that may at any time permit such affiliates to sell CEC
Common Stock to the public without registration, CEC agrees to (i) file with the
SEC in a timely manner all reports and other documents required of the SEC under
the Securities Act and the Exchange Act and (ii) furnish to any such affiliate,
forthwith upon request (a) a written statement by CEC that it has complied with
the reporting requirements of Rule 144 and the Exchange Act; (b) a copy of the
most recent annual or quarterly report of CEC and such other reports or
documents so filed by CEC; and (c) such other information as may be reasonably
requested in availing any such affiliate of any rule or regulation of the SEC
which permits the selling of any such securities without registration.
10.13 Indemnification. CEC shall, to the fullest extent permitted
---------------
under applicable law, indemnify and hold harmless, each present and former
director or officer of Indian against all costs and expenses (included
reasonable attorneys fees), judgments, fines, losses, claims, damages,
liabilities and settlement amounts paid in connection with any claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), whether civil, administrative or investigative, arising out of or
pertaining to any claim or action by any limited partners of any of the
Partnerships relating to the transactions contemplated by this Agreement;
provide, however, that CEC shall not be liable for any amounts in connection
with any settlement effected by any indemnified party without CEC's prior
written consent (which consent shall not be unreasonably withheld). Without
limiting the foregoing, in the event of any such claim, action, suit, proceeding
or investigation, CEC shall pay the fees and expenses of counsel selected by any
such indemnified party, which counsel shall be reasonably satisfactory to CEC,
promptly after statements therefor are received (unless CEC shall elect to
defend such action). If CEC shall elect to defend any such action and so long
as CEC diligently continues to defend, CEC shall have the right to control the
investigation, defense and/or settlement of each such action or matter, at its
cost and expense,
-19-
<PAGE>
including use of counsel of its choice reasonably satisfactory to the
indemnified party; provided, however, that CEC will consult with the indemnified
party and take the views of the indemnified party into consideration in
effecting or rejecting any settlement; provided, further, that if both CEC and
any indemnified party are parties to any litigation, such indemnified party
shall be entitled to retain separate counsel if there are actual or potential
conflicts of interest between such indemnified party and CEC at CEC's cost and
expense; provided, further, that CEC shall not entered into any settlement of
any action or matter that does not include a complete and unconditional release
of such indemnified party, without the prior written consent of such indemnified
party which consent shall not be unreasonably withheld. CEC and any indemnified
party shall cooperate with each other in connection with the investigation and
defense of any action or matter for which indemnification is provided under this
Section. The obligation of CEC under this Section 10.13 shall not be terminated
or modified in such manner as to adversely affect any indemnified party without
the consent of the affected indemnified party (it being expressly agreed that
each such indemnified party shall be a third party beneficiary of this Section
10.13).
ARTICLE XI
CONDITIONS
11.01 Conditions to Obligations of all Parties. In addition to the
----------------------------------------
conditions contained in the Coral/Indian Merger Agreement, all obligations of
each of the parties hereto at the Closing are subject to the fulfillment by each
of the parties hereto of each of the following conditions at or prior to the
Closing, any of which may be waived in whole or in part by the party to whom
such condition benefits, and in such cases where multiple parties benefit from a
condition to be waived, each such party must agree to waive such condition:
(a) Representations and Warranties. All representations and
------------------------------
warranties of each of the parties hereto which are contained herein or in
any document delivered pursuant hereto shall be true and correct in all
material respects when made and as of the Closing.
(b) Covenants, Agreements and Obligations. All covenants,
-------------------------------------
agreements and obligations required by the terms of this Agreement to be
performed by each of the parties hereto at or before the Closing shall
have been properly performed in all material respects.
(c) Delivery of Documents. All documents, certificates or other
---------------------
instruments required to be delivered to each party hereto at or prior to
the Closing shall have been so delivered.
(d) Certificates of Existence and Good Standing. Each of the
-------------------------------------------
parties hereto shall have delivered to the other parties hereto
certificates of existence and good standing with respect to each entity
issued by the Secretary of State of their respective states of
organization dated no earlier than ten (10) business days prior to the
Closing Date, and reflecting that each entity is in existence and is in
good standing, has filed all required franchise tax returns and has paid
all required franchise taxes, and reflecting all instruments
-20-
<PAGE>
filed of record with respect to each such entity to the date of such
certificate in the office of such Secretary of State. Each such entity
also shall deliver a certificate or letter of good standing with respect
to each other state where any of such entities are qualified to do
business as a foreign corporation reflecting that such corporation has
paid all required franchise taxes and has filed all required franchise tax
returns for all periods ending on or before the Closing Date.
(e) Partnership Mergers Approval. The Partnership Mergers shall have
----------------------------
been duly and validly adopted as provided in Section 4.01.
(f) Other Consents and Approvals. All consents, approvals, permits
----------------------------
and authorizations required to be obtained prior to the Closing from any
Governmental Authority or other person in connection with the consummation
of the transactions contemplated hereby shall have been obtained, made or
waived, except where such failure to obtain such consents, approvals,
permits, authorizations or waiver would not be reasonably likely to result
in a Material Adverse Effect on any such entity, as the case may be
(assuming the transactions contemplated hereby are consummated).
(g) Pending Actions. None of the parties hereto shall be subject to
---------------
any writ, order, decree or injunction of a court of competent jurisdiction
which prohibits or restricts the consummation of the transactions
contemplated hereby or any pending or threatened action seeking such relief
or seeking damages as a result thereof.
(h) S-4 Registration Statement Effectiveness. The S-4 Registration
----------------------------------------
Statement shall have been declared effective by the SEC under the
Securities Act and shall be effective at the Effective Time, and no stop
order suspending such effectiveness shall have been issued, no action,
suit, proceeding or investigation by SEC to suspend such effectiveness
shall have been initiated and be continuing, and all necessary approvals
under state securities law, if any, relating to the issuance or trading of
CEC Common Stock to be issued pursuant to this Agreement shall have been
received.
(i) NASDAQ Listing. The shares of CEC Common Stock issued in the
--------------
Combination Transactions shall have been authorized for listing on the
NASDAQ National Market, subject to official notice of issuance.
(j) Limitation on Cash Available for Dissenting and Cash Electing
-------------------------------------------------------------
Partners. No more than $5,000,000 shall be required for the payment of
--------
Dissenting Partners or Cash Electing Partners as set forth in Article IV.
-21-
<PAGE>
ARTICLE XII
TERMINATION
12.01 Termination of Agreement. Notwithstanding anything herein to the
------------------------
contrary, this Agreement and the transactions contemplated hereby may be
terminated and abandoned at any time prior to the Closing in the following
manner:
(a) By the mutual written consent of the parties hereto;
(b) By any party hereto, through written notice to the other
parties hereto, if there has been a material breach by any other party
hereto of any representation or warranty set forth in or incorporated by
reference into this Agreement, or if, on the Closing Date, any condition
set forth in Article XI has not been satisfied or waived; or
(c) By any party after September 1, 2000.
Upon receipt of written notice of termination, pursuant to
paragraph (b) above, the breaching or nonperforming party shall have a
period of five (5) business days to cure the breach or remedy, cure,
perform or fulfill the condition which has not been satisfied or waived.
12.02 Obligations Upon Termination. In the event of termination of
----------------------------
this Agreement pursuant to the terms and provisions hereof, each party shall
return all books, records, maps, files, papers and other property in such
party's possession to the party entitled thereto, whereupon this Agreement shall
become void, except as provided herein and no party shall have any character of
liability to the other parties hereunder, including any liability for damages;
provided that in the event of termination because of breach of or default under
a representation, warranty, covenant or agreement contained herein, the party
not in breach or default shall have and retain all rights afforded to it under
this Agreement or the Coral/Indian Merger Agreement and in law or at equity by
reason of such breach or default.
ARTICLE XIII
CLOSING
13.01 Time and Place. The closing of the transactions contemplated
--------------
hereby (the "Closing") shall take place at the offices of Crowe & Dunlevy, 1800
Mid-America Tower, 20 North Broadway, Oklahoma City, Oklahoma, as soon as
practicable after each of the conditions set forth in Article XI has been
satisfied or waived by the party or parties entitled to the benefit of such
conditions on or before Closing.
13.02 Certificates of Acquisition and Exchanges. On the Closing Date,
-----------------------------------------
subject to the provisions of this Agreement: (i) properly executed certificates
of acquisition and merger for the Share Acquisition and the Partnership Mergers
shall be filed with the Secretary of State of Oklahoma
-22-
<PAGE>
in accordance with the OGCA and the ORULPA, to be effective on the Closing Date
and CEC shall cause its shares to be issued (or cash paid to Cash Electing
Partners and Placing Brokers) in accordance with the terms of this Agreement;
and (ii) the shares of Canaan Securities shall be exchanged for shares of CEC
Common Stock as contemplated by Article III and the shares of CEC shall be
reclassified as contemplated by Section 2.06.
13.03 Further Assurances. At any time and from time to time after the
------------------
Closing, at CEC's request and without additional consideration, any party hereto
will execute and deliver such other instruments of sale, transfer, conveyance,
assignment and confirmation and take such action as CEC may deem reasonably
necessary or desirable in order to more effectively transfer, convey and assign
to CEC, and to confirm CEC's title to, all of the Coral, Inc. Shares, the Coral
Corp. shares, the Indian shares, the Canaan Securities shares, and the interests
in the Partnerships and to assist CEC in exercising all rights with respect
thereto, including the exclusive right to use the corporate names and other
trademarks and service marks used, owned or reserved by any of the parties
hereto.
13.04 Concurrent Conditions. The performance or tender of performance
---------------------
of all matters applicable to a party at the Closing under this Agreement shall
be deemed concurrent conditions and no party shall be required to perform, or
tender performance of, the obligations of such party hereunder unless,
coincident therewith, each other party for whom performance is required under
this Agreement performs or tenders performance of its obligations hereunder.
ARTICLE XIV
GENERAL PROVISIONS
14.01 Nonsurvival of Representations, Warranties and Covenants. Except
--------------------------------------------------------
for the provisions of Sections 2.05, 4.04, 4.05, 4.06, 10.01, 10.12, 10.13,
12.02, 13.02 and 13.03 and 14.09, the representations, warranties, covenants and
agreements made by each of the parties hereto shall not survive, and shall be
terminated and extinguished by the Closing.
14.02 Entire Agreement; Amendment and Waiver. This Agreement, together
--------------------------------------
with all Exhibits and Schedules attached hereto and all agreements and
instruments to be executed and delivered by the parties pursuant hereto, is
intended to supplement the Coral/Indian Merger Agreement, except as otherwise
specifically provided for herein, and, except as so limited by the first part of
this sentence, contains the entire agreement between the parties relating to the
subject matter hereof and supersedes any other prior agreement, arrangement or
understanding between the parties regarding the subject matter hereof. No
representation, warranty, covenant, obligation, promise, inducement or statement
of intention has been made by any of the parties which is not expressed in this
Agreement or the Coral/Indian Merger Agreement. This Agreement may be amended
or changed only by written instrument duly executed by all the parties hereto,
and any alleged amendment or change which is not so documented shall not be
effective as to the parties. Except as expressly provided herein to the
contrary, provisions of this Agreement may be waived only by the party(ies)
hereto who is entitled to the benefit thereof by evidencing such waiver in
writing, executed by such party(ies). Except to the extent waiver or
satisfaction is deemed to exist by the
-23-
<PAGE>
express terms of this Agreement, the failure of any party hereto to enforce at
any time any of the provisions of this Agreement shall in no way be construed to
be a waiver of any such provision, nor in any to affect the validity of this
Agreement or any part thereof or the right of any party thereafter to enforce
each and every provision. No waiver of any breach of this Agreement shall be
held to be a waiver of any other or subsequent breach.
14.03 Severability. This Agreement is intended to be performed in
------------
accordance with and only to the extent permitted by all applicable legal
requirements. If any provision of this Agreement or the application thereof to
any person or circumstance shall for any reason and to any extent, be invalid or
unenforceable, then the performance of such offending provision shall be excused
by the parties hereto, but the remainder of this Agreement and the application
of such provision to other persons or circumstances shall not be affected
thereby, but rather shall be enforced to the greatest extent permitted by law.
14.04 Applicable Law. This Agreement shall in all respects be governed
--------------
by, and construed in accordance with, the substantive federal laws of the United
States and the internal laws of the State of Oklahoma (principles of conflict of
laws excluded).
14.05 Assignment. This Agreement may not be assigned by any party
----------
without the prior written consent of each other party hereto. No such permitted
assignment shall alter any of the obligations of an assigning party under this
Agreement or release an assigning party from obligations of such party under
this Agreement. Upon any such assignment, the assignee shall succeed to all
rights assigned to it by, and shall become bound by all of the obligations of,
the assigning party. Nothing in this Agreement is intended to confer upon any
person not a party hereto any rights, benefits or remedies under or by reason of
this Agreement.
14.06 Notices. All notices and other communications required or
-------
permitted to be given pursuant to this Agreement shall be in writing and shall
be delivered personally, by overnight courier or by facsimile communication to
the number set forth below, or by first class mail, postage prepaid, certified
with return receipt requested, at the addresses set forth below. Notice shall
be effective only if and when received by the addressee. For purposes of
notice, the addresses of the parties shall be as follows:
If to Coral Companies: c/o Leo E. Woodard
119 North Robinson
Suite 600
Oklahoma City, Oklahoma 73102
Phone: (405) 232-3222
Fax: (405) 232-2226
-24-
<PAGE>
With Copies to: Michael M. Stewart, Esq.
Crowe & Dunlevy
1800 Mid-America Tower
20 North Broadway
Oklahoma City, Oklahoma 73102
Phone: (405) 235-7747
Fax: (405) 272-5238
If to Indian: Richard R. Dunning
9400 North Broadway, Suite 800
Oklahoma City, Oklahoma 73114
Phone: (405) 606-7737
Fax: (405) 606-7743
With a Copy to: Armand Paliotta, Esq.
Hartzog Conger & Cason
201 Robert S. Kerr Avenue
Suite 1600
Oklahoma City, Oklahoma 73102
Phone: (405) 235-7000
Fax: (405) 235-7329
If to Canaan Securities: c/o Thomas H. Henson
21 Locust Avenue
Suite 2A
New Canaan, Connecticut 06840
Phone: (203) 972-6277
Fax: (203) 972-6777
provided that each party shall have the right to change its address for notice,
and the person who is to receive notice hereunder, by the giving of fifteen (15)
days' prior written notice to the other parties hereto in the manner set forth
above.
14.07 Incorporation of Exhibits and Schedules by Reference. All
----------------------------------------------------
Exhibits and Schedules expressly referenced herein are hereby incorporated
herein for any and all purposes as a part of this Agreement, to the same extent
as if stated herein.
14.08 Multiple Counterparts. This Agreement will be executed in one or
---------------------
more counterparts, each of which shall be an original, but all of which shall
constitute but one instrument and shall be effective as to all parties executing
this Agreement, regardless of whether all shareholders of Indian execute this
Agreement.
-25-
<PAGE>
14.09 Expenses. Each party shall be responsible for its own fees and
--------
expenses, including fees and expenses of legal counsel, incurred in connection
with the negotiation of this Agreement and the consummation of the transactions
contemplated hereby; provided, however, if the Closing does not occur, Indian
shall not bear any of the expenses associated with this Agreement and the
Registration Statement and each Partnership's share of the transaction costs
shall be allocated (i) to the General Partners in proportion to their percentage
interest in the partnership operating costs plus a percentage equal to the
percentage of limited partners who abstain or vote to reject this Agreement; and
(ii) to the limited partners in proportion to the percentages of limited
partners who vote to approve this agreement. As between the Partnerships,
Canaan Securities and CEC, transaction costs shall be shared based on their
relative Exchange Values as described in the Prospectus.
[Signatures on Next Page]
-26-
<PAGE>
IN WITNESS WHEREOF, this Plan of Combination and Agreement of Merger has
been duly executed and delivered as of the date first above written by the
parties or the authorized representatives of the parties hereto.
Canaan Energy Corporation,
an Oklahoma corporation, f/k/a Coral
Reserves Group, Ltd.
By:/s/ Leo E. Woodard
--------------------------------------
Name: Leo E. Woodard
Title: Chairman and CEO
Shareholders:
/s/ Leo E. Woodard
---------------------------------------
Leo E. Woodard (300 shares / 47.5%)
/s/ John Penton
---------------------------------------
John Penton (300 shares / 47.5%)
/s/ Michael S. Mewbourn
---------------------------------------
Michael S. Mewbourn (32 shares / 5%)
Coral Reserves, Inc.,
an Oklahoma corporation
By:/s/ Leo E. Woodard
---------------------------------------
Name: Leo E. Woodard
Title: President
Shareholders:
/s/ Leo E. Woodard
---------------------------------------
Leo E. Woodard (500 shares / 47.5%)
/s/ John Penton
---------------------------------------
John Penton (500 shares / 47.5%)
/s/ Michael S. Mewbourn
---------------------------------------
Michael S. Mewbourn (53 shares / 5%)
-27-
<PAGE>
Coral Reserves Energy Corporation,
an Oklahoma corporation
By:/s/ Leo E. Woodard
---------------------------------------
Name: Leo E. Woodard
Title: President
Shareholders:
/s/ Leo E. Woodard
---------------------------------------
Leo E. Woodard (500 shares / 47.5%)
/s/ John Penton
---------------------------------------
John Penton (500 shares / 47.5%)
/s/ Michael S. Mewbourn
---------------------------------------
Michael S. Mewbourn (53 shares / 5%)
Canaan Securities, Inc.,
a Delaware corporation
By:/s/ Thomas H. Henson
---------------------------------------
Name: Thomas H. Henson
Title: President
Shareholder:
/s/ Thomas H. Henson
---------------------------------------
Thomas H. Henson (500 shares / 100%)
-28-
<PAGE>
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership,
an Oklahoma limited partnership ("1990")
Coral Reserves 1993 Institutional Limited Partnership,
an Oklahoma limited partnership ("1993-I")
Coral Reserves 1996 Institutional Limited Partnership,
an Oklahoma limited partnership ("1996-I")
By: Coral Reserves, Inc., an Oklahoma corporation
Title: General Partner of 1990, 1993-I and 1996-I Limited Partnerships
By:/s/ Leo E. Woodard
------------------------------------
Name: Leo E. Woodard
Title: President of Coral Reserves, Inc.
Coral Reserves Natural Gas Income Fund 1991 Limited Partnership,
an Oklahoma limited partnership ("1991")
Coral Reserves Natural Gas Income Fund 1992 Limited Partnership,
an Oklahoma limited partnership ("1992")
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership,
an Oklahoma limited partnership ("1993")
Coral Reserves Energy Income Fund 1995 Limited Partnership,
an Oklahoma limited partnership ("1995)
Coral Reserves Energy Income Fund 1996 Limited Partnership,
an Oklahoma limited partnership ("1996")
By: Coral Reserves Energy Corporation, an Oklahoma corporation
Title: General Partner of 1991, 1992, 1993, 1995 and 1996 Limited
Partnerships
By:/s/ Leo E. Woodard
------------------------------------
Name: Leo E. Woodard
Title: President of Coral Reserves Energy Corporation
-29-
<PAGE>
Indian Oil Company,
an Oklahoma corporation
By:/s/ Richard R. Dunning
--------------------------------------
Richard R. Dunning, Chief Executive Officer
Indco, L.L.C.
By:/s/ Richard R. Dunning
--------------------------------------
Richard R. Dunning, Manager
Shareholders:
Dunning Family Limited Partnership
By: Dunning Management, L.L.C.
By:
--------------------------------------
Richard R. Dunning, Manager (_____ shares / _____%)
- -----------------------------------------
Larry D. Hartzog (_____ shares / _____%)
- -----------------------------------------
Michael C. Black, Trustee of the Michael C. Black Revocable Trust (_____ shares
/ ____%)
- -----------------------------------------
Roger Graham (_____ shares / ____%)
- -----------------------------------------
Anthony Lasuzzo (_____ shares / ____%)
- -----------------------------------------
Frank Harrison (_____ shares/ _____%)
-30-
<PAGE>
EXHIBIT 10.07
Form of Affiliate Letter Addressed to Canaan Energy Corporation
Canaan Energy Corporation
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
Ladies and Gentlemen:
I have been advised of the Plan of Combination dated as of ____________, 2000
(the "Agreement") by and between (i) Canaan Energy Corporation, an Oklahoma
corporation, f/k/a Coral Reserves Group, Ltd. ("Canaan"), (ii) Coral Reserves,
Inc., an Oklahoma corporation ("Coral, Inc."), (iii) Coral Reserves Energy
Corporation, an Oklahoma corporation ("Coral Corp.") ("CEC", Coral, Inc. and
Coral Corp are sometimes collectively referred to herein as the "Coral
Companies"), (iv) Indian Oil Company, an Oklahoma corporation ("Indian"), (v)
Canaan Securities, Inc., a Connecticut corporation ("Canaan Securities"), (vi)
Coral Reserves Natural Gas Income Fund 1990 Limited Partnership, an Oklahoma
limited partnership ("1990"), (vii) Coral Reserves Natural Gas Income Fund 1991
Limited Partnership, an Oklahoma limited partnership ("1991"), (viii) Coral
Reserves Natural Gas Income Fund 1992 Limited Partnership, an Oklahoma limited
partnership ("1992"), (ix) Coral Reserves Natural Gas Income Fund 1993 Limited
Partnership, an Oklahoma limited partnership ("1993"), (x) Coral Reserves 1993
Institutional Limited Partnership, an Oklahoma limited partnership ("1993-I"),
(xi) Coral Reserves Energy Income Fund 1995 Limited Partnership, an Oklahoma
limited partnership ("1995"), (xii) Coral Reserves Energy Income Fund 1996
Limited Partnership, an Oklahoma limited partnership ("1996"); and (xiii) Coral
Reserves 1996 Institutional Limited Partnership, an Oklahoma limited partnership
("1996-I") (the entities listed in (ii)-(xii) are collectively referred to
herein as the "Combining Entities"), whereby the Combining Entities will be
merged with and into Canaan (the "Combination Transaction"). I also have been
advised that as of the date hereof I may be deemed to be an "affiliate" of one
or more of the Combining Entities, as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"). I have
been advised further that as a result of the Combination Transaction, I may
receive shares of Canaan Common Stock (the "Canaan Capital Stock"), in exchange
for shares of the Combining Entity or Entities owned by me.
I represent, warrant and covenant to Canaan that in the event I receive any
Canaan Capital Stock as a result of the Combination Transaction:
A. I shall not make any sale, transfer or other disposition of the Canaan
Capital Stock in violation of the Act or the Rules and Regulations.
<PAGE>
B. I have carefully read this letter and the Agreement and discussed its
requirements and other applicable limitations upon my ability to sell,
transfer or otherwise dispose of Canaan Capital Stock to the extent I
believe necessary with my counsel.
C. I have been advised that the issuance of Canaan Capital Stock to me
pursuant to the Combination Transaction will be registered with the
Commission under the Act on a Registration Statement on Form S-4. However,
I have also been advised that, I may be deemed to have been an affiliate of
one or more of the Combining Entities and the distribution by me of the
Canaan Capital Stock has not been registered under the Act, I may not sell,
transfer or otherwise dispose of Canaan Capital Stock issued to me in the
Combination Transaction unless (i) such sale, transfer or other disposition
has been registered under the Act, (ii) such sale, transfer or other
disposition is made in conformity with the volume and other limitations of
Rule 145 promulgated by the Commission under the Act, or (iii) in the
opinion of counsel reasonably acceptable to Canaan, such sale, transfer or
other disposition is otherwise exempt from registration under the Act.
D. I understand that Canaan is under no obligation to register the sale,
transfer or other disposition of the Canaan Capital Stock by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that stop transfer instructions will be given to
Canaan's transfer agent with respect to Canaan Capital Stock and that there
will be placed on the certificates for the Canaan Capital Stock issued to
me, or any substitutions therefor, a legend stating in the substance:
"The securities represented by this certificate have been issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies and may only be sold or otherwise transferred in
compliance with the requirements of Rule 145 or pursuant to a
registration statement under said act or an exemption from such
registration."
F. I also understand that unless the transfer by me of my Canaan Capital
Stock has been registered under the Act or is a sale made in conformity
with the provisions of Rule 145, Canaan reserves the right to put the
following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 and were acquired from a person who
received such shares in a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. The shares have been
acquired by the holder not with a view to, or for resale in connection
with, any distribution thereof within the meaning of Securities Act of
1933 and may not be sold, pledged or otherwise
-2-
<PAGE>
transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933."
By Canaan's acceptance of this letter, Canaan hereby agrees with me as
follows:
For so long as and to the extent necessary to permit me to sell shares of
Canaan Capital Stock pursuant to Rule 145 under the Act, Canaan shall (a) use
its reasonable best efforts to (i) file, on a timely basis, all reports and data
required to be filed with the Commission by it pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, and (ii) furnish to me upon request
a written statement as to whether Canaan has complied with such reporting
requirements during the 12 months preceding any proposed sale of Canaan Capital
Stock by me under Rule 145 and (b) otherwise use its reasonable best efforts to
permit such sales pursuant to Rule 145.
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if (a) the undersigned shall have delivered to Canaan a copy of a letter
from the staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to Canaan, to the effect that such legend is not
required for purposes of the Act or (b) a period of one (1) year shall have
elapsed following the date of consummation of the Combination Transaction.
Very truly yours,
By:
--------------------------------------
Name:
------------------------------------
Accepted this ______ day of _________________, 2000 by
CANAAN ENERGY CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-3-
<PAGE>
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") has been entered into
this 15th day of February, 1999, among Coral Reserves, Inc., an Oklahoma
corporation ("Coral Reserves"), Coral Reserves Energy Corp., an Oklahoma
corporation ("Coral Energy"), Coral Reserves Group, Ltd., an Oklahoma
corporation ("Coral Ltd.") (collectively, Coral Reserves, Coral Energy, and
Coral Ltd. are referred to as "Coral Group"), and Indian Oil Company, an
Oklahoma corporation ("Indian"), with reference to the following circumstances:
A. Coral Reserves is the general partner of three Oklahoma Limited
Partnerships, to wit: Coral Reserves Natural Gas Income Fund 1990 Limited
Partnership, Coral Reserves 1993 Institutional Limited Partnership, and Coral
Reserves 1996 Institutional Limited Partnership. Coral Energy is the general
partner of five Oklahoma Limited Partnerships, to wit: Coral Reserves Natural
Gas 1991 Income Fund Limited Partnership, Coral Reserves Natural Gas Income Fund
1992 Limited Partnership, Coral Reserves Natural Gas Income Fund 1993 Limited
Partnership, Coral Reserves Energy Income Fund 1995 Limited Partnership, and
Coral Reserves Energy Income Fund 1996 Limited Partnership, (collectively, all
the partnerships are referred to as "Coral Partnerships"). The Coral
Partnerships own and conduct as a going concern the production of oil and gas.
Coral Ltd. is the owner of interests and the operator of various wells in which
the Coral Partnerships own interests.
B. Indian owns and conducts as a going concern the production of oil and
gas.
C. Coral Group intends to form Coral Public, Inc., ("Coral Public") and
to consummate the Merger ( hereafter defined) and merge or otherwise reorganize
("Reorganization") the Coral Partnerships and Indian into and with Coral Public
such that the Coral Partnerships and Indian cease to exist and the partners of
the Coral Partnerships and shareholders of Indian receive publicly registered
shares of common stock of Coral Public. It is contemplated that the common
stock of Coral Public to be issued in connection with the Reorganization and
Merger will be publicly registered prior to issuance to the partners of the
Coral Partnerships and Indian shareholders.
The parties acknowledge that the exact name of Coral Public, the
number of authorized shares, par value of shares or even corporate existence of
Coral Public has not been determined or occurred. The timing of the Merger, the
registration of Coral Public shares, and the Reorganization of the Coral
Partnerships into Coral Public has not been determined.
D. The boards of directors of Indian and Coral Group deem it advisable
and in the best interests of their respective shareholders that (i) Indian be
merged with and into Coral Public, pursuant to this Agreement and the applicable
provisions of the Oklahoma General Corporation Act (the "Oklahoma Act"); (ii)
Coral Public acquire all of the issued and outstanding capital stock of Indian,
pursuant to this Agreement; and, (iii) Coral Partnerships enter into a
Reorganization with Coral Public.
E. This Agreement provides for, among other things (i) the Merger of
Indian with and into Coral Public; (ii) the automatic conversion of all the
issued and outstanding shares of Indian at the Effective Time (hereafter
defined) into registered, fully paid and non-assessable shares of Coral Public
common stock (the "Coral Public Common Stock"); and, (iii) the management of
Indian by Coral Ltd. during the period of time from execution of this Agreement
until the Effective Time or earlier
<PAGE>
termination of this Agreement.
ACCORDINGLY, premises considered and for the purpose of prescribing the
terms and conditions for the acquisition by Coral Public of Indian by means of
Merger with and into Coral Public, the parties have entered into this Agreement.
1. The Merger of Indian and Coral Public.
1.01 Coral Public Exchange Ratio: The Coral Public Common Stock shall
---------------------------
be issued pro-rata to Coral Group and Indian based upon the Reserve Report, Bank
Debt, and Net Working Capital (all hereafter defined) subject to adjustments.
Coral Group will receive an amount of Coral Public's Common Stock equal to the
fraction in which the denominator is (i) the aggregate value of Coral Group's
and Indian's Reserve Report plus the Net Working Capital of Indian and Coral
Group at Effective Time minus Indian's and Coral Group's Bank Debt at Effective
Time and the numerator is (ii) the value of Coral Group's Reserve Report plus
Net Working Capital at Effective Time minus Coral Group's Bank Debt at Effective
Time, plus $9,000,000 less amounts paid to Coral Group as payments on the
Contingent Production Payment (hereinafter defined). The Indian shareholders
will receive an amount of Coral Public Common Stock equal to the fraction in
which the denominator is the same as the denominator for Coral Group and the
numerator is (i)the value of Indian's Reserve Report plus Net Working Capital
at Effective Time minus Indian's Bank Debt at Effective Time minus $9,000,000
less amounts paid to Coral Group as payments on the Contingent Production
Payment. Indian will make additional adjustments to its Reserve Report and Net
Working Capital to conform to adjustments made by the Coral Partnerships to
their Reserve Report and Net Working Capital as required by the terms of the
Reorganization.
1.02 Restrictions on Coral Public's Common Stock: The Indian
-------------------------------------------
shareholders, Leo Woodard and John Penton shall enter into an agreement, on or
prior to the Effective Time, restricting each person's ability to sell, transfer
or acquire shares of Coral Public Common Stock and granting each person certain
rights regarding such shares. The agreement will allow "small" amounts of Coral
Public Common Stock to be acquired or transferred free from the restrictions.
Each person will negotiate in good faith toward reaching such an agreement.
1.03 Coral Payment; Operation of Indian Pending Merger:
-------------------------------------------------
a. Coral Payment; Contingent Production Payment. Upon execution of
--------------------------------------------
this Agreement, Coral Group will make a $6,000,000 payment, on
behalf of Indian to Mid First Bank. In return for this payment,
Coral Group will receive a production payment ("Contingent
Production Payment") payable from proceeds of Indian's Interests
(hereinafter defined), in an amount of $56,250 per month. The
Contingent Production Payment will be paid as set forth in
paragraph 1.04. The Contingent Production Payment agreement will
be in form as set forth in Schedule 1.03a.
b. Operation of Indian upon Execution of This Agreement. Coral Ltd.
----------------------------------------------------
and Indian shall execute a management agreement ("Management
Agreement") in form as set forth in Schedule 1.03b which will
provide
Page 2 of
<PAGE>
that Coral Ltd. provides management services to Indian pending
the Merger.
1.04 Use of Indian Revenues Pending Merger: From First Closing until
-------------------------------------
Effective Time, Coral Ltd., pursuant to the Management Agreement, will manage
the affairs and operations of Indian. Coral Ltd. will make payment, from
Indian's revenues and Net Working Capital, of the following expenses and
obligations of Indian in order of priority as follows: First, to Indian's
monthly overhead of employee salaries, rent, lease payments, utilities,
supplies, etc.; Second, to payment of Indian's Bank One, Oklahoma, N.A. debt
based on 80 equal monthly payments of principal, plus accrued interest; third,
payment of lease operating expenses; fourth, to payment of interest only on
Indian's MidFirst Bank debt; fifth, to Coral as payment of the Contingent
Production Payment. If Indian's revenues and Net Working Capital are
insufficient, in any month, to pay the Contingent Production Payment, then any
unpaid portion will be paid in the next month in which Indian's revenues and Net
Working Capital are sufficient. Remaining Indian revenues, after maintenance of
sufficient Net Working Capital, as determined in the discretion of Coral Ltd.,
will be used for developmental drilling, reduction of Indian's Bank Debt or
added to Indian's Net Working Capital, at the direction of Indian shareholders.
Payment of the Contingent Production Payment or other discretionary payments
shall not be made if such payments would place Indian in breach of its
agreements and covenants with its lenders. The Indian shareholders agree that
the Net Working Capital of Indian during the period from First Close until
Effective Time and at Effective Time shall not be less than $750,000.
1.05 Sale of Indian Minor Properties: From First Closing until
-------------------------------
Effective Time, Coral Ltd. and Indian shareholders will identify Interests of
Indian's which they believe can be sold without materially affecting Indian's
Borrowing Base, as defined in the Credit Agreement between Indian and Bank One,
Oklahoma, N.A., dated December 22, 1997. Indian, under Coral Ltd.'s management,
will attempt to sell such Interests, with the consent of Coral Ltd., Indian
shareholders and Bank One, Oklahoma, N.A.. Proceeds from the sale of such
Interests shall be used for the purposes as set forth in Section 1.04, or
applied at the direction of the Indian shareholders.
1.06 The Merger: Subject to the terms and conditions of this
----------
Agreement, Coral Group agrees to cause Indian to be included in the
Reorganization, by virtue of the Merger, and a Certificate of Merger and
Articles of Merger shall be executed by Indian and Coral Public and delivered to
the Secretary of State of Oklahoma for filing on the Second Closing (hereafter
defined). The time of filing by the Secretary of State of Oklahoma is herein
referred to as the "Effective Time." It is intended that the Merger and
Reorganization will have the same Effective Time. At the Effective Time, the
separate existence of Indian and the Coral Partnerships shall cease and Indian
and the Coral Partnerships shall be merged with and into Coral Public. At the
Effective Time, the certificates evidencing the issued and outstanding Indian
capital stock shall be canceled and certificates evidencing Coral Public Common
Stock shall be issued to the Indian shareholders ("Merger").
1.07 Effect of the Merger: At and after the Effective Time, the
--------------------
status, rights, liabilities and other matters affecting the Merger of Indian and
Coral Public shall be as provided by the Oklahoma Act.
1.08 Exchange of Certificates: At the Second Closing, Indian shall
------------------------
surrender the certificates which prior to the Merger represented 100% of the
issued and outstanding shares of stock
Page 3 of
<PAGE>
of Indian to Coral Public. The shareholders of Indian shall thereupon be
entitled to receive in exchange therefore certificates evidencing the shares of
Coral Public Common Stock into which the shares of Indian shall have been
converted at the Effective Time as provided in this Agreement.
1.09 Taking Necessary Action; Further Action: Coral Group and Indian,
---------------------------------------
respectively, shall use all reasonable efforts to take all such action as may be
necessary or appropriate in order to effectuate the Merger and Reorganization.
If, at any time after the Effective Time of the Merger, any further action is
necessary or desirable to carry out the purposes of this Agreement, or to vest
Coral Public with full right and title to and possession of all assets,
property, rights, privileges, powers and franchises of Indian, the officers and
directors of Coral Public are fully authorized in the name of Indian or
otherwise to take, and shall take, all such action.
1.10 Stockholders Meeting and Registration Statement:
-----------------------------------------------
a. In order to consummate the Merger, Indian and Coral Group, acting
through their Boards of Directors, shall, in accordance with
applicable law and their certificates of incorporation and by-
laws, (i) timely call, give notice of, convene and hold a special
meeting of stockholders for the purpose of considering and
taking action on the Merger and Reorganization and (ii) include
in the registration statement to be filed with the Securities and
Exchange Commission ("SEC"), as amended or supplemented
("Registration Statement") the proposed terms of the Merger and
Reorganization.
b. Coral Group shall prepare and file with the SEC the Registration
Statement for Coral Public and shall use all reasonable efforts
to have the Registration Statement declared effective by the SEC
as promptly as practicable. Indian shall cooperate with Coral
Group in the preparation of the Registration Statement and shall
furnish to Coral Group such data and information relating to
Indian and the interests (hereinafter defined), as Coral Group
may reasonably request for the purpose of including the data and
information in the Registration Statement. Coral Group shall
give Indian and its counsel the opportunity to review any
registration materials and the Registration Statement prior to
their being filed with the SEC and shall give Indian and its
counsel the opportunity to review all amendments and supplements
thereto and all responses to requests for additional information
and replies to comments prior to their being filed with, or sent
to, the SEC. Coral Group will provide promptly to Indian copies
of all correspondence between Coral Group or any of their
representatives and the SEC. Coral Group will advise Indian
promptly when any supplement to or amendment of the Registration
Statement has been filed, or the
Page 4 of
<PAGE>
issuance of any stop order, or of any request by the SEC for
amendment of the Registration Statement.
1.11 Certain Definitions: For purposes of this Agreement the following
-------------------
terms shall have the meanings assigned to them:
a. Reserve Report shall mean engineering reports prepared by an
independent third party engineer approved by Coral Group and
Indian setting forth (i) the proven oil and gas reserves
attributable to the oil and gas properties of Coral Group
and Indian, respectively, as of a mutually agreed date, (ii)
the aggregate present value determined on the basis of
stated pricing assumptions, of the future net income with
respect to such oil and gas properties, discounted at a
stated per annum discount rate of proven reserves, and (iii)
projections of the annual rate of production, gross income
and net income with respect to such proven reserves. The
pricing assumptions, discount rates and other criteria shall
be mutually agreed by and applied on the same basis to
Indian's and Coral Group's reserves.
The Reserve Report for Indian and Coral Group, respectively,
shall be adjusted as follows, regardless whether the adjustment is a
Material Adverse Effect:
(i) minus any adjustments for Title Defects;
(ii) plus or minus any adjustments for Gas Imbalances;
(iii) minus the value of production which must be delivered
under any take-or-pay, storage, service, exchange or
similar arrangements, and for which a contemporaneous
payment will not be received; and
(iv) plus or minus any other amounts mutually agreed upon
by Indian and Coral Group.
b. Net Working Capital shall mean current assets less current
liabilities, as determined according to generally accepted
accounting principles, as adjusted pursuant to the terms of
this Agreement.
(i) Income Tax Adjustment. To the extent that Coral Group
---------------------
or Indian has income tax payable for activities prior to the
Effective Time, as determined by the accounting firm engaged
by Coral Group in connection with the registration of the
Coral Public Common Stock, the amount of income taxes
payable shall be an adjustment to the respective party's Net
Working Capital regardless whether the adjustment is a
Material Adverse Effect.
(ii) Adjustment for Breach. If it is determined that the
---------------------
representations, warranties, covenants or agreements of
Coral Group or Indian are not Substantially True, either at
First Closing or Effective Time, the Net
Page 5 of
<PAGE>
Working Capital of the party in breach may be reduced by an
amount equal to the agreed value of the breach, if such
value can be agreed upon.
c. Gas Imbalance shall mean the difference between the volume
of produced gas that Indian or Coral Group (and their
predecessors), respectively, took from a property and the
volume of their gas entitlement for such property.
1.12 Expenses: The expenses of Indian's and Coral Group's Reserve
--------
Reports shall be borne by each respective party and if the Merger occurs each
party will be reimbursed by Coral Public, to the extent provided in the
Reorganization and Registration Statement. The additional expenses of the
Reorganization and registration of Coral Public Common Stock will be borne by
Coral Group and will be reimbursed to Coral Group by Coral Public, to the extent
provided in the Reorganization and Registration Statement. Any debt incurred by
Coral Group to pay expenses of the Reorganization or registration shall not be
used in the calculation Coral Group's Net Working Capital.
1.13 Conditions to Effectiveness of Agreement: As a condition
----------------------------------------
precedent to the requirement of Coral Group or Indian to perform under this
Agreement, all consents from Bank One, Oklahoma, N.A. and MidFirst shall have
been obtained no later than March 1, 1999. If such consents are not timely
obtained, this Agreement shall be deemed null and void and of no further force
or effect. Each party agrees to use their best efforts to obtain all required
consents.
1.14 Termination and Abandonment of Merger Transaction. Anything
-------------------------------------------------
herein to the contrary notwithstanding, Coral Group's obligation to include
Indian in the Merger contemplated hereby, and Indian's obligation to allow Coral
Group to include Indian in the Reorganization, by virtue of the Merger, may be
terminated at any time before the Effective Time, whether before or after
approval of the Merger by members of the Coral Group, as follows, and in no
other manner:
a. Mutual Consent. By mutual consent of the Boards of Directors
--------------
of Coral Group and Indian;
b. By Coral Group. By the boards of directors of Coral Group
--------------
if, by the Effective Time, the conditions set forth in
Section 6 shall not have been met (or waived as provided in
this Agreement); and
c. By Indian. By the board of directors of Indian if, by the
---------
Effective Time, the conditions set forth in Section 7 shall
not have been met (or waived as provided in this Agreement).
d. By Either Coral or Indian. By the boards of directors of
-------------------------
Coral Group or of Indian, if (i) any governmental body shall
have issued an order, decree or ruling, or taken any other
action, permanently enjoining, restraining or otherwise
prohibiting the Merger or the other transactions
contemplated hereby and such order, decree, ruling or other
action shall have become final and non-appealable; (ii) if
the limited partners of the Coral Partnerships shall not
have approved the Merger or the issuance of the
Page 6 of
<PAGE>
shares by Coral Public in the Merger or Reorganization on or
before March 1, 2000; or (iii) if the Merger and Effective
Time has not occurred on or before September 1, 2000.
In the event of termination of Coral Group's obligation to include
Indian in the Merger as provided in this Section 1.14, this Agreement shall
remain in effect for the purposes set forth in Section 1.15; provided, however,
that Coral, Ltd. and the Indian shareholders shall agree on a date after which
Coral, Ltd. is no longer obligated to provide services pursuant to the
Management Agreement and the Management Agreement and this Agreement shall
terminate, including for purposes of Section 1.15 below. Nothing contained in
this Section shall relieve any party from liability for any breach of the
representations, warranties, covenants or agreements set forth in this
Agreement.
1.15 Liquidation: Upon termination of Coral Group's obligation to
-----------
include Indian in the Merger transaction contemplated by this Agreement, the
Management Agreement will remain in full force and effect and Coral Group agrees
to cause a manager under the Management Agreement to commence, in accordance
with the Management Agreement, a timely sale and liquidation of Indian's assets.
Coral Group and the Indian shareholders agree they will conduct good faith
negotiations with each other, for a period of 90 days following termination of
Coral Group's obligation to include Indian in the Merger transaction
contemplated by this Agreement, for the purpose of either party acquiring all or
a portion of Indian's Interests. The proceeds of such sale and Indian's Net
Working Capital shall be paid in the following priority:
First, to Indian's overhead;
Second, to Bank One, Oklahoma, N.A. to retire Indian's debt;
Third, to MidFirst Bank to retire Indian's debt;
Fourth, to Coral Group (or its designee) in an amount of $6,000,000,
less amounts previously paid on the Contingent Production Payment; and
Fifth, 50% to Indian's shareholders and 50% to Coral Group (or its
designee).
2. Closing: Subject to the terms and provisions hereof, the execution of
-------
this agreement (the "First Closing") shall occur at 4:00 p.m. in the offices of
Indian Oil Company, 9400 N. Broadway, Suite 800, Oklahoma City, Oklahoma 73114
on February 15, 1999 (the "Closing Date"). The execution of the Merger
Certificates, issuance of Coral Public Common Stock and other transactions
contemplated to occur upon Merger and Reorganization ("Second Closing") shall
occur simultaneously at a mutually agreed time and place. It is intended that
the Second Closing and the Effective Time occur contemporaneously.
3. Representatives and Warranties of Indian: Indian represents and
----------------------------------------
warrants to the Coral Group as follows:
3.01 Organization, Good Standing, Etc.: Indian is a corporation duly
---------------------------------
organized,
Page 7 of
<PAGE>
validly existing and in good standing under the laws of the State of Oklahoma.
Indian has the corporate power to own its properties and to carry on its
business as now being conducted. Indian has the corporate power to execute and
deliver this Agreement and, at the Effective Time, will have the corporate power
to consummate the Merger transaction contemplated hereby. At the Effective Time,
Indian will be duly qualified and/or licensed, as may be required, and in good
standing in each of the jurisdictions in which the nature of the business
conducted by it or the character of the property owned, leased or used by it
makes such qualification and/or licensing necessary, except where the failure to
be so qualified and/or licensed, and in good standing would not singly or in the
aggregate have a Material Adverse Effect on Indian. Indian has, or will, make
available to Coral Public copies of the certificate of incorporation, bylaws and
the records of meetings of the shareholders and Board of Directors of Indian
which are complete and correct in all respects. All material corporate actions
taken by Indian since its organization and incorporation through the date hereof
have been or, at the Effective Time, will have been, duly authorized or
subsequently ratified as necessary. Indian is not in default under or in
violation of any provision of its respective certificate of incorporation or
bylaws.
3.02 Capital Stock of Indian: The authorized capital stock of Indian
-----------------------
consists of 2,000,000 shares of common stock, par value $0.005 per share
("Indian Common Stock"), of which 62,360 shares are issued and outstanding and
all of which are owned by the shareholders listed on Schedule 3.02 ("Indian
Shareholders") which shall be free and clear of all security interests, liens
and encumbrances as of the Effective Time. The issued Indian Common Stock is
validly authorized and issued and fully paid and non-assessable. Indian has
never authorized the creation or issuance of, or issued, or authorized or
effected any split-up or any other recapitalization of, any of its capital
stock, or directly or indirectly redeemed, purchased or otherwise acquired any
of its outstanding capital stock and, except as permitted by this Agreement,
will not do so between the date of this Agreement and the Effective Time of the
Merger. Indian will neither declare or pay any dividends on its capital stock
between the date of this Agreement and the Effective Time. There are no
contractual obligations of Indian to repurchase, redeem or otherwise acquire any
outstanding shares of its capital stock. Further, there are no options,
warrants or other rights to acquire any additional shares of capital stock of
Indian.
3.03 No Breach of Statute or Contract; Governmental Authorizations:
-------------------------------------------------------------
Neither the execution and delivery of this Agreement nor compliance with the
terms and provisions of this Agreement by Indian will violate any law, statute,
rule or regulation of any governmental authority, or will on the Closing Date or
the Effective Time conflict with or result in a breach of any of the terms,
conditions or provisions of any judgment, order, injunction, decree or ruling of
any court or governmental agency, authority to which Indian is subject or,
except as set forth in Schedule 3.03, of any agreement or instrument to which
Indian is a party or by which it is bound, or constitute a material default
thereunder, or result in the creation of any material lien, charge or
encumbrance upon any of Indian's properties or assets or cause any acceleration
of maturity of any material obligation or loan, or give to others any material
interest or rights, including rights of termination or cancellation, in or with
respect to any of Indian's properties or assets.
3.04 Authorization of Agreement: The execution, delivery and
--------------------------
performance of this Agreement by Indian have been duly and validly authorized by
all requisite corporate action on the part of Indian. The execution, delivery
and performance by Indian of all other agreements and transactions contemplated
hereby have been, or prior to the First Closing and the Effective Time will be,
duly authorized and approved by all requisite corporate action on the part of
Indian. This Agreement has
Page 8 of
<PAGE>
been, and the other agreements and instruments contemplated hereby, when
executed and delivered, will be, duly executed and delivered by Indian as
required and, assuming the due authorization, execution and delivery hereof and
thereof by the other parties hereto or thereto, this Agreement constitutes and,
when executed, each of the other agreements contemplated hereby will constitute,
a valid and binding obligation of Indian, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance and similar laws affecting creditors' rights
generally from time to time and to general principles of equity.
3.05 Disclosure:
----------
a. None of the information, including the oil and gas reserve,
well and acreage data, which has been or will be supplied by Indian to Coral
Reserves or Coral Energy (or any amendment thereof or supplement thereto) will
contain any statement which, at the time and in light of the circumstances under
which it is made, is false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of a proxy for the same
meeting or subject matter which has become false or misleading.
b. Indian has furnished, or will furnish, Coral Public with
all information required with respect to its assets necessary for Coral Public
to prepare financial statements with respect thereto for inclusion in the
Registration Statement in accordance with applicable rules of the SEC, including
Regulation S-X.
3.06 Broker's or Finder's Fees: Indian has not incurred any
-------------------------
liability, contingent or otherwise, for brokers' or finders' fees in respect of
this Agreement for which any member of the Coral Group shall have any
responsibility whatsoever.
3.07 Permits: At the Effective Time, Indian will have all approvals,
-------
authorizations, consents, licenses, orders, franchises, rights, registrations
and permits of all governmental agencies, whether federal, state or local,
required to permit the operation of its business as presently conducted (the
"Permits") and each will be in full force and effect and will have been duly and
validly issued, except where the absence of which, singly or in the aggregate,
would not have a Material Adverse Effect on Indian. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any revocation, cancellation, suspension or modification of
any such Permit except where such revocation, cancellation, suspension or
modification would not have a Material Adverse Effect on Indian. At the
Effective Time, there will be no outstanding violation of any of the Permits
singly or in the aggregate that would have a Material Adverse Effect on Indian.
3.08 Title to the Assets: Except (i) as set forth in Schedule 3.08
-------------------
(ii) for the Excluded Assets, and (iii) the assets to be sold in the minor
assets sales contemplated by Section 1.05 above, Indian will have at the
Effective Time good and defensible title of record to its assets free and clear
of all liens, pledges, claims, charges, security interests, production payments
or other encumbrances except (i) liens for current taxes and assessments not yet
due, or being contested in good faith by appropriate proceedings and (ii) such
imperfections of title and encumbrances, if any, which do not have singly or in
the aggregate a Material Adverse Effect on Indian.
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3.09 Oil and Gas Leases in Good Standing: Except as disclosed in
-----------------------------------
Schedule 3.09, all oil and gas leases which are material singly or in the
aggregate to Indian are in full force and effect, and Indian is not default
thereunder.
3.10 Financial Statements: Attached as Schedule 3.10 are the
--------------------
following financial statements (collectively the "Financial Statements") for
Indian: (i) audited balance sheets and statements of income, changes in
stockholders' equity, and cash flow as of and for the fiscal year ended December
31, 1997 (the "Most Recent Fiscal Year End"); and (ii) an unaudited balance
sheet and statement of income (the "Most Recent Financial Statements") as of and
for the nine months ended September 30, 1998 (the "Most Recent Fiscal Month
End"). The Financial Statements (including the notes thereto) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, present fairly in all respects the assets, liabilities,
and financial condition of Indian as of such dates and the results of operations
of Indian for such periods, are correct and complete in all respects, and are
consistent with the books and records of Indian (which books and records are
correct and complete); provided, however, that the Most Recent Financial
Statements are subject to normal year-end adjustments (which will not be
material individually or in the aggregate) and lack footnotes and other
presentation items of the type required in GAAP statements. Indian agrees to
provide to Coral Group audited balance sheets and statements of income, changes
in stockholders' equity, and cash flow as of and for the fiscal year ended
December 31, 1998 as soon as such financial statements are available. The
audited financial statements for the year ended December 31, 1998 shall be
substituted in their entirety for the financial statements for the nine months
ended September 30, 1998 and for all purposes thereafter the audited December
31, 1998 financial statements shall be the Most Recent Fiscal Month End.
3.11 Events Subsequent to Most Recent Fiscal Month End: Since the
-------------------------------------------------
Most Recent Fiscal Month End (as defined in Section 3.10 above), there has not
been any Material Adverse Effect in the business, financial condition,
operations, results of operations, or future prospects of Indian.
3.12 Undisclosed Liabilities: Indian has no liabilities and there is
-----------------------
no basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against Indian giving rise to
any liability, except for (i) liabilities set forth on the face of the Most
Recent Financial Statements, as defined in Section 3.10 above (rather than in
any notes thereto), and (ii) liabilities which have arisen after the Most Recent
Fiscal Month End (as defined in Section 3.10 above) in the ordinary course of
business (none of which results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement or violation of law), and which liabilities will not, individually
or in the aggregate, have a Material Adverse Effect upon the business,
properties, or condition (financial or otherwise) of Indian.
3.13 Legal Compliance: Indian has complied with, and is conducting
----------------
the business in accordance with, all applicable laws, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand or notice
has been filed or commenced or, to the knowledge of Indian, threatened against
Indian alleging any failure so to comply. There is no basis for any such
action, suit, proceeding or investigation (i) which would have a Material
Adverse Effect on the financial condition, properties, assets, business or
prospects of Indian or (ii) which would impair Indian's ability or obligation to
perform fully on a timely basis any obligations which it may have or will have
under this Agreement. There are no existing violations of any laws which could
have a Material Adverse Effect
Page 10 of
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upon the business or the possession, use, occupancy or operation of any of
Indian's facilities or other property.
3.14 Environmental and Safety Matters: To the best of Indian's
--------------------------------
information and belief:
a. Indian is not aware, and has not received notice from any
person, entity or governmental body, agency or commission, of any release,
disposal, event, condition, circumstance, activity, practice or incident
concerning any land, facility, asset or property that (i) interferes with or
prevents compliance or continued compliance by Indian with any United States,
state or local law, regulation, code or ordinance or the terms of any license or
permit issued pursuant thereto, or (ii) gives rise to or results in any common
law or other liability of Indian to any person, entity or governmental body,
agency or commission for damage or injury to natural resources, wildlife, human
health or the environment which would have a Material Adverse Effect on Indian.
b. There is no civil, criminal or administrative action,
lawsuit, demand, litigation, claim, hearing, notice of violation, investigation
or proceeding, pending or threatened, against Indian or any present or former
owner of any interest in, or operator of, any of the lands, facilities, assets
and properties owned or formerly owned, operated, leased or used by Indian as a
result of the violation or breach of any federal, state, or local law,
regulation, code or ordinance or any duty arising at common law to any person,
entity or governmental body, singly or in the aggregate, which if determined
adversely to Indian would have a Material Adverse Effect on Indian.
3.15 The Interests: At First Closing and at Effective Time, Indian
-------------
shall own all right, title and interest in the surface, leasehold, royalty,
overriding royalty, mineral interests, wells, equipment, personal property, oil,
condensate, natural gas, liquids, sulphur and other marketable by-products,
contracts and beneficial interests, surface use agreements, easements, rights-
of-way, licenses, authorizations, permits, and similar rights and interests,
existing or future causes of action, claims, demands, litigation and judgments,
and all other assets used in Indian's business as currently conducted and as
reflected in the Financial Statements. As used herein, the term "Interests"
means the aggregate of all rights, titles and interests owned by Indian except
as specifically excluded.
The Interests, as owned and operated by Indian, shall not include:
The following prospects, as well as all other prospects in the work-up
stage and all geological, geophysical, seismic information
interpretive maps, well logs, and other well data and proprietary
information applying to the prospects:
1. NE Norman Prospect AMI
Sections 1, 2, 11, 12 of T 9N-R 2W
Cleveland County, Oklahoma
SW Bucklin Prospect AMI
Sections 13, 14, 23, 24, 25 of T 295-R 22W
Ford County, Kansas
Page 11 of
<PAGE>
Sections 19, 30, of T 295-R 21W
Ford County, Kansas
South Elk City AMI
Sections 1, 2, 3, 4, 10, 11, 12 of T 10N-R 21W
Beckham County, Oklahoma
Sections 33, 34, 35, 36 of T 11N-R21W
Washita County, Oklahoma
2. Indian's Geological Data Base.
3. All of Indian's Section 29 tax credits.
4. All of Indian's cars, art, furniture and office equipment, except
such furniture and office equipment which is necessary for the
continued operation of Indian's business pending and subsequent
to the Merger and Reorganization
5. All of Indian's accounts receivable from directors.
The excluded properties are herein referred to collectively as the
"Excluded Assets".
3.16 Bank Debt: At First Closing, Indian will owe no more than
---------
$20,000,000 to Bank One, Oklahoma, N.A. which is secured by the Indian's
Interests and, after application of Coral's $6,000,000, will owe no more than
$6,000,000 to MidFirst Bank which is not secured by any Indian assets (the debts
to Bank One, Oklahoma, N.A. and MidFirst are referred to as "Bank Debt"). At
First Closing, Indian will have no other liabilities, other than accounts
payable and accrued expenses and other current liabilities, which are reflected
on the Indian Financial Statements. During the period from First Closing to
Effective Time, Indian shall take no action to increase its debt to Bank One,
Oklahoma, N.A. or MidFirst without the consent of Coral Ltd. At Effective Time,
Indian will have no long term debt other than Bank Debt.
3.17 Board Recommendation: The board of directors of Indian, at a
--------------------
meeting duly called and held, has by unanimous vote, (i) determined that this
Agreement and the transactions contemplated hereby, including the Merger, are
fair to and in the best interests of the stockholders of Indian, and (ii)
resolved to recommend that the stockholders of Indian approve the Merger.
4. Representations and Warranties of the Coral Group: Each member of the
-------------------------------------------------
Coral Group represents and warrants to Indian as follows:
4.01 Organization, Good Standing, Etc.: Each member of the Coral
---------------------------------
Group is a limited partnership or corporation duly organized, validly existing
and in good standing under the laws of the state of its formation. Each member
of the Coral Group has the corporate power to own its respective properties and
carry on its respective business as now being conducted. Each member of the
Coral Group has the corporate power to execute and deliver this Agreement and,
at the Effective Time, will have the corporate power to consummate the Merger
and Reorganization contemplated hereby.
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At the Effective Time, each member of the Coral Group will be duly qualified
and/or licensed and in good standing in each of the jurisdictions in which the
nature of the business conducted by it or the character of the property owned,
leased or used by it makes such qualification and/or licensing necessary, except
in such jurisdictions where the failure to be so qualified or licensed would not
have a Material Adverse Effect on such member of the Coral Group. No member of
the Coral Group is in default under or in violation of any provision of its
respective certificate of incorporation or bylaws.
4.02 Coral Public: At the Effective Time, Coral Group will cause
------------
Coral Public to make representations and warranties to Indian regarding (i) the
acquisition of Indian's stock and (ii) Coral Public's capital stock and Coral
Public Common Stock, which representations and warranties are usual and
customary in similar transactions and which are substantially similar to the
representations and warranties made by Coral Public to any member of the Coral
Group.
4.03 No Breach of Statute or Contract; Governmental Authorizations:
-------------------------------------------------------------
Neither the execution and delivery of this Agreement nor compliance with the
terms and provisions of this Agreement by any member of the Coral Group will
violate any law, statute, rule or regulation of any governmental authority, or
will on the Closing Date or the Effective Time conflict with or result in a
breach of any of the terms, conditions or provisions of any judgment, order,
injunction, decree or ruling of any court or governmental agency, authority to
which any such member of the Coral Group is subject or of any agreement or
instrument to which any such member of the Coral Group is a party or by which it
is bound, or constitute a material default thereunder, or result in the creation
of any material lien, charge or encumbrance upon any property or assets of any
member of the Coral Group or cause any acceleration of maturity of any material
obligation or loan, or give to others any material interest or rights, including
rights of termination or cancellation, in or with respect to any of the
properties, assets, agreements, contracts or business of any member of the Coral
Group.
4.04 Authorization of Agreement: The execution, delivery and
--------------------------
performance of this Agreement by each member of the Coral Group have been duly
and validly authorized and approved by all requisite action on the part of each
member of the Coral Group. The execution, delivery and performance by each
member of the Coral Group of all other agreements and transactions contemplated
hereby have been or prior to the First Closing and the Effective Time will be,
duly authorized and approved by all requisite action on the part of each member
of the Coral Group. This Agreement has been, and the other agreements
contemplated hereby, when executed and delivered, will be, duly executed and
delivered by each member of the Coral Group as required and, assuming the due
authorization, execution and delivery hereof and thereof by the other parties
hereto or thereto, this Agreement constitutes and, when executed, each of the
other agreements contemplated hereby will constitute, a valid and binding
obligation of each member of the Coral Group that is a party hereto or thereto,
as the case may be, enforceable against each of them in accordance with its
terms subject to applicable bankruptcy, reorganization, insolvency, moratorium,
fraudulent conveyance and similar laws affecting creditors' rights generally
from time to time and to general principles of equity.
4.05 Disclosure:
----------
a. None of the information, including the oil and gas reserve,
well and acreage data, which has been or will be supplied by any member of the
Coral Group to Indian (or any amendment thereof or supplement thereto) will
contain any statement which, at the time and in light of
Page 13 of
<PAGE>
the circumstances under which it is made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of a
proxy for the same meeting or subject matter which has become false or
misleading.
b. Each member of the Coral Group will furnish all information
required with respect to its respective assets necessary for the preparation of
financial statements with respect thereto for inclusion in the Registration
Statement in accordance with applicable rules of the SEC, including Regulation
S-X.
4.06 Broker's or Finder's Fees: No member of the Coral Group has
-------------------------
incurred any liability, contingent or otherwise, for brokers' or finders' fees
in respect of this Agreement for which Indian shall have any responsibility
whatsoever.
4.07 Permits: At the Effective Time, each member of the Coral Group
-------
will have all approvals, authorizations, consents, licenses, orders, franchises,
rights, registrations and permits of all governmental agencies, whether federal,
state or local, required to permit the operations of their businesses as
presently conducted (the "Permits") and each will be in full force and effect
and will have been duly and validly issued, except where the absence of which,
singly or in the aggregate, would not have a Material Adverse Effect on any
member of the Coral Group. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
revocation, cancellation, suspension or modification of any such Permit except
where such revocation, cancellation, suspension or modification would not have a
Material Adverse Effect on any member of the Coral Group. At the Effective
Time, there will be no outstanding violation of any of the Permits singly or in
the aggregate that would have a Material Adverse Effect on any member of the
Coral Group.
4.08 Title to the Assets: Except as set forth in Schedule 4.08, each
-------------------
member of the Coral Group will have at the Effective Time good and defensible
title of record to their respective assets free and clear of all liens, pledges,
claims, charges, security interests, production payments or other encumbrances
except (i) liens for current taxes and assessments not yet due, or being
contested in good faith by appropriate proceedings and (ii) such imperfections
of title and encumbrances, if any, which do not have singly or in the aggregate
a Material Adverse Effect on any member of the Coral Group.
4.09 Oil and Gas Leases in Good Standing: Except as disclosed in
-----------------------------------
Schedule 4.09, all oil and gas leases which are material singly or in the
aggregate to each member of the Coral Group are in full force and effect, and no
member of the Coral Group is in default thereunder.
4.10 Registration Statement Information: Assuming that the
----------------------------------
representations of Indian set forth in Section 3 hereof are true and correct,
neither the Registration Statement nor any amendment thereof or supplement
thereto will contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which has been false or misleading.
Page 14 of
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4.11 Board Recommendation: The boards of directors of each member of
--------------------
Coral Group, at meetings duly called and held, have by unanimous vote, (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger and the Reorganization, and the issuance of Coral Public
Common Stock to Indian in the Merger and pursuant to this Agreement are fair to
and in the best interests of the stockholders and partners, as appropriate, of
each member of the Coral Group, and (ii) resolved to recommend that the partners
of the Coral Partnerships approve the Reorganization and issuance of the shares
of Coral Public Common Stock to be issued to Indian in the Merger.
4.12 Required Vote: The affirmative vote of a majority of the limited
-------------
partners of the Coral Partnerships is the only vote necessary to approve the
issuance of the shares of Coral Public Common Stock to be issued to Indian
pursuant to the Merger and this Agreement. Except for such vote, there is no
vote of the holders of any class or series of securities necessary to approve
this Agreement, the Merger, the Reorganization, or any other transaction
contemplated hereby or thereby.
4.13 Financial Statements. Attached as Schedule 4.13 are the
--------------------
following consolidated financial statements (collectively the "Financial
Statements") for the Coral Partnerships: (i) audited balance sheets and
statements of income, and changes in partner's equity as of and for the fiscal
year ended December 31, 1997 (the "Most Recent Fiscal Year End"); and (ii) an
unaudited balance sheet and statement of income (the "Most Recent Financial
Statements") as of and for the twelve months ended December 31, 1998 (the "Most
Recent Fiscal Month End"). The Financial Statements (including the notes
thereto) have been prepared on the basis of accounting used by the Coral
Partnerships for federal income tax reporting purposes applied on a consistent
basis throughout the periods covered thereby, present fairly in all respects the
assets, liabilities, and financial condition of the Coral Partnerships as of
such dates and the results of operations of the Coral Partnerships for such
periods, are correct and complete in all respects, and are consistent with the
books and records of the Coral Partnerships (which books and records are correct
and complete); provided, however, that the Most Recent Financial Statements are
subject to normal year-end adjustments (which will not be material individually
or in the aggregate) and lack footnotes and other presentation items of the type
required. Coral Group agrees to provide to Indian audited balance sheets and
statements of income, and changes in partners equity as of and for the fiscal
year ended December 31, 1998 as soon as such financial statements are available.
The audited financial statements for the year ended December 31, 1998 shall be
substituted in their entirety for the unaudited financial statements for the
twelve months ended December 31, 1998 and for all purposes thereafter the
audited December 31, 1998 financial statements shall be the Most Recent Fiscal
Month End.
4.14 Events Subsequent to Most Recent Fiscal Month End. Since the
-------------------------------------------------
Most Recent Fiscal Month End (as defined in Section 4.13 above), there has not
been any Material Adverse Effect in the business, financial condition,
operations, results of operations, or future prospects of any member of the
Coral Group.
4.15 Undisclosed Liabilities. No member of the Coral Group has any
-----------------------
liabilities and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any member of the Coral Group giving rise to any liability, except for (i)
liabilities set forth on the face of the Most Recent Financial Statements, as
defined in Section 4.13 above (rather than in any notes thereto) and (ii)
liabilities which have arisen after the Most Recent
Page 15 of
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Fiscal Month End (as defined in Section 4.13 above) in the ordinary course of
business (none of which results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement or violation of law), and which liabilities will not, individually
or in the aggregate, have a Material Adverse Effect upon the business,
properties, or condition (financial or otherwise) of any member of the Coral
Group.
4.16 Legal Compliance. Each member of the Coral Group has complied
----------------
with, and is conducting its respective business in accordance with, all
applicable laws, and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand or notice has been filed or commenced or, to
the knowledge of any member of the Coral Group, threatened against it alleging
any failure so to comply. There is no basis for any such action, suit,
proceeding or investigation (i) which would have a Material Adverse Effect on
the financial condition, properties, assets, business or prospects of any member
of the Coral Group or (ii) which would impair any member of the Coral Group's
ability or obligation to perform fully on a timely basis any obligations which
it may have or will have under this Agreement. There are no existing violations
of any laws which could have a Material Adverse Effect upon the business or the
possession, use, occupancy or operation of any member of the Coral Group's
facilities or other property.
4.17 Environmental and Safety Matters: Except as set forth in
--------------------------------
Schedule 4.17 and to the best of Coral Group's information and belief:
a. No member of the Coral Group is aware, and no member has
received any notice from any person, entity or governmental body, agency or
commission, of any release, disposal, event, condition, circumstance, activity,
practice or incident concerning any land, facility, asset or property that (i)
interferes with or prevents compliance or continued compliance by any member of
the Coral Group with any United States, state or local law, regulation, code or
ordinance or the terms of any license or permit issued pursuant thereto, or (ii)
gives rise to or results in any common law or other liability of any member of
the Coral Group to any person, entity or governmental body, agency or commission
for damage or injury to natural resources, wildlife, human health or the
environment which would have a Material Adverse Effect on any member of the
Coral Group.
b. There is no civil, criminal or administrative action,
lawsuit, demand, litigation, claim, hearing, notice of violation, investigation
or proceeding, pending or threatened, against any member of the Coral Group or
any present or former owner of any interest in, or operator of, any of the
lands, facilities, assets and properties owned or formerly owned, operated,
leased or used by any member of the Coral Group as a result of the violation or
breach of any federal, state, or local law, regulation, code or ordinance or any
duty arising at common law to any person, entity or governmental body, singly or
in the aggregate, which if determined adversely to any member of the Coral Group
would have a Material Adverse Effect on any such member of the Coral Group.
5. Conduct and Transactions Prior to Effective Time:
------------------------------------------------
5.01 Investigation by Indian/Operation of Business of Coral: Between
------------------------------------------------------
the date of this Agreement and the Effective Time (for purposes of this Section
5.01, Coral group shall include Coral Public):
Page 16 of
<PAGE>
a. Coral Group and the Coral Partnerships shall give, and shall
cause Coral Public to give, Indian, its agents and
representatives, reasonable access to all of the premises
and books and records of Coral Group and the Coral
Partnerships and agree to cause their respective officers to
furnish Indian, its agents and representatives with such
financial and operating data and other information with
respect to the respective businesses and properties of Coral
Group and the Coral Partnerships as Indian, its agents and
representatives shall from time to time reasonably request,
provided, however, that any such investigations shall not
affect any of the representations and warranties of Coral
Group hereunder, and provided further, that any such
investigation shall be conducted in such manner as not to
interfere unreasonably with the operation of the respective
businesses of Coral Group and the Coral Partnerships. In the
event of termination of this Agreement, except as prevented
by law, Indian will, and shall cause its agents and
representatives to, return to Coral Group all documents,
work papers and other materials obtained from Coral Group
and the Coral Partnerships, in connection with the
transactions contemplated hereby, and all copies, extracts
or other reproductions thereof in whole or in part (the
"Coral Confidential Material").
b. Except as required by law, the Coral Confidential Material
will be kept confidential and will not, without the prior
written consent of Coral Ltd., be disclosed by Indian, in
whole or in part, and will not be used by Indian, directly
or indirectly, for any purpose other than in connection with
this Agreement, the other transactions contemplated by this
Agreement or evaluating, negotiating or advising Indian with
respect to the transactions contemplated herein.
c. Coral Group and the Coral Partnerships will conduct their
business only in the ordinary course and, by way of
amplification and not limitation, will not, without the
prior written consent of Indian (i) issue shares of their
capital stock except pursuant to existing contractual
commitments or in connection with the Reorganization (ii)
amend their Certificates of Incorporation or bylaws, except
as contemplated by this Agreement, (iii) waive any rights of
substantial value, (iv) enter into any agreement not in the
ordinary course of their business, or (v) take any action or
omit to take any action which would result in any of their
representations or warranties set forth in this Agreement
becoming untrue.
5.02 Investigation by Coral Group of Indian. Between the date of
--------------------------------------
this Agreement and
Page 17 of
<PAGE>
the Effective Time:
a. Insofar as related to the Interests, Indian shall give Coral
Group, their agents and representatives, reasonable access
to all of the books and records of Indian and the properties
of Indian, and agrees to cause its respective officers to
furnish Coral Group, their agents and representatives with
such financial and operating data and other information with
respect to the respective businesses and properties of
Indian as Coral Group, their agents and representatives
shall from time to time reasonably request; provided,
however, that any such investigation shall not affect any of
the representations and warranties of Indian hereunder, and
provided further, that any such investigation shall be
conducted in such manner as not to interfere unreasonably
with the operation of the business of Indian. In the event
of termination of this Agreement, except as prevented by
law, Coral Group will, and shall cause their agents and
representatives to, return to Indian all documents, work
papers and other materials obtained from Indian, in
connection with the transactions contemplated hereby, and
all copies, extracts or other reproductions thereof in whole
or in part (the "Indian Confidential Material").
b. Except as required by law, the Indian Confidential Material
will be kept confidential and will not, without the prior
written consent of Indian, be disclosed by Coral Group, in
whole or in part, and will not be used by any member of
Coral Group, directly or indirectly, for any purpose other
than in connection with this Agreement, the other
transactions contemplated by this Agreement or evaluating,
negotiating or advising Coral Group with respect to the
transactions contemplated herein.
c. Except as contemplated by this Agreement and the Management
Agreement, Indian will conduct its business only in the
ordinary course and, by way of amplification and not
limitation, it will not, without the prior written consent
of Coral Ltd. (i) issue, sell or otherwise dispose of shares
of its capital stock, or (ii) INTENTIONALLY OMITTED, or
(iii) declare, set aside, or pay any dividend or
distribution with respect to the capital stock of Indian, or
(iv) directly or indirectly redeem, purchase or otherwise
acquire any capital stock of Indian, or (v) effect a split
or reclassification of any capital stock of Indian or a
recapitalization of Indian, or (vi) change the charter or
bylaws of Indian, or (vii) permit Indian to grant any
increase in the compensation payable to its employees other
than regularly scheduled merit increases, or (viii) borrow,
except as provided in this Agreement and for working capital
purposes and except in the ordinary course of
Page 18 of
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business, or agree to borrow any funds, or guarantee or agree to
guarantee the obligations of others, or (ix) waive any rights of
substantial value, or (x) except in the ordinary course of
business enter into an agreement, contract or commitment which,
if entered into prior to the date of this Agreement, would be
required to be listed in a Schedule attached to this Agreement,
or materially amend or change the terms of any such agreement,
contract or commitment, or (xi) take any action or omit to take
any action which would result in any of its representations or
warranties set forth in this Agreement becoming untrue.
d. Indian will maintain its books of account in the usual, regular
and ordinary manner.
6. Conditions and Obligations of Coral Group: The obligations of Coral
-----------------------------------------
Group to cause Indian to be included in the Merger contemplated by this
Agreement shall be subject to the following conditions:
6.01 Resolutions of Board of Directors: Indian shall have furnished
---------------------------------
Coral Group with certified copies of resolutions duly adopted by the Board of
Directors of Indian authorizing all necessary and proper corporate action to
enable Indian to comply with the terms of the Merger.
6.02 Representations and Warranties of Indian to be True: Except to
---------------------------------------------------
the extent waived in writing by Coral Group (i) the representations and
warranties of Indian herein contained shall be Substantially True (hereinafter
defined) as of the Effective Time with the same effect as though made at such
time (except if a representation and warranty speaks as of a different date, in
which case it shall be Substantially True as of such date); and (ii) Indian
shall have performed all material obligations and complied with all material
covenants required by this Agreement to be performed or complied with by it at
or prior to the Effective Time. Indian shall have also delivered to Coral Group
a certificate of Indian, dated the Effective Date, signed by two of its
officers, to both of the aforementioned effects. If Coral Group and Indian are
able to agree on a basis upon which to adjust the consideration to be received
among them in the Merger and Reorganization, after taking into account any
representation or warranty that is not Substantially True as provided in this
Section 6.02, then, for purposes of Section 1.14(b), this condition shall be
deemed satisfied, regardless of the fact that Indian's representations and
warranties will not be Substantially True at the Effective Time.
6.03 Third Party Consents: Indian shall have obtained and delivered to
--------------------
Coral Group at the Effective Time consents to the Merger contemplated by this
Agreement from the parties whose consent is required by contract or otherwise.
6.04 Coral Partnership Approval: A majority of the limited partnership
--------------------------
interests in each of the Coral Partnerships shall have approved the Merger and
the Reorganization and the issuance of the Coral Public Common Stock
contemplated by this Agreement.
6.05 No Material Adverse Change: There shall not have occurred since
--------------------------
the First Closing (i) any material adverse change in the financial condition,
results of operations or business of
Page 19 of
<PAGE>
Indian excluding any change or effect resulting from general economic
conditions, any occurrence or condition affecting the oil and gas industry
generally and any occurrence or condition arising out of the transactions
contemplated by this Agreement or the Management Agreement, or (ii) any loss or
damage to any of the properties or assets (whether or not covered by insurance)
of Indian or its assets, which, in any case, would have a Material Adverse
Effect on Indian.
6.06 Statutory Requirements: All statutory and regulatory
----------------------
requirements and approvals for the valid consummation by Indian of the Merger
transaction contemplated by this Agreement shall have been fulfilled and all
authorizations, consents and approvals of all governmental bodies required to be
obtained in order to permit consummation by Indian of the transactions
contemplated by the Merger shall have been obtained. Between the date of this
Agreement and the Effective Date, no action or proceeding shall have been
instituted or, to the knowledge of Indian, shall have been threatened by any
party (public or private) before a court or other governmental body to restrain
or prohibit the transactions contemplated by this Agreement or to obtain damages
in respect thereof.
7. Conditions and Obligations of Indian: The obligations of the Indian
------------------------------------
to allow Coral Group to include Indian in the Merger contemplated by this
Agreement shall be subject to the following conditions:
7.01 Resolutions of Boards of Directors; Partners: Each member of the
--------------------------------------------
Coral Group shall have furnished Indian with certified copies of resolutions
duly adopted by the Boards of Directors or partners of each Coral Group
authorizing all necessary and proper corporate action to enable each member of
the Coral Group to comply with the terms of the Merger.
7.02 Representations and Warranties of Coral Group to be True: Except
--------------------------------------------------------
to the extent waived in writing by Indian (i) the representations and warranties
of each member of the Coral Group herein contained shall be Substantially True
at the Effective Time with the same effect as though made at such time (except
if a representation and warranty speaks as of a different date, in which case it
shall be Substantially True as of such date); and (ii) each member of the Coral
Group shall have performed all material obligations and complied with all
material covenants required by this Agreement to be performed or complied with
by it at or prior to the Effective Time. Each member of the Coral Group shall
have also delivered to Indian a certificate of each such member, dated the
Effective Time and signed by two of its officers, if it is a corporation, or
signed by its general partner(s), if it is a limited partnership, to both of the
aforementioned effects. If Coral Group and Indian are able to agree on a basis
upon which to adjust the consideration to be received among them in the Merger
and the Reorganization, after taking into account any representation or warranty
that is not Substantially True as provided in this Section 7.02, then, for
purposes of Section 1.14(c), this condition shall be deemed satisfied,
regardless of the fact that any member of Coral Group's representations and
warranties will not be Substantially True at the Effective Time.
7.03 Third Party Consents: Each member of the Coral Group shall have
--------------------
obtained and delivered to Indian at the Effective Time consents to the Merger
and the Reorganization contemplated by this Agreement from the parties to all
material contracts which require such consent.
7.04 Coral Partnerships Approval: The general partners of, and the
---------------------------
holders of a
Page 20 of
<PAGE>
majority of the limited partnerships interests in, each of the Coral
Partnerships shall have approved the Merger and the issuance of the Coral Public
Common Stock contemplated by this Agreement, and Coral Group shall have
furnished to Indian certified copies of resolutions to this effect.
7.05 No Material Adverse Change: There shall not have occurred since
--------------------------
the First Closing (i) any material adverse change in the business, properties,
results of operations or financial condition of any member of the Coral Group
excluding any change or effect resulting from general economic conditions, any
occurrence or condition affecting the oil and gas industry generally and any
occurrence and condition arising out of the transactions contemplated by this
Agreement, or (ii) any loss or damage to any of the properties or assets
(whether or not covered by insurance) of any member of the Coral Group or any of
their consolidated subsidiaries which, in either case, would have a Material
Adverse Effect on such member of the Coral Group.
7.06 Statutory Requirements: All statutory and regulatory
----------------------
requirements and approval for the valid consummation by each member of the Coral
Group and Coral Public of the Merger and the Reorganization contemplated by this
Agreement shall have been fulfilled and all authorizations, consents and
approvals of all governmental bodies required to be obtained in order to permit
consummation by each member of the Coral Group and Coral Public of the
transactions contemplated by the Merger and the Reorganization shall have been
obtained. Between the date of this Agreement and the Effective Time, no action
or proceeding shall have been instituted or, to the knowledge of any member of
the Coral Group, shall have been threatened by any party (public or private)
before a court or other governmental body to restrain or prohibit the
transactions contemplated by this Agreement or to obtain damages in respect
thereof.
7.07 Effectiveness of Registration Statement: Coral Public's
---------------------------------------
Registration Statement has been filed with the SEC in accordance with the
requirements of the Securities Act of 1933 and such Registration Statement has
become effective.
7.09 Terms of the Merger. The Reorganization shall have occurred and
-------------------
Indian shall be included in the Merger on substantially the same terms and
conditions as the other members of the Coral Group in the Reorganization, and
the terms of such Merger and Reorganization shall, in any event, be similar to
the terms of other oil and gas limited partnership reorganizations.
8. General Provisions:
------------------
8.01 Amendments: Subject to applicable law, this Agreement and the
----------
form of any exhibit attached hereto may be amended upon authorization by the
boards of directors of the parties hereto at any time prior to the Effective
Time.
8.02 Survival of Covenants, Representations and Warranties: The
-----------------------------------------------------
representations and warranties of Coral Group and Indian shall survive the First
Closing until the Effective Time and shall then terminate.
8.03 Certain Definitions: As used in this Agreement, a "Material
-------------------
Adverse Effect" on any one or more of the parties hereto is an event or
condition that has an adverse financial impact of more than $500,000 on Indian,
and $500,000 on Coral Group, and the statement that the
Page 21 of
<PAGE>
representations and warranties of the parties are to be "Substantially True"
shall be true if the cumulative adverse financial impact of all untrue
representations and warranties is less than $500,000 in the case of Indian and
$500,000 in the case of the Coral Group. Notwithstanding anything else in this
Agreement to the contrary, no event resulting from general economic conditions,
no occurrence or condition affecting oil and gas industry generally and no
occurrence or condition arising out of the transactions contemplated by this
Agreement thereof shall be considered adverse or make any representation or
warranty herein untrue.
8.04 Governing Law: This Agreement and the legal relations between
-------------
the parties shall be governed by and construed in accordance with the laws of
the State of Oklahoma.
8.05 Notices: All notices, requests, demands or other communications
-------
required or permitted by this Agreement shall be in writing and effective when
received, and delivery shall be made personally or by registered or certified
mail, return receipt requested, postage prepaid, or overnight courier or
confirmed facsimile transmission, addressed as follows:
a. If to Coral Group:
Coral Reserves Group, Ltd.
119 N. Robinson, Suite 600
Oklahoma City, Oklahoma 73102
Attention: Leo Woodard, President
Facsimile: (405) 232-2226
with a copy to:
Musser & Bunch
100 Park Avenue, Suite 400
Oklahoma City, Oklahoma 73102
Attention: Scott M. Rayburn
Facsimile: (405) 232-7930
b. If to Indian:
Indian Oil Company
9400 N. Broadway, Suite 800
Oklahoma City, Oklahoma 73114
Attention: Rick Dunning
Facsimile: (405)
Page 22 of
<PAGE>
With a copy to:
Hartzog Conger & Cason
201 Robert S. Kerr, Suite 1600
Oklahoma City, Oklahoma 73102
Attention: Armand Paliotta
Facsimile: (405) 235-7329
8.06 No Assignment: This Agreement may not be assigned by operation of
-------------
law or otherwise; provided, however, Coral Group may assign its rights to an
affiliate formed for that purpose but such assignment shall not relieve Coral
Group of its obligations hereunder.
8.07 Fees and Expenses: Except as set forth in Section 1.12, all fees
-----------------
and expenses, including attorneys' fees, incurred in connection with this
Agreement and the transactions contemplated hereby shall be borne by the
respective party who has incurred such fee or expense.
8.08 Headings: The descriptive headings of the Sections and
--------
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
8.09 Counterparts: This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.10 Entire Agreement: This Agreement and the other agreements
----------------
contemplated hereby constitutes the entire agreement among the Coral Group and
Indian with respect to the subject matter hereof. Unless this Agreement is
specifically amended in writing, it supersedes all other agreements and under
standings among the parties with respect to the subject matter hereof and
thereof.
8.11 No Third Party Beneficiaries: Nothing in this Agreement, whether
----------------------------
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any person other than the parties to it, nor is
anything in this Agreement intended to relieve or discharge the obligation or
liability of any third persons to any party to this Agreement, nor shall any
provision give any third persons any rights of subrogation or action over or
against any party to this Agreement.
8.12 Specific Performance: Coral Group and Indian each acknowledge
--------------------
that neither would have an adequate remedy at law for money damages in the event
that this Agreement were not performed in accordance with its terms, and
therefore, agree that Coral Group and Indian each shall be entitled to specific
enforcement of the terms hereof in addition to any other remedy to which it may
be entitled, at law or in equity.
8.13 Partial Illegality or Unenforceability: Wherever possible, each
--------------------------------------
provision hereof shall be interpreted in such manner as to be effective under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be illegal or unenforceable in any
Page 23 of
<PAGE>
respect, such illegality or unenforceability shall not affect any other
provision of this Agreement, and this Agreement shall be construed as if such
illegal or unenforceable provision or provisions had never been contained herein
unless the deletion of such provision or provisions would result in such a
material change as to cause completion of the transactions contemplated hereby
to be unreasonable.
EXECUTED and delivered the day and year first above written.
Coral Reserves, Inc.
By:_______________________________
Coral Reserves Energy Corp.
By:_______________________________
Coral Reserves Group, Ltd.
By:_______________________________
Indian Oil Company
By:_______________________________
Page 24 of
<PAGE>
PRODUCTION PAYMENT
------------------
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned, Indian Oil Company ("Indian") for and in
consideration of Ten Dollars and other good and valuable consideration, receipt
of which is hereby acknowledged, does hereby sell, assign, convey, transfer and
set over unto Coral Reserves, Inc. and Coral Reserves Energy Corp.,
(collectively called "Coral") jointly and severally, a production payment of
Nine Million ($9,000,000) Dollars payable out of the proceeds realized from the
sale of oil, gas, casinghead gas, and other petroleum products produced and
saved from the leasehold, royalty, overriding royalty and mineral interests,
including any extension, renewal, replacement, substitution or reversionary
interest, now owned or hereafter acquired by Indian, wherever located, free and
clear of all operating and development expenses. The proceeds used to pay this
production payment shall be allocated and paid in priority and in accordance
with the terms and conditions of an Agreement and Plan of Merger among Indian,
Coral and other entities, dated February 15, 1999 ("Merger Agreement").
The production payment shall terminate when all monies due Coral have
been paid and received by Coral or at such time as Indian has been liquidated
and all payments have been made to Coral pursuant to the Merger Agreement.
Dated this 15th day of February, 1999.
INDIAN OIL COMPANY, an Oklahoma
Corporation
By: /s/
---------------------------------
Roger Graham, President
CORAL RESERVES, INC., an Oklahoma
Corporation
By: /s/
---------------------------------
Leo E. Woodard
CORAL RESERVES ENERGY CORP., an
Oklahoma Corporation
By: /s/
---------------------------------
Leo E. Woodard
<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
BETWEEN
CORAL GROUP AND INDIAN OIL COMPANY
1. This is the First Amendment to the Agreement and plan of Merger among Coral
Reserves, Inc., Coral Reserves Energy Corp., Coral Reserves Group, Ltd. and
Indian Oil Company dated February 15, 1999 ("Original Agreement"). All
terms and conditions of the Original Agreement remain in full force and
effect unless expressly modified by this amendment.
2. Upon execution of the Original Agreement, Coral Group shall deposit Two
Million ($2,000,000) Dollars into an escrow account with MidFirst Bank,
N.A. The terms of the escrow will provide that the funds will remain in
escrow until the earlier of (i) the consent of BancOne is obtained to the
terms of the Original Agreement, at which time the funds will be removed
from escrow and applied to Indian's debt with MidFirst Bank, or (ii) March
1, 1999, at which time the funds will be removed from escrow and paid to
Coral Group.
3. If the consent of BancOne is obtained to the terms of the Original
Agreement, Coral Group will immediately pay the remainder of its Six
Million ($6,000,000) Dollar obligation pursuant to Section 1.03(a) of the
Original Agreement.
Dated: February 15, 1999
CORAL RESERVES, INC.
By: /s/
---------------------------------
Leo E. Woodard
CORAL RESERVES ENERGY CORP.
By: /s/
---------------------------------
Leo E. Woodard
CORAL RESERVES GROUP, LTD.
By: /s/
--------------------------------
Leo E. Woodard
INDIAN OIL COMPANY
By: /s/
---------------------------------
Roger Graham
<PAGE>
EXHIBIT 2.3
MANAGEMENT AGREEMENT
This Management Agreement (the "Agreement") has been entered into as of
this ____ day of February, 1999, by and between Indian Oil Company ("Indian"),
an Oklahoma corporation, and Coral Reserves Group, Ltd. ("Coral"), an Oklahoma
corporation. All defined terms used herein shall have the same meaning given to
those terms in the Merger Agreement (as hereinafter defined) unless the context
indicates otherwise.
R E C I T A L S:
Indian and Coral are parties to an Agreement and Plan of Merger (the
"Merger Agreement") which provides for, among other things, the Merger of Indian
into Coral Public or, alternatively, the sale and liquidation of Indian's assets
and properties (the "Interests"). The Merger Agreement contemplates that, during
the period described herein, Coral will manage Indian's operations and affairs
and make payments from Indian's revenues and working capital for certain
obligations of Indian. Alternatively, the Merger Agreement provides that, upon
termination of the Merger or Reorganization transactions contemplated by the
Merger Agreement, Coral will manage the timely sale and liquidation of Indian's
Interests. The parties intend for this Agreement to memorialize the terms
pursuant to which a representative of Coral will manage Indian's operations and
affairs in accordance with this Agreement and the Merger Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Commencement Date. The date upon which BancOne's consent to the
------------------
terms of the Merger Agreement is obtained shall be the effective date for the
commencement of the management services described herein (the "Commencement
Date"). Beginning as of the Commencement Date, the duties and responsibilities
of the Manager (as defined in Section 2 below) will commence.
2. Engagement of the Manager. As of the Commencement Date, Coral agrees
-------------------------
to designate an individual experienced and knowledgeable in the oil and gas
production business (the "Manager"), and Indian agrees to engage such Manager,
to manage the operations and affairs of Indian, upon the terms and conditions
set forth in this Agreement; provided, however, that the person designated by
Coral shall be approved by Indian's board of directors, which approval shall not
be unreasonably withheld. Subject to its approval of Coral's designee, Indian's
board of director shall elect the Manager as an executive officer of Indian.
<PAGE>
3. Manager's Duties and Responsibilities.
-------------------------------------
3.1 General. The Manager shall be responsible for managing the
-------
business and affairs of Indian in a good, diligent and workmanlike manner, but
shall in no event have liability to Indian or to other parties for losses
sustained or liabilities incurred, except such as may result from a breach of
this Agreement or from gross negligence or willful misconduct. Subject to the
limitations set forth herein, the Manager shall have the responsibility and
authority to manage the day-to-day operations of Indian including, but not
limited to, employment hiring and termination decisions. The Manager shall
perform his duties, and shall cause Indian's business to continue to be
operated, in compliance with all applicable federal, state, and local rules,
ordinances, regulations and statutes.
3.2 Employment Downsizing. The parties intend that, immediately
---------------------
after the Commencement Date, the Manager will cause Indian's work force to be
reduced as determined by the Manager. In connection with the reduction of
Indian's work force, Indian's board of directors shall have the right to direct
that the Manager cause Indian to make reasonable severance payments.
3.3 Collection of Revenues and Payment of Expenses; Accounting. The
----------------------------------------------------------
Manager shall have the duty and responsibility of collecting Indian's revenues,
managing its working capital, and making monthly payments therefrom of the
following obligations of Indian, in order of priority:
(a) First, to Indian's monthly overhead (salaries, rent, lease
payments, utilities, supplies, etc.);
(b) second, to payment of Indian's debt to BancOne based on 80
equal monthly payments of principal, plus accrued interest;
(c) third, to payment of Indian's lease operating expenses; and
(d) fourth, to payment of interest only on Indian's debt to
MidFirst Bank, N.A.
The expenses listed above are referred to as the "Overhead Expenses". If
Indian's revenues and working capital are sufficient in any month to pay all of
the Overhead Expenses, then the excess shall be used as follows, in order of
priority:
2
<PAGE>
(a) First, in payment to Coral of the Contingent Production
Payment; and
(b) second, at the discretion and direction of Indian's board of
directors; it being contemplated that Indian's board of directors will direct
that such excess be used to fund developmental drilling, reduce Indian's long-
term debt, and/or supplement Indian's working capital.
If Indian's revenues and working capital are insufficient, in any
month, to make the full Contingent Production Payment, then any unpaid portion
will be paid in the next month in which Indian's revenues and working capital
are sufficient, but only after paying all of that month's Overhead Expenses.
Payment of the Contingent Production Payment, or any other discretionary
payments, shall only be made to the extent permitted by Section 1.04 of the
Merger Agreement.
The Manager shall provide monthly financial statements to Indian's board of
directors with respect to Indian's revenues and expenses, which statement shall
contain information related to total revenues received and expenses paid.
3.4 Minor Assets Sale. In addition to the other duties and
-----------------
responsibilities described herein, the Manager shall have the obligation to sell
those of Indian's Interests that have been identified by Indian's board of
directors and Coral as Interests of Indian's that can be sold without materially
affecting Indian's Borrowing Base, as defined in the Credit Agreement between
Indian and BancOne, dated December 22, 1997.
3.5 Other. Upon the termination of Coral's obligation to include
-----
Indian in the Merger transaction contemplated by the Merger Agreement, and after
the 90-day negotiation period described in Section 1.15 of the Merger Agreement,
the Manager shall have the obligation to cause a timely sale and liquidation of
Indian's Interests, as directed and supervised by Indian's board of directors.
The proceeds of such sale and liquidation of Indian's Interests shall be paid as
set forth in Section 1.15 of the Merger Agreement.
3.6 Signature Authority. Subject to the restrictions set forth
-------------------
herein, the Manager shall have the authority of an executive officer of Indian,
including the authority to execute contracts and enter into agreements with
third parties on behalf of Indian in order to fulfill his duties and
responsibilities set forth herein.
3
<PAGE>
4. Restrictions on Authority. Notwithstanding any provisions of this
-------------------------
Agreement or the Merger Agreement to the contrary, without first obtaining the
consent of Indian's board of directors, the Manger shall not, on behalf of or in
the name of Indian:
(a) Except in connection with a liquidation and sale of Indian's
Interests as provided in Section 1.15 of the Merger Agreement, sign any deed,
pledge agreement, mortgage, contract of sale or other commitment purporting to
sell, convey, encumber or refinance all or substantially all of Indian's
Interests;
(b) do any act that would change or substantially expand or
enlarge the business of Indian;
(c) conduct any exploratory or development drilling on behalf of
Indian;
(d) distribute or utilize insurance proceeds received upon the
total or substantial destruction of Indian's Interests in any manner other than
which may be dictated by any relevant loan agreements or other such documents;
(e) do any act in contravention of this Agreement;
(f) execute or deliver any assignment for the benefit of
creditors of Indian;
(g) lend any person any of the funds of Indian;
(h) confess a judgment against Indian;
(i) except in connection with a liquidation and sale of Indian's
Interests as provided in Section 1.15 of the Merger Agreement, do any act that
would make it impossible to carry on the ordinary business of Indian;
(j) except in connection with a liquidation and sale of Indian's
Interests as provided in Section 1.15 of the Merger Agreement, sell all or
substantially all of Indian's Interests;
(k) perform any act that would subject a shareholder or member of
the board of directors of Indian to personal liability; and
4
<PAGE>
(l) execute or approve any waiver by Indian of any of the Coral
Groups' obligations or conditions under this Agreement or the Merger Agreement;
amend, modify, or otherwise change, on behalf of Indian, any of the terms or
conditions of this Agreement or the Merger Agreement; or cause Indian to be in
default or in breach of any of its representations, warranties, obligations or
conditions under this Agreement or the Merger Agreement.
5. Indemnification. Coral agrees to indemnify and hold Indian harmless
---------------
from and against any costs, liabilities, claims, demands, and causes of action,
including attorneys' fees, incurred by Indian and arising out of or in
connection with any material breach by Coral or the Manager of the terms of this
Agreement. Indian agrees to indemnify the Manager to the fullest extent
permitted by, but subject to the conditions and limitations of, Section 1031 of
the Oklahoma General Corporation Act, or its successor statute.
6. Term and Termination. The term of this Agreement shall begin as of
--------------------
the Commencement Date and shall continue until the earlier of (i) the mutual
agreement of the parties to terminate this Agreement or (ii) completion of
either the Merger of Indian into Coral Public or the sale and liquidation of
Indian's Interests; provided, however, if the Merger Agreement is terminated
prior to the consummation of either of such events in (ii) above, this Agreement
shall terminate, without any further action, as of the same date of termination
of the Merger Agreement; and provided further, however, that this Management
Agreement shall terminate as provided in Section 1.14(d) of the Merger
Agreement.
This Agreement may be terminated by Indian, upon five (5) days prior
written notice to Coral, if the Manager, Coral or any of the Coral Group
breaches any material term of this Agreement or the Merger Agreement.
Either party may terminate this Agreement if the other party shall be
adjudged bankrupt, or shall make a general assignment for the benefit of its
creditors or shall file a petition for arrangement with creditors or for
reorganization, or if a receiver shall be appointed on account of its
insolvency.
7. Notices. All notices, requests, demands or other communications
-------
required or permitted by this Agreement shall be made as set forth in the Merger
Agreement.
8. Counterparts. This Agreement may be executed in one or
------------
5
<PAGE>
more counterparts, all of which shall be considered one and the same agreement
and shall be effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
9. No Third Party Beneficiaries. Nothing in this Agreement, whether
----------------------------
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any person other than the parties to this Agreement,
nor is anything in this Agreement intended to relieve or discharge the
obligation or liability of any third persons to any party to this Agreement, nor
shall any provision give any third persons any rights of subrogation or action
over or against any party to this Agreement.
10. Assignment. Neither this Agreement nor any interest herein, nor any
----------
claim hereunder, shall be assigned or transferred by either party without the
prior written consent of the other party.
11. Partial Invalidity. If any provision of this Agreement shall be held
------------------
to be void or unenforceable for any reason, said provision shall be deemed
modified so as to constitute a provision conforming as nearly as possible to
said void or unenforceable provision while still remaining valid and
enforceable, and the remaining terms and provisions hereof shall not be affected
thereby.
12. Entire Agreement. This Agreement and the Merger Agreement contain and
----------------
constitute the entire agreement between the parties hereto and supersede all
prior agreements and understandings between the parties hereto relating to the
subject matter hereof. There are no agreements, understandings, restrictions,
warranties or representations between the parties relating to the subject matter
hereof other than those set forth or referred to herein. This Agreement is not
intended to have any legal effect whatsoever, or to be a legally binding
agreement or any evidence thereof, until the Commencement Date.
13. Amendment and Waiver. This Agreement may only be amended by a writing
--------------------
executed by each of the parties hereto. Any party may waive any requirement to
be performed by the other party, provided that such waiver shall be in writing
and executed by the party granting the waiver. The parties agree that a waiver
by one party on one occasion shall not be deemed a waiver on any other occasion.
14. Construction. This Agreement shall be construed,
------------
6
<PAGE>
enforced and governed in accordance with the laws of the State of Oklahoma. In
the event any party hereto institutes any legal action in connection with any
matter contained herein, that legal action shall be instituted in the District
Court of Oklahoma County, Oklahoma, if in state court, and if federal court,
then in the federal district court located in Oklahoma City, Oklahoma. All
pronouns and any variations thereof shall be deemed to refer to the masculine,
feminine or neuter gender thereof or to the plurals of each, as the identity of
the person or persons or the context may require. The descriptive headings
contained in this Agreement are for reference purposes only and are not intended
to describe, interpret, define or limit the scope, extent or intent of this
Agreement or any provision contained herein.
15. Binding Effect. This Agreement shall be binding upon, inure to the
--------------
benefit of and be enforceable by and against the parties hereto and their
respective heirs, executors, personal representatives, successors and assigns.
Executed and delivered the day and year first above written.
INDIAN OIL COMPANY
By: ______________________________
Its: _________________________
CORAL RESERVES GROUP, LTD.
By: ______________________________
Its: _________________________
7
<PAGE>
Exhibit 3.1(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
of
CORAL RESERVES GROUP, LTD.
The undersigned officers of Coral Reserves Group, Ltd., an Oklahoma
corporation (the "Corporation") do hereby certify as follows:
1. The Certificate of Incorporation (the "Certificate of Incorporation")
of the Corporation was originally filed with the Oklahoma Secretary of State, on
March 2, 1987, under the provisions of the Oklahoma General Corporation Act, and
was amended on October 18, 1988.
2. This Amended and Restated Certificate of Incorporation ("Certificate
of Incorporation") has been duly adopted in accordance with the provisions of
Sections 1077 and 1080 of the Oklahoma General Corporation Act by the
affirmative vote of the holders of a majority of all outstanding shares entitled
to vote at a meeting of such shareholders.
4. The text of the Certificate of Incorporation of Coral Reserves Group,
Ltd., as amended, is hereby amended and restated in its entirety by this
Certificate of Incorporation to provide as follows:
FIRST. The name of the Corporation is Canaan Energy Corporation.
SECOND. The address of its registered office in the State of Oklahoma is
20 North Broadway, 1800 Mid-America Tower, Oklahoma City, Oklahoma County,
Oklahoma 73102. The name of its registered agent at such address is Reeder E.
Ratliff, Esq., c/o Crowe & Dunlevy, 20 North Broadway, 1800 Mid-America Tower,
Oklahoma City, Oklahoma 73102.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Oklahoma General
Corporation Act.
FOURTH. The total number of shares of capital stock which the Corporation
shall have authority to issue is Fifty-One Million (51,000,000), divided into
Fifty Million (50,000,000) shares of Common Stock of the par value of $.01 per
share and One Million (1,000,000) shares of Preferred Stock of the par value of
$.01 per share.
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of this Article FOURTH, to provide for the issuance of
the shares of Preferred Stock in series, and by filing a certificate pursuant to
the applicable law of the State of Oklahoma, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
<PAGE>
The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) Whether or not the shares of that series will be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
FIFTH. The Corporation, acting through its Board of Directors, may create
and issue, whether or not in connection with the issue and sale of any shares of
stock or other securities of the Corporation, rights or options entitling the
holders thereof to purchase from the Corporation any shares of its capital stock
of any class or classes, such rights or options to be evidenced by or in such
instrument or instruments as shall be approved by the Board of Directors. The
terms upon which, including the time or times, which may be limited or unlimited
in duration, at or within which, and the price or prices at which any such
shares may be purchased from the corporation upon the exercise of any such right
or option, shall be such as shall be stated in a resolution adopted by the Board
of Directors providing for the creation and issue of such rights or options,
and, in every case, shall be set forth or incorporated by reference in the
instrument or instruments evidencing such rights or options. Without limiting
the generality of the foregoing, the authority to adopt and maintain a
shareholders' rights plan, and to establish the terms and conditions thereof,
including the terms and circumstances under which the rights are to be redeemed,
shall be reserved exclusively to the Board of Directors of the Corporation.
<PAGE>
SIXTH. The bylaws may be adopted, altered, amended or repealed by the
Board of Directors. Election of directors need not be by written ballot unless
the bylaws so provide.
SEVENTH. (1) A director of the Corporation shall have no personal
liability to the Corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director; provided, however, that the provisions of this
paragraph (1) shall not eliminate or limit the liability of a director (a) for
any breach of the director's duty of loyalty to the Corporation or its
shareholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 1053,
Title 18 of the Oklahoma Statutes (1991), as amended, relating to the liability
of directors for unlawful payment of dividends or unlawful stock purchases or
redemptions, or (d) for any transaction from which the director derived an
improper personal benefit.
(2) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, 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
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
---- ----------
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
(3) The Corporation shall 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 interests 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
indemnity for such expenses which the court shall deem proper.
<PAGE>
(4) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (2) and (3) of this Article
SEVENTH, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(5) Any indemnification under paragraphs (2) and (3) of this Article
SEVENTH (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth therein. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum (as defined in the bylaws of the Corporation) consisting of directors
who were not parties to such action, suit or proceeding, or (b) if such quorum
is not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
shareholders.
(6) Expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article SEVENTH. Such
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
(7) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article SEVENTH, unless
otherwise provided by or granted pursuant to Article SEVENTH, shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any statute, bylaw, agreement,
vote of shareholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(8) By action of the Board of Directors, notwithstanding any interest
of the directors in the action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, on
behalf of any person who 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 any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or would be required to
indemnify him against such liability under the provisions of this Article
SEVENTH or of the Oklahoma General Corporation Act.
(9) Each paragraph and part thereof of this Article SEVENTH shall be
considered severable; and if, for any reason, any paragraph or part thereof is
determined to be invalid and
<PAGE>
contrary to, or in conflict with, any existing or future provision of the
Oklahoma General Corporation Act or any other law of the State of Oklahoma by a
court having valid jurisdiction, such determination shall not impair the
operation of, or have any other effect upon, the other paragraphs of this
Article SEVENTH or the other parts of the paragraph in question as may remain
otherwise intelligible, and such other paragraphs or parts shall continue to be
given full force and effect and such invalid paragraphs or parts shall be deemed
not to be a part of this Certificate of Incorporation.
EIGHTH. The provisions of Section 1090.3, Title 18 of the Oklahoma States
(1991), as amended, specifically shall apply to the Corporation from and after
the filing of this Certificate of Incorporation with the Secretary of State of
the State of Oklahoma.
NINTH. The provisions of Sections 1145 through Section 1155, Title 18 of
the Oklahoma Statutes (1991), as amended, specifically shall apply to the
Corporation from and after the filing of this Certificate of Incorporation with
the Secretary of State of the State of Oklahoma.
TENTH. Except upon the affirmative vote of shareholders holding all the
issued and outstanding shares of Common Stock, no amendment to this Certificate
of Incorporation may be adopted by the Corporation which would impose personal
liability for the debts of the Corporation on the shareholders of the
Corporation or which would amend, alter or repeal this Article EIGHTH or would
adopt any provision inconsistent with this Article EIGHTH.
ELEVENTH. Notwithstanding anything contained in this Certificate of
Incorporation or the bylaws of the Corporation to the contrary:
(1) Number, Election and Terms. The Board of Directors of the
--------------------------
Corporation shall consist of not less than three (3) Members with the exact
number to be fixed from time to time by the Board of Directors. The
directors shall be divided into three classes, designated Class A, Class B,
and Class C, as nearly equal in number as possible as the Board of
Directors shall determine from time to time, with the term of office of the
Class C directors to expire at the 2001 annual meeting of shareholders, the
term of office of the Class B directors to expire at the 2002 annual
meeting of shareholders, and the term of the Class A directors to expire at
the 2003 annual meeting of shareholders. At each meeting of shareholders
following such initial classification and election, the number of directors
in the class whose term expires at the time of such meeting as determined
by the Board of Directors shall be elected to hold office until the third
succeeding annual meeting of shareholders. Each director shall hold office
until his successor is elected and qualified, or until his earlier
resignation or removal.
(2) Newly Created Directorships and Vacancies. Newly created
-----------------------------------------
directors resulting from any increase in the authorized number of directors
and any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other
cause may be filled only by the affirmative vote of a majority of the
directors then in office, although less than a quorum, and directors so
chosen shall hold
<PAGE>
office for a term expiring at the annual meeting of shareholders at which
the term of the class to which they have been elected expires and until his
successor is elected and qualified.
(3) Removal. At a meeting of shareholders called expressly for that
-------
purpose, any director, or the entire Board of Directors, may be removed
from office only with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of the Corporation then entitled
to be voted in an election of directors.
(4) Amendment, Repeal, Etc.. The affirmative vote of the holders of
-----------------------
at least sixty-six and two thirds percent (66 2/3%) of the outstanding
shares of the Corporation then entitled to be vote in an election of
directors shall be required to alter, amend or repeal, or to adopt any
provision inconsistent with, this Article ELEVENTH.
TWELFTH. Any action which is required or which may be taken at any annual
or special meeting of the shareholders may be taken without a meeting, without
prior notice, and without a vote, only if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of all the
outstanding capital stock of the Corporation entitled to vote on such action.
THIRTEENTH. Subject to the limitations set forth in this Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
shareholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned officers have signed this Amended and
Restated Certificate of Incorporation this 5th day of January, 2000.
CORAL RESERVES GROUP, LTD.
By: /s/ Leo E. Woodard
----------------------------------------
, President
ATTEST:
/s/ Michael S. Mewbourn
- -------------------------------------------
Michael S. Mewbourn, Secretary
<PAGE>
Exhibit 3.1(b)
================================================================================
AMENDED AND RESTATED
BYLAWS
OF
CANAAN ENERGY CORPORATION
(As Adopted January 3, 2000)
(Effective January 13, 2000)
================================================================================
<PAGE>
TABLE OF CONTENTS
TO
AMENDED AND RESTATED
BYLAWS
OF
CANAAN ENERGY CORPORATION
(an Oklahoma Corporation)
<TABLE>
<S> <C>
ARTICLE I - SHAREHOLDERS................................................................... 1
Section 1.01. Annual Meeting......................................................... 1
Section 1.02. Special Meetings....................................................... 1
Section 1.03. Notice of Meetings..................................................... 1
Section 1.04. Quorum................................................................. 2
Section 1.05. Organization........................................................... 2
Section 1.06. Conduct of Business.................................................... 2
Section 1.07. Proxies and Voting..................................................... 2
Section 1.08. Written Consents....................................................... 3
Section 1.09. Stock List............................................................. 3
Section 1.10. Notice of Shareholder Nomination and Shareholder Business.............. 3
ARTICLE II - BOARD OF DIRECTORS............................................................ 5
Section 2.01. Number and Term of Office.............................................. 5
Section 2.02. Vacancies.............................................................. 5
Section 2.03. Regular Meetings....................................................... 5
Section 2.04. Special Meetings....................................................... 5
Section 2.05. Quorum................................................................. 6
Section 2.06. Participation in Meetings by Conference Telephone...................... 6
Section 2.07. Written Consents....................................................... 6
Section 2.08. Conduct of Business.................................................... 6
Section 2.09. Powers................................................................. 6
Section 2.10. Compensation of Directors.............................................. 7
Section 2.11. Removal................................................................ 7
ARTICLE III - COMMITTEES................................................................... 7
Section 3.01. Executive Committee.................................................... 7
Section 3.02. Other Committees of the Board of Directors............................. 8
Section 3.03. Limitations on Power and Authority of Committees....................... 8
Section 3.04. Conduct of Business.................................................... 8
ARTICLE IV - OFFICERS...................................................................... 9
Section 4.01. Generally.............................................................. 9
Section 4.02. Chairman of the Board.................................................. 9
Section 4.03. Vice Chairman of the Board............................................. 9
Section 4.04. Chief Executive Officer................................................ 9
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 4.05. President.............................................................. 10
Section 4.06. Vice Presidents........................................................ 10
Section 4.07. Secretary.............................................................. 10
Section 4.08. Treasurer.............................................................. 10
Section 4.09. Delegation of Authority................................................ 10
Section 4.10. Removal................................................................ 10
Section 4.11. Action with Respect to Securities of Other Corporations................ 10
ARTICLE V - STOCK.......................................................................... 11
Section 5.01. Certificates of Stock.................................................. 11
Section 5.02. Transfers of Stock..................................................... 11
Section 5.03. Record Date............................................................ 11
Section 5.04. Lost, Stolen or Destroyed Certificates................................. 12
Section 5.05. Regulations............................................................ 12
ARTICLE VI - NOTICES....................................................................... 12
Section 6.01. Notices................................................................ 12
Section 6.02. Waivers................................................................ 13
ARTICLE VII - MISCELLANEOUS................................................................ 13
Section 7.01. Facsimile Signatures................................................... 13
Section 7.02. Corporate Seal......................................................... 13
Section 7.03. Reliance upon Books, Reports and Records............................... 13
Section 7.04. Fiscal Year............................................................ 13
Section 7.05. Time Periods........................................................... 13
ARTICLE VIII - AMENDMENTS.................................................................. 14
</TABLE>
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
CANAAN ENERGY CORPORATION
(As Adopted January 3, 2000)
(Effective January 13, 2000)
ARTICLE I - SHAREHOLDERS
Section 1.01. Annual Meeting
An annual meeting of the shareholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen months subsequent to the later of the date of
incorporation or the last annual meeting of the shareholders.
Section 1.02. Special Meetings
Special meetings of the shareholders, for any purpose or purposes
prescribed in the notice of the meeting, may be called by the Board of Directors
or by the Chairman of the Board or the President and shall be held at such
place, on such date, and at such time as they or he shall fix.
Section 1.03. Notice of Meetings
Written notice of the place, date, and time of all meetings of the
shareholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each shareholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Oklahoma General Corporation Act or the Certificate of Incorporation). The
term "Certificate of Incorporation" as used herein shall mean the Certificate of
Incorporation of the Corporation as may be amended from time to time. Notice of
a special meeting of the shareholders shall also state the purpose or purposes
for which the meeting is called.
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date, and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
<PAGE>
Section 1.04. Quorum
At any meeting of the shareholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or
represented by proxy, shall constitute a quorum for all purposes, unless or
except to the extent that the presence of a larger number may be required by law
or by the Certificate of Incorporation.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of the stock entitled to vote who are
present, in person or represented by proxy, may adjourn the meeting to another
place, date, or time.
Section 1.05. Organization
Such person as the Board of Directors may have designated or, in the
absence of such a person, the highest ranking officer of the Corporation who is
present shall call to order any meeting of the shareholders and act as chairman
of the meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman appoints.
Section 1.06. Conduct of Business
The chairman of any meeting of shareholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him in order.
Section 1.07. Proxies and Voting
At any meeting of the shareholders, every shareholder entitled to vote may
vote in person or by proxy authorized in such manner as specifically permitted
by the Oklahoma General Corporation Act or as the Corporation may otherwise
permit. Proof of such authority shall be filed in accordance with the procedure
established for the meeting. The validity and authenticity of any proxy shall
be determined by the Corporation.
Each shareholder shall have one vote for every share of stock entitled to
vote which is registered in his name on the record date for the meeting, except
as otherwise provided herein or required by law or by the Certificate of
Incorporation.
All voting, except where otherwise required by law or by the Certificate of
Incorporation, may be by a voice vote; provided, however, that upon demand
therefor by a shareholder entitled to vote or his proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state
the name of the shareholder or proxy voting and such other information as may be
required under the procedure established for the meeting. Every vote taken by
ballots shall be counted by an inspector or inspectors appointed by the chairman
of the meeting.
2
<PAGE>
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or by the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
Section 1.08. Written Consents
Any action required or which may be taken at any annual or special meeting
of the shareholders may be taken without a meeting, without prior notice or a
vote, only if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders all the of outstanding stock entitled to
vote on such action. Every written consent shall bear the date of signature of
each shareholder who signs the consent and no written consent shall be effective
to take the corporate action referred to therein unless, within sixty (60) days
of the earliest dated consent delivered in the manner required by this section
to the corporation, written consents signed by a sufficient number of holders to
take action are delivered to the corporation by delivery to its registered
office in this state, its principal place of business, or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
shareholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Section 1.09. Stock List
The officer who has charge of the stock ledger of the Corporation shall
prepare a complete list of shareholders entitled to vote at any meeting of
shareholders, arranged in alphabetical order for each class of stock and showing
the address of each such shareholder and the number of shares registered in the
name of each shareholder. Such list shall be open to the examination of any
shareholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to examination by any shareholder who is
present. The stock ledger shall be the only evidence as to the identity of the
shareholders entitled to examine the stock list and to vote in person or by
proxy at the meeting.
Section 1.10. Notice of Shareholder Nomination and Shareholder Business
At a meeting of the shareholders, only such business shall be conducted as
shall have been properly brought before the meeting. Nominations for the
election of directors may be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors. Other matters to be
properly brought before the meeting must be: (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
3
<PAGE>
Directors, including matters covered by Rule 14a-8 under the Securities Exchange
Act of 1934, as in effect from time to time; (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors; or (c)
otherwise properly brought before the meeting by a shareholder, as provided
below.
A notice of the intent of a shareholder to make a nomination or to bring
any other matter before the meeting shall be made in writing and received by the
Secretary of the Corporation not more than one hundred fifty (150) days and not
less than ninety (90) days in advance of the annual meeting or, in the event of
a special meeting of shareholders, such notice shall be received by the
Secretary of the Corporation not later than the close of the fifteenth day
following the day on which notice of the meeting is first mailed to
shareholders.
Every such notice by a shareholder shall set forth:
(a) the name and residence address of the shareholder of the
Corporation who intends to make a nomination or bring up any other matter;
(b) a representation that the shareholder is a registered holder of
the Corporation's voting stock and intends to appear in person or by proxy
at the meeting to make the nomination or bring up the matter specified in
the notice;
(c) with respect to notice of an intent to make a nomination, a
description of all arrangements or understandings among the shareholder and
each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to made by the
shareholder;
(d) with respect to notice of an intent to make a nomination, such
other information regarding each nominee proposed by such shareholder as
would have been required to be included in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had each
nominee been nominated by the Board of Directors of the Corporation; and
(e) with respect to notice of an intent to bring up any other matter,
a description of the matter, and any material interest of the shareholder
in the matter.
Notice of intent to make a nomination shall be accompanied by the written
consent of each nominee to serve as director of the Corporation, if so elected.
At the meeting of shareholders, the Chairman of the meeting shall declare
out of order and disregard any nomination or other matter not presented in
accordance with this section.
<PAGE>
ARTICLE II - BOARD OF DIRECTORS
Section 2.01. Number and Term of Office
The Board of Directors of the Corporation shall consist of not less than
three (3) members, with the exact number to be fixed from time to time by the
Board of Directors. The directors shall be divided into three classes,
designated Class A, Class B, and Class C, as nearly equal in number as possible
as the Board of Directors shall determine from time to time, with the term of
office of the Class C directors to expire at the 2001 annual meeting of
shareholders, the term of office of the Class B directors to expire at the 2002
annual meeting of shareholders, and the term of the Class A directors to expire
at the 2003 annual meeting of shareholders. At each meeting of shareholders
following such initial classification and election, the number of directors in
the class whose term expires at the time of such meeting as determined by the
Board of Directors shall be elected to hold office until the third succeeding
annual meeting of shareholders. Each director shall hold office until his
successor is elected and qualified, or until his earlier resignation or removal.
Section 2.02. Vacancies
Newly created directors resulting from any increase in the authorized
number of directors and any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or other
cause may be filled only by the affirmative vote of a majority of the directors
then in office, although less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of shareholders at which the
term of the class to which they have been elected expires and until his
successor is elected and qualified.
Section 2.03. Regular Meetings
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 2.04. Special Meetings
Special meetings of the Board of Directors may be called by one-third (1/3)
of the directors then in office or by the President and shall be held at such
place, on such date, and at such time as they or he shall fix. Notice of the
place, date, and time of each such special meeting shall be given each director
by whom it is not waived in one or more of the following ways: (i) by mailing
written notice not less than three (3) days before the meeting, or (ii) by
personally delivering the same not less than eighteen (18) hours before the
meeting; or (iii) by telegraphing, transmitting by facsimile or telephoning the
same in a manner reasonably designed to reach the director not less than
eighteen (18) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
5
<PAGE>
Section 2.05. Quorum
At any meeting of the Board of Directors, a majority of the total directors
then in office, but not less than a majority of the total number of directors
constituting the whole board, shall constitute a quorum for all purposes. If a
quorum shall fail to attend any meeting, a majority of the directors present may
adjourn the meeting to another place, date, or time, without further notice or
waiver thereof.
Section 2.06. Participation in Meetings by Conference Telephone
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment that enables all persons
participating in the meeting to hear each other. Such participation shall
constitute presence in person at such meeting.
Section 2.07. Written Consents
Action may be taken by the Board of Directors without a meeting if all
members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors.
Section 2.08. Conduct of Business
At any meeting of the Board of Directors at which a quorum of the directors
is present, business shall be transacted in such order and manner as the board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law or by the Certificate of Incorporation.
Section 2.09. Powers
The Board of Directors may, except as otherwise required by law or by the
Certificate of Incorporation, exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation, including, without
limiting the generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
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(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon
any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers and agents of the Corporation and its
subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these bylaws, for the management of the Corporation's business and affairs.
Section 2.10. Compensation of Directors
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
directors.
Section 2.11. Removal
At a meeting of shareholders called expressly for that purpose, any
director, or the entire Board of Directors, may be removed from office only with
cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of the Corporation then entitled to be voted in an election
of directors.
ARTICLE III - COMMITTEES
Section 3.01. Executive Committee
The Board of Directors may designate an Executive Committee to serve at the
pleasure of the board and shall elect a director or directors to serve as the
member or members of the Executive Committee, designating, if it desires, other
directors as alternative members who may replace any absent or disqualified
member at any meeting of the Executive Committee. The Executive Committee,
except to the extent as it may be restricted from time to time by the vote of a
majority of the total number of directors, may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it subject to
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the limitations set forth on Section 3.03. Unless expressly restricted by
resolution of the Board of Directors, the Executive Committee shall have the
power and authority to declare a dividend, to authorize the issuance of stock
and to adopt a certificate of ownership and merger. In the absence or
disqualification of any member of the Executive Committee, and any alternate
member in his place, the member or members of the Executive Committee present at
the meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 3.02. Other Committees of the Board of Directors
The Board of Directors may from time to time designate other committees of
the board, with such lawfully delegable powers and duties as it thereby confers,
to serve at the pleasure of the board and shall, for those committees, elect a
director or directors to serve as the member or members, designating, if it
desires, other directors as alternative members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so
designated may exercise the power and authority of the Board of Directors to the
extent the resolution designating the committee or a supplemental resolution of
the Board of Directors shall so provide subject to the limitation set forth in
Section 3.03. In the absence or disqualification of any member of any committee
and any alternate member in his place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may by unanimous vote appoint another member of the
Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 3.03. Limitations on Power and Authority of Committees
No committee of the Board of Directors shall have any power or authority in
reference to amending the Certificate of Incorporation of the Corporation
(except that the Executive Committee, to the extent authorized in the resolution
or resolutions providing for the issuance of shares of stock adopted by the
Board of Directors, may fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation or
fix the number of the shares in any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the shareholders the sale, lease or exchange of
all or substantially all of the property and assets of the Corporation,
recommending to the shareholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the bylaws of the Corporation.
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Section 3.04. Conduct of Business
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the total committee
members shall constitute a quorum unless the committee shall consist of one or
two members, in which event one member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Minutes
of each committee meeting shall be prepared, approved by the chairman of the
meeting and filed with the Secretary of the Corporation. Action may be taken by
any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.
ARTICLE IV - OFFICERS
Section 4.01. Generally
The officers of the Corporation shall consist of a President and a
Secretary and such other senior or subordinate officers as may from time to time
be elected by the Board of Directors. The Board of Directors may also elect a
Chief Executive Officer and may elect from its number a Chairman and Vice
Chairman of the Board of the Corporation. Officers shall be elected by the
Board of Directors, which shall consider that subject at its first meeting after
every annual meeting of shareholders. Each officer shall hold his office until
his successor is elected and qualified or until his earlier resignation or
removal. Any number of offices may be held by the same person.
Section 4.02. Chairman of the Board
The Chairman of the Board, if any, shall, if present, preside at all
meetings of the Board of Directors and exercise and perform such other powers
and duties as may be from time to time assigned to him by the Board of
Directors. He shall be the senior officer of the Corporation and shall be
responsible for overall planning and policy.
Section 4.03. Vice Chairman of the Board
The Vice Chairman of the Board shall perform such duties as the Board of
Directors shall prescribe. In the absence or disability of the Chairman of the
Board, the Vice Chairman shall perform the duties and exercise the powers of the
Chairman of the Board.
Section 4.04. Chief Executive Officer
The Chief Executive Officer shall, subject to the provisions of these
Bylaws and to the directors of the Board of Directors, be responsible for the
general management and control of the
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affairs and business of the Corporation and shall perform all duties and have
all powers which are commonly incident to the office of Chief Executive Officer
or which are delegated to him by the Board of Directors. He shall have the power
to execute on behalf of the Corporation, negotiable instruments, bonds,
mortgages, deeds, contracts and other documents which the Board of Directors has
authorized to be executed. The Chief Executive Officer may attend and
participate in all meeting of the Board of Directors, but shall not be entitled
to vote on any action submitted to the Board of Directors, unless he or she is
also a member of the Board of Directors. The Chief Executive Officer and the
President shall generally supervise the other officers, shall exercise such
other powers and perform such other duties as may be assigned to the Chief
Executive Officer by the Board of Directors at any time and from time to time.
Section 4.05. President
The President shall, in the absence of disability of the Chief Executive
Officer, perform the duties and exercise the powers of the Chief Executive
Officer and shall have such duties as are assigned to him by the Chief Executive
Officer and the Board of Directors. He shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
Section 4.06. Vice Presidents
Each Vice President shall perform such duties as the Board of Directors,
the Chief Executive Officer or the President shall prescribe. In the absence or
disability of the President, the Vice President with the highest ranking shall
perform the duties and exercise the powers of the President.
Section 4.07. Secretary
The Secretary shall issue all authorized notices for, and shall keep
minutes of, all meetings of the shareholders and the Board of Directors. He
shall have charge of the corporate records.
Section 4.08. Treasurer
The Treasurer, if any, shall have the custody of all monies and securities
of the Corporation and shall keep regular books of account. He shall make such
disbursements of the funds of the Corporation as are proper and shall render
from time to time an account of all such transactions and of the financial
condition of the Corporation.
Section 4.09. Delegation of Authority
The Board of Directors may from time to time delegate the powers or duties
of any officer to any other officers or agents, notwithstanding any provision
hereof.
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Section 4.10. Removal
Any officer of the Corporation may be removed at any time, with or without
cause, by the Board of Directors.
Section 4.11. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of shareholders of or with respect to any action of
shareholders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE V - STOCK
Section 5.01. Certificates of Stock
Each shareholder shall be entitled to a certificate signed by, or in the
name of, the Corporation by the Chairman or the Vice Chairman of the Board, or
the President or a Vice President, and by the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer, certifying and
representing the number of shares owned by him. Any of or all the signatures on
the certificate may be facsimile.
Section 5.02. Transfers of Stock
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 5.04 of these bylaws, an
outstanding certificate for the number of shares involved shall be surrendered
for cancellation before a new certificate is issued therefor.
Section 5.03. Record Date
The Board of Directors may fix a record date for determining shareholders
entitled to notice of or to vote at a meeting of shareholders, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If no
record date is fixed by the Board of Directors, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of shareholders
of record entitled to notice of or to vote at a meeting of
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shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining shareholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
the Oklahoma General Corporation Act, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in this state,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of shareholders are
recorded. Delivery made to a Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by the Oklahoma General Corporation Act, the record date
for determining shareholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
In order that the Corporation may determine the shareholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the shareholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty (60) days prior to such
action. If no record date is fixed, the record date for determining
shareholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 5.04. Lost, Stolen or Destroyed Certificates
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5.05. Regulations
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
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ARTICLE VI - NOTICES
Section 6.01. Notices
Except as otherwise permitted herein, whenever notice is required to be
given to any shareholder, director, officer, or agent, such requirement shall
not be construed to mean personal notice. Such notice may in every instance be
effectively given by depositing a writing in a post office or letter box, first
class postage prepaid, or by dispatching a prepaid telegram, addressed to such
shareholder, director, officer, or agent at his or her address as the same
appears on the books of the Corporation. The time when such notice is deposited
or dispatched shall be the time of the giving of the notice.
Section 6.02. Waivers
A written waiver of any notice, signed by a shareholder, director, officer,
or agent, whether before or after the time of the event for which notice is to
be given, shall be deemed equivalent to the notice required to be given to such
shareholder, director, officer, or agent. Neither the business nor the purpose
of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 7.01. Facsimile Signatures
In addition to the provisions for the use of facsimile signatures elsewhere
specifically authorized in these bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 7.02. Corporate Seal
The Board of Directors may provide a suitable seal, containing the name of
the Corporation and the word "Oklahoma," which seal shall be placed in the
custody of the Secretary. If and when so directed by the Board of Directors or
a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.03. Reliance upon Books, Reports and Records
A member of the Board of Directors or a member of any committee designated
by the Board of Directors, in the performance of his duties, shall be fully
protected in relying in good faith upon the records of the Corporation and upon
such information, opinions, reports or statements presented to the Corporation
by any of the Corporation's officers or employees, or committees of the Board of
Directors, or by any other person as to matters the member
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reasonably believes are within such officer's, employee's, committee's or other
person's competence and who have been selected with reasonable care by or on
behalf of the Corporation.
Section 7.04. Fiscal Year
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 7.05. Time Periods
In applying any provision of these bylaws which require that an act be done
or not done a specified number of days prior to an event or that an act be done
during a period of a specified number of days prior to an event, calendar days
shall be used, the day of the doing of the act shall be excluded and the day of
the event shall be included.
ARTICLE VIII - AMENDMENTS
These bylaws may be amended or repealed by the Board of Directors at any
meeting or by the shareholders at any meeting, except that the amendment or
repeal of Sections 1.08, 2.01 or 2.11 of these Bylaws is prohibited unless the
Certificate of Incorporation is amended to permit the amendment or repeal of
such Sections of these bylaws.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Canaan Energy
Corporation, an Oklahoma corporation;
2. That the foregoing amended and restated bylaws comprising thirteen
(13) pages constitute the amended and restated bylaws of said Corporation as
duly adopted by Unanimous Written Consent of Board of Directors on January 3,
2000, effective January 13, 2000.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of said Corporation this 5th day of January, 2000.
/s/ Michael S. Mewbourn
--------------------------------------------------
Michael S. Mewbourn, Secretary
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Exhibit 3.2(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INDIAN OIL COMPANY
Indian Oil Company, an Oklahoma corporation incorporated on April 16, 1981
(the "Corporation"), does hereby file this Amended and Restated Certificate of
Incorporation pursuant to the Oklahoma General Corporation Act, as it may be
amended from time to time (hereinafter referred to as the "Act").
FIRST: The name of the Corporation is:
Indian Oil Company
SECOND: The address of its registered office in the State of Oklahoma is
1600 Bank of Oklahoma Plaza, 201 Robert S. Kerr, in the City of Oklahoma City,
County of Oklahoma. The name of its registered agent at such address is Hartzog
Conger Cason & Hargis, Inc.
THIRD: The nature of the businesses or purposes to be conducted or
promoted are:
To conduct any lawful business, to exercise any lawful purpose and
power, and to engage in any lawful act or activity for which corporations
may be organized under the Act, and in general, to possess and exercise all
the powers and privileges granted by the Act or by any other law of
Oklahoma or by this Certificate of Incorporation together with any powers
incidental thereto, so far as such powers and privileges are necessary or
convenient to the conduct, promotion or attainment of the businesses or
purposes of the Corporation.
FOURTH: The total number of shares of stock which this Corporation shall
have authority to issue is Two Million (2,000,000) shares, all of which shall be
Common Stock. The par value of each such share of Common Stock is one-half of a
cent ($.005), amounting in the aggregate to Ten Thousand Dollars ($10,000) of
capital. The shares of Common Stock shall have no preemptive or preferential
rights of subscription concerning further issuance or authorization of the
Corporation's shares of stock. The number of authorized shares of any class of
stock of the Corporation may be increased or decreased by amendments to this
Certificate of Incorporation. Each share of Common Stock shall entitle the
holder thereof to one vote, in person or by proxy, on any matter upon which
holders of Common Stock are
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entitled to vote.
At any time and from time to time when authorized by resolution of the
Board of Directors and without any action by its shareholders, the Corporation
may issue or sell any shares of its stock of any class or series, whether out of
the unissued shares thereof authorized by the Certificate of Incorporation as
originally filed, or by an amendment thereof, or out of shares of its stock
acquired by it after the issue thereof, and whether or not the shares thereof so
issued or sold shall confer upon the holders thereof the right to exchange or
convert such shares for or into other shares of stock of the Corporation of any
class or classes or any series thereof. When similarly authorized, but without
any action by its shareholders, the Corporation may issue or grant rights,
warrants or options, in bearer or registered or such other form as the Board of
Directors may determine, for the purchase of shares of the stock of any class or
series of the Corporation within such period of time, or without limit as to
time, to such aggregate number of shares, and at such price per share, as the
Board of Directors may determine. Such rights, warrants or options may be
issued or granted separately or in connection with the issue of any bonds,
debentures, notes, obligations or other evidences of indebtedness or shares of
the stock of any class or series of the Corporation and for such consideration
and on such terms and conditions as the Board of Directors, in its sole
discretion, may determine. In each case, the consideration to be received by
the Corporation for any such shares so issued or sold shall be such as shall be
fixed from time to time by the Board of Directors.
FIFTH: Except as may otherwise be provided in this Certificate or in the
Bylaws of the Corporation, as the same may be amended from time to time, the
Board of Directors shall have all powers and authority which may be granted to a
board of directors of a corporation under the Act, including but not limited to
the following:
(a) To adopt, amend or repeal the Bylaws of the Corporation.
(b) To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation.
(c) To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
(d) By a majority vote of the whole Board, to remove a director for
cause or change the status of a director from a voting director to an
advisory director or from an advisory director to a voting director.
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(e) To designate one or more committees.
(f) To sell, lease or exchange all or substantially all of the
property and assets of the Corporation, including its good will and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other
corporation or corporations, as the Board of Directors shall deem expedient
and for the best interest of the Corporation, when and as authorized by the
shareholders entitled to vote thereon.
(g) To provide indemnification for directors, officers, employees,
and/or agents of the Corporation to the fullest extent permitted by law,
subject however, to the rules against limitation on liability of directors
as set forth in Section 1006 of the Act, as amended from time to time.
(h) To determine from time to time whether and to what extent, and at
what times and places and under what conditions and regulations, the
accounts and books of the Corporation or any of them, shall be opened to
the inspection of the shareholders, and no shareholder shall have any right
to inspect any account or book or document of the Corporation, except as
conferred by the Act or authorized by the Board of Directors, or by a
resolution of the shareholders.
SIXTH: The number of directors shall be fixed in the manner provided for
in the Bylaws. Any director may be designated as an advisory director rather
than a regular voting director at any annual or special meeting of the
shareholders.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its shareholders or any class of them, any court of equitable
jurisdiction within the State of Oklahoma, on the application in a summary way
of this Corporation or of any creditor or shareholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 1106 of Title 18 of the Oklahoma Statutes or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 1100 of Title 18 of the
Oklahoma Statutes may order a meeting of the creditors or class of creditors,
and/or of the shareholders or class of shareholders of this Corporation, as the
case may be, to be summoned in such manner as the court directs. If a majority
in number representing three-fourths (3/4) in value of the creditors or
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class of creditors, and/or of the shareholders or class of shareholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the compromise or arrangement and the reorganization shall, if
sanctioned by the court to which the application has been made, be binding on
all the creditors or class of creditors and/or on all the shareholders or class
of shareholders of this Corporation, as the case may be, and also on this
Corporation.
EIGHTH: To the extent permitted by law, no contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purposes, if:
(a) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved by vote of the shareholders; or
(c) the contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors,
a committee thereof, or the shareholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained herein, add any additional provisions hereto, increase or
decrease the number of authorized shares of stock, or restate this Certificate
of Incorporation in its entirety in the manner now or hereafter prescribed by
the Act.
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TENTH: Except as otherwise required by law or as otherwise provided in
this Certificate of Incorporation or in the Bylaws of the Corporation, any
matter properly submitted to a vote of the shareholders at a meeting of
shareholders duly convened at which there is a quorum present shall be deemed
approved upon an affirmative vote of a majority of the outstanding shares of
Common Stock present at the meeting, in person or by proxy. No holders of any
class of stock other than Common Stock shall be entitled to vote upon any
matter, except as may be required by law, this Certificate of Incorporation, or
the Bylaws of the Corporation. Written ballots shall not be required for the
election of directors.
ELEVENTH: Any corporate action upon which a vote of shareholders is
required or permitted may be taken without a meeting or vote of shareholders
with the written consent of shareholders having not less than a majority of the
total number of votes entitled to be cast upon the action, or such larger
percentage required by statute, if a meeting were held. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to all shareholders who did not consent thereto in
writing. Any such notice shall have been given promptly if such notice is
delivered or mailed within ten (10) days of the taking of such action to such
shareholders.
TWELFTH: In addition to any other indemnification granted to directors of
the Corporation contained in this Certificate of Incorporation, the Bylaws of
the Corporation, or adopted by resolution of the shareholders or directors of
the Corporation, no director of the Corporation shall be personally liable to
the Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, provided however, that this indemnification shall not
eliminate or limit the liability of a director for any breach of the director's
duty of loyalty to the Corporation or its shareholders, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, or payment of any unlawful dividend or for any unlawful stock purchase
or redemption, or for any transaction from which the director derived an
improper personal benefit.
THIRTEENTH: No shareholder may transfer any shares of Common Stock of
the Corporation, including shares of Common Stock which may be issued after the
date of this Certificate of Incorporation, except as expressly provided in this
Article. The term "transfer" includes, but is not limited to, the acts of
selling, assigning, exchanging, transferring, pledging, encumbering, giving or
otherwise disposing of shares of Common Stock, of record or beneficially,
whether voluntarily or by operation of law.
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(a) Any shareholder (herein called a "Selling Shareholder") who receives and
desires to accept a bona fide written purchase offer (a "Purchase Offer") to
sell any shares of Common Stock may do so only for cash, or a promissory note,
the payments under which are unconditional and payable only in cash, or for some
combination of cash and such a promissory note, and only upon compliance with
all of the following:
(1) the Selling Shareholder shall give notice (the "Transfer Notice")
of the Purchase Offer to the Corporation. The Transfer Notice shall specify
(i) the number of shares of Common Stock proposed to be sold (the "Offered
Shares"), (ii the selling price per share, (ii the identity of the person
who made the Purchase Offer, (iv the proposed terms of payment (v) the
proposed closing date of the sale, and (vi all other material terms of the
Purchase Offer. The Transfer Notice shall also include a copy of the
Purchase Offer.
(2) The Corporation shall have the first option to purchase all or any
number of the Offered Shares on the same terms and conditions as contained
in the Purchase Offer by giving notice of acceptance (the "Acceptance
Notice") to the Selling Shareholder within thirty (30) days from the date
the Corporation received the Transfer Notice. The Acceptance Notice shall
state the number of the Offered Shares which the Corporation elects to
purchase. The Corporation's failure to deliver an Acceptance Notice to the
Selling Shareholder within such thirty-day period shall constitute a
rejection by the Corporation of its option to purchase any of the Offered
Shares.
(3) To the extent the Corporation elects to purchase Offered
Shares as specified in its Acceptance Notice, the Selling Shareholder shall
be required to sell those Offered Shares to the Corporation and the
Corporation shall be required to purchase those Offered Shares from the
Selling Shareholder, in accordance with the terms of the Purchase Offer.
Closing of the purchase of the Offered Shares as specified in the
Acceptance Notice shall occur on the date specified in the Purchase Offer
or, if later, the date which is thirty (30) days after the Corporation
received the Transfer Notice. If all Offered Shares are not elected for
purchase in an Acceptance Notice by the Corporation, then the Selling
Shareholder shall sell the balance of the Offered Shares to the person who
made the Purchase Offer in accordance with the terms of the Purchase Offer
prior to or concurrent with the Corporation's purchase of Offered Shares
specified in its Acceptance Notice. The failure of the Selling Shareholder
to sell the balance of the Offered Shares to the person who made the
Purchase Offer
6
<PAGE>
shall relieve the Corporation of its obligation to purchase the Offered
Shares as specified in its Acceptance Notice.
(4) If the Corporation does not exercise its right to purchase any of
the Offered Shares, then the Selling Shareholder may sell all of the
Offered Shares pursuant to the terms of the Purchase Offer. If the Selling
Shareholder does not sell all of the Offered Shares in accordance with all
of the terms of the Purchase Offer, the Selling Shareholder shall be
prohibited from selling any of the Offered Shares without again going
through procedure for selling the Offered Shares set forth in this Article.
(5) In the event a Transfer Notice of a Purchase Offer is given to the
Corporation, the Corporation shall have the right, in addition to its
option to purchase, to designate the other shareholders of the Corporation,
on a pro rata basis or such other basis as the other shareholders may agree
(or to one or more third parties to the extent the Corporation and the
other shareholders do not elect to purchase all of the Offered Shares), to
exercise all or any part of the Corporation's option to purchase, in which
event the other shareholders and any such third parties shall be entitled
to purchase Offered Shares of the Selling Shareholder on the same basis as
the Corporation could have done. Notice of the designation of the other
shareholders or third parties, if to be made, shall be included with the
Acceptance Notice to the Selling Shareholder.
(b) Upon the death of a shareholder, all shares of Common Stock owned by
that deceased shareholder may be transferred subject to the terms hereof to any
beneficiary or beneficiaries named in the deceased shareholder's will or other
dispositive document or to the heirs of the deceased shareholder, but any sale
of such shares of Common Stock by the executor or personal representative of a
deceased shareholder may only be made upon compliance with the terms hereof.
(c) A shareholder may grant a security interest in shares of Common Stock
to secure indebtedness of the shareholder, if such security interest is not
granted with the purpose of avoiding the restrictions on transfer contained in
this Article. However, any sale of the Common Stock by a creditor pursuant to
such security interest shall be subject to this Article.
(d) Any permitted transferee of Common Stock shall be bound by all of the
terms of this Article.
(e) If any Common Stock is purportedly transferred without complying with
the provisions of this Article, such transfer shall be of no effect, and the
shareholder who attempted to transfer such Common Stock shall remain the owner
of the Common
7
<PAGE>
Stock for all purposes. Such shareholder shall also be liable to the Corporation
and all other shareholders for any damages (including legal and other expenses)
arising from the improper attempted transfer.
This Amended and Restated Certificate of Incorporation amends and restates
in entirety the Corporation's Articles of Incorporation and was duly adopted in
accordance with the provisions of Section 1077 and 1080 of the Act.
IN WITNESS WHEREOF, the undersigned, being the President of the Corporation
certifies that the facts hereinabove stated are true as set forth as of this
30th day of September, 1992.
INDIAN OIL COMPANY
By: ______________________________
Richard R. Dunning, President
Attest:
______________________________
Michael C. Black, Secretary
8
<PAGE>
EXHIBIT 3.2(b)
AMENDED AND RESTATED
BYLAWS
OF
INDIAN OIL COMPANY
ARTICLE I.
Offices
-------
Section 1.1 Registered Office. The registered office of Indian Oil
-----------------
Company (hereinafter referred to as the "Corporation") shall be located 1600
Bank of Oklahoma Plaza, 201 Robert S. Kerr, Oklahoma City, Oklahoma.
Section 1.2 Offices. The Corporation may establish or discontinue, from
-------
time to time, such other offices and places of business within or without the
State of Oklahoma as the Board of Directors deems proper for the conduct of the
Corporation's business.
ARTICLE II.
Meetings of Shareholders
------------------------
Section 2.1 Annual Meeting. An annual meeting of shareholders for the
--------------
purpose of electing directors and transacting such other business as may come
before it shall be held at such place, within or without the State of Oklahoma,
on such date and at such time as shall be designated by the Board of Directors
or the President.
Section 2.2 Special Meetings. Special meetings of the shareholders,
----------------
unless otherwise prescribed by statute, may be called by the Board of Directors
or by the President. Business transacted at any special meeting of the
shareholders shall be limited to the purposes stated in the notice, but if no
purposes are stated, then any business may be transacted which lawfully comes
before the meeting.
Section 2.3 Notice of Meetings. Written notice of each meeting of
------------------
shareholders shall be given to each shareholder of record entitled to vote at
the meeting at the shareholder's address as it appears on the stock books of the
Corporation. The notice shall state the time and the place of the meeting and
shall be delivered or mailed not less than ten (10) nor more than sixty (60)
days before the day of the meeting. If mailed, such notice shall be deemed to
be given when deposited in the United
<PAGE>
States mail, postage prepaid, directed to the shareholder at his address as it
appears on the stock books of the Corporation. In the case of a special meeting,
the notice may but need not state the purpose or purposes for which the meeting
is being called. Whenever notice is required to be given hereunder, a written
waiver of notice signed by the shareholder entitled to notice, whether before or
after the time stated in the notice, shall be deemed equivalent to notice. Also,
attendance of a person at a meeting shall constitute a waiver of notice of such
meeting except when a person attends for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
Section 2.4 Quorum and Adjournment. The presence, in person or by
----------------------
proxy, of the holders of a majority of the shares of stock entitled to vote on
every matter that is to be voted on without regard to class or series shall
constitute a quorum at all meetings of the shareholders. In the absence of a
quorum, the holders of a majority of such shares of stock present in person or
by proxy may adjourn such meeting, from time to time, without notice other than
announcement at the meeting, until a quorum shall attend. At any such adjourned
meeting at which a quorum may be present, any business may be transacted which
might have been transacted at the meeting as originally called, but only those
shareholders entitled to vote at the meeting as originally called shall be
entitled to vote at any adjournment thereof.
Section 2.5 Officers at Shareholders' Meetings. The Chairman of the
----------------------------------
Board of Directors shall preside at all meetings of shareholders. In his
absence, the chairman shall be elected as the first order of business by a
majority of the shares of capital stock in attendance at the meeting.
Section 2.6 List of Shareholders Entitled to Vote. At least ten (10)
-------------------------------------
days before every meeting of shareholders, a complete list of the shareholders
entitled to vote at the meeting, arranged in alphabetical order and showing the
address of each shareholder and the number of shares registered in the name of
each shareholder, shall be prepared by or for the Secretary and shall be open to
the examination of any shareholder for any purpose germane to the meeting,
during ordinary business hours, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
Such list shall be available for inspection at the meeting.
Section 2.7 Fixing Date for Shareholders of Record. In order that the
--------------------------------------
Corporation may identify the shareholders entitled to notice of or to vote at
any meeting of shareholders or any
2
<PAGE>
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be less than ten (10) days nor more than sixty (60) days before
the date of such meeting, nor more than sixty (60) days prior to any other
action. If no record date is fixed, the record date for determining shareholders
entitled to notice of or to vote at a meeting of shareholders shall be at the
close of business on the day next preceding the day on which notice of the
meeting is given, or if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held. The record date for
determining shareholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is given. The
record date for determining shareholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of shareholders of record entitled
to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 2.8 Voting and Proxies. Subject to the provisions for fixing
------------------
the date for shareholders of record:
(a) Each shareholder shall at every meeting of the shareholders be
entitled to one vote for each share of capital stock having voting rights held
by that shareholder as to the matter being voted upon.
(b) Each shareholder entitled to vote at a meeting of shareholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for that shareholder by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy expressly provides for a longer period.
(c) Each matter properly presented to any meeting shall be decided by
a majority of the votes present and entitled to vote on the matter.
Section 2.9 Voting Procedures. When any matter is submitted to a vote
-----------------
of the shareholders, the chairman shall decide upon the qualifications of
voters, have the votes counted and declare the results. The chairman shall
decide whether voting is to be conducted by written ballot, a show of hands, or
voice vote.
3
<PAGE>
Section 2.10 Consent of Shareholders in Lieu of Meeting. Any action that
------------------------------------------
may be taken at any annual or special meeting of shareholders may be taken
without a meeting, without a prior notice and without a vote, if a consent in
writing, setting forth the action so taken, is signed by the shareholders having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of such action without a
meeting by less than unanimous written consent shall be given to each
shareholder who did not consent thereto in writing. Any such notice shall have
been given promptly if such notice is delivered or mailed within ten (10) days
of the taking of such action to each such shareholder in the manner provided in
Section 2.3.
ARTICLE III.
Directors
---------
Section 3.1 Number and Term of Office. The business and affairs of the
-------------------------
Corporation shall be managed by or under the direction of its Board of
Directors. The number of directors that shall constitute the whole Board shall
be fixed from time to time by resolution of the shareholders or the Board of
Directors and shall consist of not more than six (6) members. Directors shall
be elected at the annual meeting of shareholders to hold office until the next
annual meeting of shareholders or until their respective successors are elected
and have qualified. Directors may be designated as "advisory directors" rather
than regular voting directors by the shareholders at any annual or special
meeting of shareholders. In addition, the Board of Directors may change the
status of a director from an advisory director to a voting director or from a
voting director to an advisory director. The Board of Directors shall from time
to time establish minimum qualifications for eligibility to become a director.
Those qualifications may include, but not be limited to, a prerequisite stock
ownership in the Corporation.
Section 3.2 Place of Meetings. Meetings of the Board of Directors may
-----------------
be held at any place, within or without the State of Oklahoma, from time to time
as designated by the Chairman of the Board or by the body or person calling such
meeting.
Section 3.3 Annual Meetings. The newly elected Board of Directors shall
---------------
meet as soon as practicable without further notice after each annual meeting of
shareholders at the place at which such meeting of shareholders took place,
provided a majority of the whole Board of Directors is present. If such a
majority is not present, such meeting may be held at any other
4
<PAGE>
time or place which may be specified in a notice given in the manner provided
for special meetings of the Board of Directors or in a waiver of notice thereof.
Section 3.4 Regular Meetings. Regular meetings of the Board of
----------------
Directors shall be held at such times as may be determined by the Board of
Directors. No notice shall be required for any regular meeting.
Section 3.5 Special Meetings. Special meetings of the Board of
----------------
Directors shall be called by the Chairman of the Board or the President. Notice
of any special meeting shall be mailed to each director at that director's
residence or usual place of business not later than three (3) days before the
day on which the meeting is to be held, or shall be given to that director by
telegraph, by overnight express mail service, personally, or by telephone, not
later than twenty-four (24) hours before the time of such meeting. Notice of
any meeting of the Board of Directors need not be given to any director if that
director signs a written waiver thereof either before or after the time stated
therein. Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except when the director attends the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 3.6 Action Without Meeting. Any action required or permitted to
----------------------
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or of
such committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of the Board of Directors or of such
committee.
Section 3.7 Presiding Officer and Secretary at Meetings. Each meeting of
-------------------------------------------
the Board of Directors shall be presided over by the Chairman of the Board of
Directors, or in his or her absence, by the President, and if neither is
present, then by such member of the Board of Directors as shall be chosen at the
meeting.
Section 3.8 Quorum. A majority of the total number of directors (other
------
than advisory directors) shall constitute a quorum for the transaction of
business. In the absence of a quorum, a majority of those present (or if only
one be present, then that one) may adjourn the meeting, without notice other
than announcement at the meeting, until such time as a quorum is present. The
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 3.9 Meeting by Telephone. Members of the Board of Directors or
--------------------
of any committee thereof may participate in a
5
<PAGE>
meeting of the Board of Directors or of such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Such participation shall
constitute presence in person at such meeting.
Section 3.10 Compensation. Directors shall receive such fees and expense
------------
reimbursements for their services as directors or as members of committees as
set by the Board of Directors. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
Section 3.11 Resignations. Any director, member of a committee or other
------------
officer may resign at any time by giving written notice thereof to the Chairman
of the Board or the President. Such resignation shall be effective at the time
of its receipt, unless a date certain is specified for it to take effect.
Acceptance of any resignation shall not be necessary to make it effective.
Section 3.12 Removal of Directors. Except as otherwise required by law,
--------------------
any director may be removed for cause by a majority of the other directors. Any
director may be removed with or without cause, at any time by the shareholders.
Section 3.13 Filling of Vacancies. In case of any increase in the number
--------------------
of directors or any vacancy created by death, removal, or resignation, the newly
created directorships may be filled, or as the case may be, the vacancy or
vacancies may be filled, either (a) by the Board of Directors, or (b) by the
shareholders. Any director or directors so chosen shall hold office until the
next annual meeting of shareholders or until his or their successors are
elected.
ARTICLE IV.
Committees
----------
The Board of Directors may, by resolution passed by a majority of the whole
Board of Directors, designate one or more committees, each such committee to
consist of one or more directors of the Corporation. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in such resolution or
resolutions, shall have and may exercise all the powers and
6
<PAGE>
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have
such power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the shareholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws; and, unless the resolution expressly so provides, no such committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger.
ARTICLE V.
The Officers
------------
Section 5.1 Designation. The Corporation shall have such officers with
-----------
such titles and duties as set forth in these Bylaws or in a resolution of the
Board of Directors adopted on or after the effective date of these Bylaws.
Section 5.2 Election and Qualification. The officers of the Corporation
--------------------------
shall be elected by its Board of Directors and shall consist of a President, may
but need not consist of one or more Vice Presidents, a Secretary, a Treasurer,
one or more Assistant Secretaries and Assistant Treasurers, and such other
officers and agents as the Board of Directors may deem advisable. None of the
officers of the Corporation need be directors.
Section 5.3 Term of Office. Officers shall be chosen in such manner and
--------------
shall hold their offices for such term as determined by the Board of Directors.
Each officer shall hold office from the time of his or her election and
qualification to the time at which his or her successor is elected and
qualified, or until his or her earlier resignation, removal or death.
Section 5.4 Resignation. Any officer of the Corporation may resign at
-----------
any time by giving written notice of such resignation to the Chairman of the
Board of Directors or to the President. Any such resignation shall take effect
at the time specified therein or, if no time be specified, upon receipt thereof
by the Chairman of the Board of Directors or the President. The acceptance of
such resignation shall not be necessary to make it effective.
Section 5.5 Removal. Any officer may be removed at any time, with or
-------
without cause, by the Board of Directors.
7
<PAGE>
Section 5.6 Compensation. The compensation of each officer shall be
------------
determined by the Board of Directors.
Section 5.7 The President. The President shall be the chief executive
-------------
officer of the Corporation and, subject to the control of the Board of
Directors, shall have general and active charge, control and supervision of all
of the business and affairs of the Corporation. The President shall report to
the Board of Directors and shall direct the implementation of the decisions,
policies and procedures established by the Board of Directors. The President
shall have general authority to execute bonds, deeds and contracts in the name
and on behalf of the Corporation and in general to exercise all the powers
generally appertaining to the chief executive officer of a corporation.
Section 5.8 Vice President. Each Vice President shall have such powers
--------------
and shall perform such duties as shall be assigned to him or her by the Board of
Directors. During the absence of the President or during his inability to act,
a Vice President designated by the Board of Directors shall exercise the powers
and shall perform the duties of the President, subject to the direction of the
Board of Directors.
Section 5.9 Secretary. The Secretary shall attend meetings of the Board
---------
of Directors and shareholders and record votes and minutes of such proceedings,
subject to the direction of the Chairman; assist in issuing calls for meetings
of shareholders and directors; keep the seal of the Corporation and affix it to
such instruments as may be required from time to time; keep the stock transfer
books and other books and records of the Corporation; act as stock transfer
agent for the Corporation; attest the Corporation's execution of instruments
when requested and appropriate; make such reports to the Board of Directors as
are properly requested; and perform such other duties incident to the office of
Secretary and those that may be otherwise assigned to the Secretary from time to
time by the President or the Chairman of the Board of Directors.
Section 5.10 Treasurer. The Treasurer shall have custody of all
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation. The Treasurer
shall deposit or disburse all moneys and other property in the name and to the
credit of the Corporation as may be designated by the President or the Board of
Directors. The Treasurer shall render to the President and the Board of
Directors at the regular meetings of the Board of Directors, or whenever they
may request it, an account of all his or her transactions as Treasurer and of
the financial condition of the Corporation. The Treasurer shall perform such
other duties incident to the office of Treasurer as the President or the Board
of Directors shall from time to time designate.
8
<PAGE>
Section 5.11 Other Officers. Each other officer of the Corporation shall
--------------
have such powers and shall perform such duties as shall be assigned to him or
her by the Board of Directors.
ARTICLE VI.
Certificates of Stock,
Transfers of Stock and
Registered Shareholders
-----------------------
Section 6.1 Stock Certificates. The interest of each holder of stock of
------------------
the Corporation shall be evidenced by a certificate or certificates signed by or
in the name of the Corporation by the Chairman of the Board of Directors, or the
President or a Vice President, and by the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary of the Corporation certifying the
number of shares owned by the holder thereof in the Corporation. Any of or all
of the signatures on the certificate may be a facsimile. If any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, the certificate may be issued by
the Corporation with the same effect as if he/she were such officer, transfer
agent or registrar at the date of issuance.
Section 6.2 Classes/Series of Stock. The Corporation may issue one or
-----------------------
more classes of stock or one or more series of stock within any class thereof,
as stated and expressed in the Certificate of Incorporation or of any amendment
thereto, any or all of which classes may be stock with par value or stock
without par value. The powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, in accordance with the Oklahoma General
Corporation Act, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each shareholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 6.3 Transfers of Stock. No shareholder may transfer any shares
------------------
of Common Stock of the Corporation, including
9
<PAGE>
shares of Common Stock which may be issued after the adoption of these Bylaws,
except as expressly provided in this Section. The term "transfer" includes, but
is not limited to, the acts of selling, assigning, exchanging, transferring,
pledging, encumbering, giving or otherwise disposing of shares of Common Stock,
of record or beneficially, whether voluntarily or by operation of law.
(a) Any shareholder (herein called a "Selling Shareholder") who receives and
desires to accept a bona fide written purchase offer (a "Purchase Offer") to
sell any shares of Common Stock shall give notice (the "Transfer Notice") of the
Purchase Offer to the Corporation. The Transfer Notice shall specify (i) the
number of shares of Common Stock may do so only for cash, or a promissory note,
the payments under which are unconditional and payable only in cash, or for some
combination of cash and such a promissory note, and only upon compliance with
all of the following:
(1) the Selling Shareholder proposed to be sold (the "Offered
Shares"), (ii the selling price per share, (ii the identity of the person
who made the Purchase Offer, (iv the proposed terms of payment, (v) the
proposed closing date of the sale, and (vi all other material terms of the
Purchase Offer. The Transfer Notice shall also include a copy of the
Purchase Offer.
(2) The Corporation shall have the first option to purchase all or any
number of the Offered Shares on the same terms and conditions as contained
in the Purchase Offer by giving notice of acceptance (the "Acceptance
Notice") to the Selling Shareholder within thirty (30) days from the date
the Corporation received the Transfer Notice. The Acceptance Notice shall
state the number of the Offered Shares which the Corporation elects to
purchase. The Corporation's failure to deliver an Acceptance Notice to the
Selling Shareholder within such thirty-day period shall constitute a
rejection by the Corporation of its option to purchase any of the Offered
Shares.
(3) To the extent the Corporation elects to purchase Offered Shares as
specified in its Acceptance Notice, the Selling Shareholder shall be
required to sell those Offered Shares to the Corporation and the
Corporation shall be required to purchase those Offered Shares from the
Selling Shareholder, in accordance with the terms of the Purchase Offer.
Closing of the purchase of the Offered Shares as specified in the
Acceptance Notice shall occur on the date specified in the Purchase Offer
or, if later, the date which is thirty (30) days after the Corporation
received the Transfer Notice. If all Offered Shares are not elected for
purchase in an Acceptance Notice by the Corporation, then
10
<PAGE>
the Selling Shareholder shall sell the balance of the Offered Shares to the
person who made the Purchase Offer in accordance with the terms of the
Purchase Offer prior to or concurrent with the Corporation's purchase of
Offered Shares specified in its Acceptance Notice. The failure of the
Selling Shareholder to sell the balance of the Offered Shares to the person
who made the Purchase Offer shall relieve the Corporation of its obligation
to purchase the Offered Shares as specified in its Acceptance Notice.
(4) If the Corporation does not exercise its right to purchase any of
the Offered Shares, then the Selling Shareholder may sell all of the
Offered Shares pursuant to the terms of the Purchase Offer. If the Selling
Shareholder does not sell all of the Offered Shares in accordance with all
of the terms of the Purchase Offer, the Selling Shareholder shall be
prohibited from selling any of the Offered Shares without again going
through procedure for selling the Offered Shares set forth in this Section.
(5) In the event a Transfer Notice of a Purchase Offer is given to the
Corporation, the Corporation shall have the right, in addition to its
option to purchase, to designate the other shareholders of the Corporation,
on a pro rata basis or such other basis as the other shareholders may agree
(or to one or more third parties to the extent the Corporation and the
other shareholders do not elect to purchase all of the Offered Shares), to
exercise all or any part of the Corporation's option to purchase, in which
event the other shareholders and any such third parties shall be entitled
to purchase Offered Shares of the Selling Shareholder on the same basis as
the Corporation could have done. Notice of the designation of the other
shareholders or third parties, if to be made, shall be included with the
Acceptance Notice to the Selling Shareholder.
(b) Upon the death of a shareholder, all shares of Common Stock owned by
that deceased shareholder may be transferred subject to the terms hereof to any
beneficiary or beneficiaries named in the deceased shareholder's will or other
dispositive document or to the heirs of the deceased shareholder, but any sale
of such shares of Common Stock by the executor or personal representative of a
deceased shareholder may only be made upon compliance with the terms hereof.
(c) A shareholder may grant a security interest in shares of Common Stock
to secure indebtedness of the shareholder, if such security interest is not
granted with the purpose of avoiding the restrictions on transfer contained in
this Section. However, any sale of the Common Stock by a creditor pursuant to
such security interest shall be subject to this Section.
11
<PAGE>
(d) Any permitted transferee of Common Stock shall be bound by all of the
terms of this Section.
(e) If any Common Stock is purportedly transferred without complying with
the provisions of this Section, such transfer shall be of no effect, and the
shareholder who attempted to transfer such Common Stock shall remain the owner
of the Common Stock for all purposes. Such shareholder shall also be liable to
the Corporation and all other shareholders for any damages (including legal and
other expenses) arising from the improper attempted transfer.
(f) Subject to the transfer restrictions provided above and to stop
transfer orders directed in good faith by the Corporation to any transfer agent
to prevent possible violations of federal or state securities laws, rules or
regulations, the shares of stock of the Corporation shall be transferrable upon
its books by the holders thereof in person or by their duly authorized attorneys
or legal representatives, and upon such transfer the old certificates shall be
surrendered to the Corporation by the delivery thereof to the person in charge
of the stock and transfer books and ledgers, or to such other persons as the
directors may designate, by who they shall be canceled, and new certificates
shall be issued. A record shall be made of each transfer and whenever a
transfer shall be made for collateral security, and not absolutely, it shall be
so expressed in the entry of the transfer.
Section 6.4 Holders of Record. Prior to due presentment for
-----------------
registration of transfer, the Corporation may treat the holder of record of a
share of its stock as the complete owner thereof exclusively entitled to vote,
to receive notifications and otherwise entitled to all the rights and powers of
a complete owner thereof, notwithstanding notice of the contrary.
Section 6.5 Lost, Stolen, Destroyed, or Mutilated Certificates. A new
--------------------------------------------------
certificate of stock may be issued to replace a certificate theretofore issued
by the Corporation, alleged to have been lost, stolen, destroyed or mutilated,
and the Board of Directors or the President may require the owner of the lost or
destroyed certificate or his or her legal representatives, to give such sum as
they may direct to indemnify the Corporation against any expense or loss it may
incur on account of the alleged loss of any such certificate.
Section 6.6 Dividends. Subject to the provisions of the Certificate of
---------
Incorporation and applicable law, the directors may, out of funds legally
available therefor at any annual, regular, or special meeting, declare dividends
upon the capital stock of the Corporation as and when they deem expedient.
Dividends may be paid in cash, in property, or in shares of stock of the
Corporation. Before declaring any dividends there may be
12
<PAGE>
set apart out of any funds of the Corporation available for dividends such sum
or sums as the directors from time to time in their discretion deem proper
working capital to serve as a reserve fund to meet contingencies or as
equalizing dividends or for such other purposes as the directors shall deem in
the best interest of the Corporation.
ARTICLE VII.
Indemnification of Officers,
Directors, Employees and Agents
-------------------------------
Section 7.1 Indemnification Other Than in Action by or in Right of
------------------------------------------------------
Corporation. To the fullest extent and in the manner permitted by the laws of
- -----------
the State of Oklahoma and specifically as is permitted under Section 1031 of
Title 18 of the Oklahoma Statutes or its successor or any other law which may
hereafter be enacted granting to a corporation the powers of indemnification,
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the Corporation, by reason of the
fact that such person 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
in connection with such action, suit, or proceeding if he acted in good faith
and in a manner he reasonably believed to be in and not opposed to the best
interests of the Corporation, and with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful.
Determination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in and not opposed to the best
interests of the Corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was lawful.
Section 7.2 Indemnification in Action by or in Right of Corporation.
-------------------------------------------------------
The Corporation shall 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
13
<PAGE>
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 interests of the Corporation, 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 indemnity for such
expenses which the court shall deem proper.
Section 7.3 Further Indemnity. To the extent that a director, officer,
-----------------
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
7.1 or 7.2 above, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection therewith.
Section 7.4 Limitations on Indemnity. Any indemnification under the
------------------------
provisions of Section 7.1 or 7.2 above, unless ordered by a court, shall be made
by the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in Section 7.1 or 7.2, as applicable. Such determination shall be made:
(a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding;
or
(b) if such a quorum is not obtainable, or even if obtainable, if a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or
(c) by the shareholders.
Section 7.5 Advance of Indemnification Expenses. Expenses incurred by an
-----------------------------------
officer or director in defending a civil or criminal action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount, unless it shall ultimately be determined that he
is entitled to be indemnified by the Corporation as authorized by the provisions
of this section.
14
<PAGE>
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
Section 7.6 Other Indemnification. The indemnification herein provided
---------------------
shall not limit the Corporation from providing any other indemnification
permitted by law nor shall it be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action in
his or her official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 7.7 Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who 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 any liability asserted against
and incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not the Corporation would have the power to indemnify
him or her against such liability under these provisions.
Section 7.8 Other Entities. For the purposes of this section,
--------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this section with respect to the resulting or surviving corporation as he/she
would have with respect to such constituent corporation if its separate
existence had continued.
ARTICLE VIII.
Miscellaneous
-------------
Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined by resolution of the Board of Directors.
15
<PAGE>
Section 8.2 Corporate Seal. The corporate seal shall be in such form as
--------------
the Board of Directors may from time to time prescribe and the same may be used
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
Section 8.3 Severability. The invalidity or unenforceability of any
------------
provision hereof shall not affect the validity or enforceability of the
remaining provisions hereof.
Section 8.4 Certificate of Incorporation and Articles of Incorporation.
----------------------------------------------------------
Reference made herein to the Certificate of Incorporation of the Corporation
shall refer in a like manner to any Articles of Incorporation previously updated
by the Corporation.
ARTICLE IX.
Amendment of Bylaws
-------------------
These Bylaws may be made, altered, or repealed, or new bylaws may be
adopted by the shareholders or the Board of Directors.
Approval of Directors
---------------------
The foregoing Bylaws were adopted by the Directors of Indian Oil Company on
the 30th day of September, 1992.
_________________________________ ___________________________________
Richard R. Dunning, Chairman Michael C. Black, Secretary
16
<PAGE>
EXHIBIT 3.3(a)
CERTIFICATE OF INCORPORATION
OF
CANAAN SECURITIES, INC.
----------------------------------------------------------------
FIRST. The name of the Corporation is CANAAN SECURITIES, INC.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of the registered agent is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 1,000 shares of stock of the par value of $.01 per
share, all of the same class.
FIFTH. The name and mailing address of the incorporator is Warren E.
Friss, Esq., Shea & Gould, 1251 Avenue of the Americas, New York, New York
10020-1193.
SIXTH. Election of directors need not be by written ballot.
SEVENTH. The Board of Directors is authorized to adopt, amend, or repeal
By-laws of the Corporation.
EIGHTH. Any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (whether or not by or
in the right of the Corporation) by reason of the fact that he is or was a
director, officer, incorporator, employee, or agent of the Corporation,
<PAGE>
or is or was serving at the request of the Corporation as a director, officer,
incorporator, employee, partner, trustee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise (including an employee
benefit plan), shall be entitled to be indemnified by the Corporation to the
full extent then permitted by law against expenses (including counsel fees and
disbursements), judgments, fines (including excise taxes assessed on a person
with respect to an employee benefit plan), and amounts paid in settlement
incurred by him in connection with such action, suit, or proceeding. Such right
of indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Article EIGHTH. Such right of
indemnification shall continue as to a person who has ceased to be a director,
officer, incorporator, employee, partner, trustee, or agent and shall inure to
the benefit of the heirs and personal representatives of such person. The
indemnification provided by this Article EIGHTH shall not be deemed exclusive of
any other rights which may be provided now or in the future under any provision
currently in effect or hereafter adopted of the By-laws, by any agreement, by
vote of stockholders, by resolution of disinterested directors, by provision of
law, or otherwise.
NINTH. No director of the Corporation shall be liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty as
a director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit. For purposes of the
prior sentence, the term "damages" shall, to the extent permitted by law,
include without limitation, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise or other tax assessed with respect to an
employee
<PAGE>
benefit plan, or expense of any nature (including, without limitation, counsel
fees and disbursements). Each person who serves as a director of the Corporation
while this Article NINTH is in effect shall be deemed to be doing so in reliance
on the provisions of this Article NINTH, and neither the amendment or repeal of
this Article NINTH, or the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article NINTH, shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for, arising out of, based upon, or in connection with any acts or omissions of
such director occurring prior to such amendment, repeal, or adoption of an
inconsistent provision. The provisions of this Article NINTH are cumulative and
shall be in addition to and independent of any and all other limitations on or
eliminations of the liabilities of directors of the Corporation, as such,
whether such limitations or eliminations arise under or are created by any law,
rule, regulations, by-law, agreement, vote of shareholders or disinterested
directors, or otherwise.
TENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors,
<PAGE>
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
IN WITNESS WHEREOF, I have made, signed and sealed this Certificate of
Incorporation this 8th day of June, 1989.
__________________________________________
Warren E. Friss, Esq.
<PAGE>
EXHIBIT 3.3(b)
CANAAN SECURITIES, INC.
A Delaware Corporation
BY-LAWS
_____________________________
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
--------------
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors.
Section 1.2 Special Meetings.
----------------
Special meetings of stockholders for any purpose or purposes may be held at
any time upon call of the Chairman of the Board, if any, the President, the
Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice.
A special meeting of stockholders shall be called by the President or the
Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record a majority
of the outstanding stock of all classes entitled to vote at such meeting.
Section 1.3 Notice of Meetings.
------------------
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by law.
<PAGE>
Section 1.4 Quorum.
------
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws, at any meeting of stockholders, the holders of a majority of
the outstanding shares of each class of stock entitled to vote at the meeting
shall be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in interest
of the stockholders present or the chairman of the meeting may adjourn the
meeting from time to time in the manner provided in Section 1.5 of these By-Laws
until a quorum shall attend.
Section 1.5 Adjournment.
-----------
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 1.6 Organization.
------------
The Chairman of the Board, if any, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
-2-
<PAGE>
Section 1.7 Voting.
------
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the Corporation entitled to elect such
directors.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
-------------------------
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a Board of one director; provided, however, that the
Board, by resolution adopted by vote of a majority of the then authorized number
of directors, may increase or decrease the number of directors. The directors
shall be elected by the holders of shares entitled to vote thereon at the annual
meeting of stockholders, and each shall serve (subject to the provisions of
Article IV) until the next succeeding annual meeting of stockholders and until
his respective successor has been elected and qualified.
Section 2.2 Chairman of the Board.
---------------------
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed by
the Board of Directors. He shall perform such duties as may from time to time be
assigned to him by the Board.
Section 2.3 Meetings.
--------
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
-3-
<PAGE>
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, if any, the President, or by a majority of the directors
then in office.
Section 2.4 Notice of Special Meetings.
--------------------------
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least three days before the
meeting, or by telegram, cable, radiogram, telex, telefacsimile or personal
service at least one day before the meeting. Unless otherwise stated in the
notice thereof, any and all business may be transacted at any meeting without
specification of such business in the notice.
Section 2.5 Quorum and Organization of Meetings.
-----------------------------------
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except
as otherwise provided by law or in the Certificate of Incorporation or these By-
Laws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence by the
President, or in the absence of both by such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.6 Committees.
----------
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any
-4-
<PAGE>
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence of disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business, property, and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it; but no such
committee shall have power of authority in reference to amending the Certificate
of Incorporation of the Corporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors pursuant to authority expressly
granted to the Board of Directors by the Corporation's Certificate of
Incorporation, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation, or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), adopting an agreement of merger or
consolidation under Section 251 or 252 of the General Corporation Law of the
State of Delaware, recommending to the stockholders the sale, lease, or exchange
of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of dissolution, or amending these By-Laws; and, unless the resolution
expressly so provided, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of the State of Delaware. Each committee which may be
established by the Board of Directors pursuant to these By-Laws may fix its own
rules and procedures. Notice of meetings of committees, other than of regular
meetings provided for by the rules, shall be given to committee members. All
action taken by committees shall be recorded in minutes of the meetings.
-5-
<PAGE>
Section 2.7 Action Without Meeting.
----------------------
Nothing contained in these By-Laws shall be deemed to restrict the power of
members of the Board of Directors or any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting.
Section 2.8 Telephone Meetings. Nothing contained in these By-Laws
------------------
shall be deemed to restrict the power of members of the Board of Directors, or
any committee designated by the Board, to participate in a meeting of the Board,
or committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
------------------
The executive officers of the Corporation shall be a President, a
Treasurer, and a Secretary, each of whom shall be elected by the Board of
Directors. The Board of Directors may elect or appoint such other officers
(including a Controller and one or more Vice Presidents, Assistant Treasurers
and Assistant Secretaries) as it may deem necessary or desirable. Each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time. Any person may hold at one time two or more offices.
Section 3.2 Powers and Duties.
-----------------
The Chairman of the Board, if any, or, in his absence, the President, shall
preside at all meetings of the stockholders and of the Board of Directors. The
President shall the chief executive officer of the Corporation. In the absence
of the President, a Vice President appointed by the President or, if the
President fails to make such appointment, by the Board, shall perform all the
duties of the President. The officers and agents of the Corporation shall each
have such powers and authority and shall perform such duties in the management
of the business, property, and affairs of the Corporation as generally pertain
to their respective offices, as well as such
-6-
<PAGE>
powers and authorities and such duties as from time to time may be prescribed by
the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS AND VACANCIES
Section 4.1 Resignations.
------------
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
President, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified therein,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
Section 4.2 Removals.
--------
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof, or by written consent, at any time, may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee.
Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares entitled at the time
to vote at an election of directors.
Section 4.3 Vacancies.
---------
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even though less than
a quorum remains) or, in the case of any vacancy in the office of any director,
by the stockholders, and, subject to the provisions of this Article IV, the
person so chosen shall hold office until his successor shall have been elected
and qualified; or, if the person so chosen is a director elected to fill a
vacancy, he shall (subject to the provisions of this Article IV) hold office for
the unexpired term of his predecessor.
-7-
<PAGE>
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates.
------------------
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
Section 5.2 Transfer of Shares.
------------------
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 Fixing Record Date.
------------------
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
(or to express consent to corporate action in writing without a meeting), or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
-----------------
The Board of Directors or any transfer agent of the Corporation may direct
a new certificate or certificates representing stock of the Corporation to be
issued in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen , or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution
-8-
<PAGE>
of the Board of Directors) may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board of Directors (or any transfer agent
so authorized) shall direct to indemnify the Corporation against any claim that
may be made against the Corporation with respect to the certificate alleged to
have been lost, stolen, or destroyed or the issuance of such new certificates,
and such requirement may be general or confined to specific instances.
Section 5.5 Regulations.
-----------
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Corporate Seal.
--------------
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware".
Section 6.2 Fiscal Year.
-----------
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
Section 6.3 Notices and Waivers Thereof.
---------------------------
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable, telex, telefacsimile or radiogram, addressed to such address as appears
on the books of the Corporation. Any notice given by telegram, cable, telex,
-9-
<PAGE>
telefacsimile or radiogram shall be deemed to have been given when it shall
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 6.4 Stock of Other Corporations or Other Interests.
----------------------------------------------
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the Corporation as may be from time
to time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of this Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the By-Laws by
vote of not less than a majority of the entire Board. However, any By-Law
adopted
-10-
<PAGE>
by the Board may be amended or repealed by vote of the holders of a majority of
the shares entitled at the time to vote for the election of directors.
-11-
<PAGE>
EXHIBIT 3.4(a)
CERTIFICATE OF INCORPORATION
OF
CORAL RESERVES, INC
STATE OF OKLAHOMA )
) ss:
COUNTY OF OKLAHOMA )
TO: THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:
ARTICLE I
---------
The name of the corporation is Coral Reserves, Inc.
ARTICLE II
----------
The address of the corporation's registered office in the State of Oklahoma
is 100 Park Avenue Building, Suite 400, Oklahoma City, Oklahoma 73102. The name
of the corporation's registered agent at such address is Scott M. Rayburn.
ARTICLE III
-----------
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the general corporation law of the
State of Oklahoma.
ARTICLE IV
----------
The total number of shares of stock which the corporation shall have
authority to issue is 10,000 shares, each of the shares having a par value of
$0.10, thereby resulting in the corporation having total authorized capital
stock in the amount of $1,000, all of which shall be Common Stock.
<PAGE>
The Board of Directors of the corporation shall have full authority, to the
extent permitted by law, to increase, decrease or otherwise adjust the capital
stock of the corporation, to designate the classes or series thereof and to
determine whether all or any part of such stock shall have voting powers, full
or limited, or no voting powers, and to determine such designations, and such
powers, preferences, relative, participating or optional, or other special
rights and qualifications, limitations or restrictions thereof as the Board
shall from time to time determine in duly adopted resolutions.
At any time and from time to time, when authorized by resolution of the
Board of Directors and without any action by its shareholders, the corporation
may issue or sell any shares of its capital stock of any class or series,
whether out of the unissued shares thereof authorized by the Certificate of
Incorporation of the corporation as originally filed or by an amendment thereof
or out of shares of its capital stock acquired by it after the issue thereof,
and whether or not the shares thereof so issued or sold shall confer upon the
holders thereof the right to exchange or convert such shares for or into other
shares of capital stock of the corporation of any class or classes or any series
thereof. When similarly authorized, but without any action by its share
holders, the corporation may issue or grant rights, warrants or options, in
bearer or registered or such other form as the Board of Directors may determine,
for the purchase of shares of the capital stock of any class or series of the
corporation within such period of time, or without limit as to time, to such
aggregate number of shares, and at such price per share, as the Board of
Directors may determine. Such rights, warrants or options may be issued or
granted separately or in connection with the issue of any bonds, debentures,
notes, obligations or other evidences of indebtedness or shares of the capital
stock of any class or series of the corporation and for such
2
<PAGE>
consideration and on such terms and conditions as the Board of Directors in its
sole discretion may determine. In each case, the consideration to be received by
the corporation for any such shares so issued or sold shall be such as shall be
fixed from time to time by resolution of the Board of Directors.
ARTICLE V
---------
The name and mailing address of each incorporator is as follows:
Name Mailing Address
---- ---------------
Scott M. Rayburn 100 Park Avenue, Suite 400
Oklahoma City, Oklahoma 73102
ARTICLE VI
----------
The name and address of each director who will serve until the first annual
meeting of the shareholders or until their successors are elected and qualified
is as follows:
Name Mailing Address
---- ---------------
Leo Woodard 3313 Arrowhead Drive
Edmond, OK 73013
John Penton 1807 Huntington
Oklahoma City, OK 73116
ARTICLE VII
-----------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
(a) To adopt, amend or repeal the Bylaws of the corporation.
(b) To authorize and cause to be executed or granted mortgages, security
interests and liens upon the real and personal property of the
corporation.
3
<PAGE>
(c) To set apart out of any of the funds of the corporation available to
dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
(d) By a majority of the whole Board of Directors, to designate one or
more committees, each committee to consist of one (1) or more of the
directors of the corporation. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution or in the
Bylaws of the corporation, shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; provided, however, the
Bylaws may provide that in the absence or disqualification of any
member of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
(e) When and as authorized by the affirmative vote of the holders of a
majority of the stock issued and outstanding having voting power
given at a shareholders' meeting duly called upon such notice as is
required by law, or when authorized by the written consent of the
holders of a majority of the voting stock issued and outstanding, to
sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its goodwill and its corporate
franchises, upon such terms and conditions and for such consideration,
which may consist in whole or in part of money or property including
shares of stock in, and/or other securities of, any other corporation
or corporations, as its Board of Directors shall deem expedient and
for the best interests of the corporation.
ARTICLE VIII
------------
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
shareholders or any class of them, any court of equitable jurisdiction within
the State of Oklahoma, on the application in a summary way of this corporation
or of any creditor or shareholder thereof, or on the application of any receiver
or receivers appointed for this corporation under the provisions of Section 1106
4
<PAGE>
of Title 18 of the Oklahoma Statutes or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation under
the provisions of Section 1100 of Title 18 of the Oklahoma Statutes order a
meeting of the creditors or class of creditors, and/or of the shareholders or
class of shareholders of this corporation, as the case may be, to be summoned in
such manner as the court directs. If a majority in number representing three-
fourths (3/4) in value of the creditors or class of creditors, and/or of the
shareholders or class of shareholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the compromise
or arrangement and the reorganization shall, if sanctioned by the court to which
the application has been made, be binding on all the creditors or class of
creditors and/or on all the shareholders of this corporation, as the case may
be, and also on this corporation.
ARTICLE IX
----------
Meetings of shareholders may be held within or without the State of
Oklahoma, as the Bylaws may provide. The books of the corporation may be kept
(subject to applicable law) inside or outside the State of Oklahoma at such
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the corporation. Elections of directors need not be by
written ballot unless the Bylaws of the corporation shall so provide.
ARTICLE X
---------
To the extent permitted by law, no contract or transaction between the
corporation and one or more of its directors or officers, or between the
corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or
5
<PAGE>
solely because the directors or officers are present at or participate in the
meeting of the Board or committee thereof which authorizes the contract or
transaction, or solely because the directors or officers or their votes are
counted for such purpose.
ARTICLE XI
----------
The Board of Directors shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, 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
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
The Board of Directors shall have 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
6
<PAGE>
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 interests of the
corporation and except that no indemnification shall be made in respect to 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 indemnity for such expenses
which the court shall deem proper.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized by the provisions of this section. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
The indemnification and advancement of expenses provided by or granted
pursuant to this Article shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of
7
<PAGE>
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
ARTICLE XII
-----------
No director shall be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director;
provided, however, this provision shall not eliminate or limit the liability of
a director: (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 1053 of Title Eighteen of the Oklahoma General Corporation Act; or (iv)
for any transaction from which the director derived an improper personal
benefit.
ARTICLE XIII
------------
In furtherance and not in limitation of the powers conferred by the laws of
the State of Oklahoma, the Board of Directors is expressly authorized to adopt,
or amend or repeal the Bylaws of the corporation.
ARTICLE XIV
-----------
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by law, and all rights conferred upon the shareholders
herein are granted subject to this reservation.
THE UNDERSIGNED (whether one or more), being the incorporator hereinbefore
named, for the purpose of forming a corporation pursuant to the Oklahoma General
Corporation Act, makes this Certificate, hereby declaring and certifying that
this is the act and deed of the undersigned and that the facts herein stated are
true, as of this 29th day of December, 1989.
8
<PAGE>
________________________________________
Scott M. Rayburn, Incorporator
9
<PAGE>
EXHIBIT 3.4(b)
BYLAWS OF
CORAL RESERVES, INC.
The within and following Bylaws were read and discussed, section by
section, by the Directors, who have authority to adopt Bylaws which shall remain
effective until legally amended or repealed.
They were adopted on the 29th day of December, 1989.
To certify which, witness my hand and seal of the Corporation this 29th day
of December, 1989.
___________________________________
Jody Lueb, Secretary
<PAGE>
BYLAWS OF
CORAL RESERVES, INC.
Contents
ARTICLE ONE
- -----------
Offices
1.01 Registered Office and Agent
1.02 Other Offices
ARTICLE TWO
- -----------
Meetings of Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Written Notice of Annual Meeting
2.04 Voting List
2.05 Special Meetings
2.06 Written Notice of Special Meeting
2.07 Business Limited to Purposes
2.08 Quorum
2.09 Majority Vote; Withdrawal of Quorum
2.10 Method of Voting; Record Date; Closing Transfer Books
2.11 Action Without Meeting
ARTICLE THREE
- -------------
Directors
3.01 Number; Qualification; Election; Term
3.02 Vacancies
3.03 Management
3.04 Meetings
3.05 Regular Meetings
<PAGE>
3.06 Special Meetings
3.07 Quorum; Majority Vote
3.08 Committees
3.09 Committee Minutes
3.10 Committee Participation
3.11 Committee Action
3.12 Compensation
3.13 Removal of Officers
3.14 Removal of Directors
ARTICLE FOUR
- ------------
Notices
4.01 Method
4.02 Waiver
ARTICLE FIVE
- ------------
Officers
5.01 Number
5.02 Election
5.03 Salaries
5.04 Term
5.05 Chairman
5.06 President
5.07 Seal
5.08 Vice-President
5.09 Secretary
5.10 Assistant Secretary
5.11 Treasurer
5.12 Disbursements
5.13 Bond
5.14 Assistant Treasurer
ARTICLE SIX
- -----------
Certificates of Stock, Transfers of Stock, Closing of Transfer Books and
Registered Shareholders
6.01 Certificates
<PAGE>
6.02 Signatures
6.03 Lost or Stolen
6.04 Registration of Transfer
6.05 Record Date
6.06 Owner
6.07 Additional Transfer Requirements
6.08 Share Transfer Restrictions
6.09 Legends
ARTICLE SEVEN
- -------------
General Provisions
7.01 Dividends
7.02 Reserve
7.03 Business Condition
7.04 Checks and Notes
7.05 Fiscal Year
7.06 Seal
7.07 Record Books
ARTICLE EIGHT
- -------------
Indemnification of Officers, Directors, Employees and Agents
8.01 Indemnification
ARTICLE NINE
- ------------
Amendments
9.01 Amendments
<PAGE>
ARTICLE ONE: OFFICES
--------------------
1.01. Registered Office and Agent. The registered office of the
---------------------------
Corporation shall be at 100 Park Avenue, Suite 400, in the City of Oklahoma
City, County of Oklahoma, State of Oklahoma. The name of the registered agent at
such address is Scott M. Rayburn.
1.02. Other Offices. The Corporation may also have offices at such other
-------------
places both within and without the State of Oklahoma as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE TWO: MEETINGS OF SHAREHOLDERS
-------------------------------------
2.01. Place of Meetings. Meetings of the shareholders for any purpose may
-----------------
be held at such time and place, within or without the State of Oklahoma, as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
2.02. Annual Meeting. Annual meetings of the shareholders, commencing
--------------
with the year 1992, shall be held on the second Tuesday of December, if not a
legal holiday, and if a legal holiday, then on the next secular day following,
at 10:00 a.m., at which they shall elect by a plurality vote by written ballot a
board of directors, and transact such other business as may be properly brought
before the meeting.
2.03. Written Notice of Annual Meeting. Written notice of the annual
--------------------------------
meeting, stating the place, date and hour of such meeting, shall be given to
each shareholder entitled to vote thereat not less than ten (10) days nor more
than sixty (60) days before the date of the meeting unless otherwise required by
law.
2.04. Voting List. The officer who has charge of the stock ledger of the
-----------
Corporation shall prepare and make, at least ten (10) days before every meeting
of shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the election, either at a place within the city where the meeting is to be held
and which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held, and the list shall be
produced and kept at the time and place of the meeting during the whole time
thereof, and subject to the inspection of any shareholder who may be present.
1
<PAGE>
2.05. Special Meetings. Special meetings of the shareholders, for any
----------------
purpose or purposes, unless otherwise prescribed by law or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of shareholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
2.06. Written Notice of Special Meeting. Written notice of a special
---------------------------------
meeting of shareholders, stating the place, date, hour and purpose or purposes
thereof, shall be given to each shareholder entitled to vote thereat, not less
than ten (10) days before the date fixed for the meeting unless otherwise
required by law.
2.07. Business Limited to Purposes. Business transacted at any special
----------------------------
meeting of the shareholders shall be limited to the purposes stated in the
notice.
2.08. Quorum. The holders of a majority of the shares of stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by law or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented; provided, however, that
if the date of any adjourned meeting is more than thirty (30) days after the
date for which the meeting was originally noticed, or if a new record date is
fixed for the adjourned meeting, written notice of the place, date and hour of
the adjourned meeting shall be given in conformity herewith. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted at the meeting as originally notified.
2.09. Majority Vote; Withdrawal of Quorum. When a quorum is present at
-----------------------------------
any meeting, the affirmative vote of the holders of a majority of the shares
having voting power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which, by
express provision of law or of the Certificate of Incorporation, a different
vote is required, in which case such express provision shall govern and control
the decision of such question.
2.10. Method of Voting; Record Date; Closing Transfer Books. Each
-----------------------------------------------------
shareholder shall at every meeting of the shareholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such shareholders,
2
<PAGE>
but no proxy shall be voted or acted upon after three (3) years from its date
unless the proxy provides for a longer period, and, except where the transfer
books of the corporation have been closed or a date has been fixed as a record
date for the determination of its shareholders entitled to vote, no share of
stock shall be voted on at any election for directors which has been transferred
on the books of the corporation within twenty (20) days preceding such election
of directors.
2.11. Action Without Meeting. Any action required to or which may be
----------------------
taken at any annual or special meeting of the shareholders, may be taken without
a meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action by the shareholders without a meeting by less than unanimous
written consent shall be given to those shareholders who have not consented in
writing.
ARTICLE THREE: DIRECTORS
------------------------
3.01. Number; Qualification; Election; Term. The number of directors
-------------------------------------
which shall constitute the whole Board shall be not less than one (1) nor more
than seven (7). As of December 29, 1989, the Board shall consist of two (2)
directors. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the Board of Directors or by the
shareholders at the annual or a special meeting of the shareholders. Except for
the election held by the incorporator(s) and except as provided in Section 3.02
and in Section 3.14 of this Article Three, the directors shall be elected at the
annual meeting of shareholders. Each director elected shall hold office until
such director's successor is elected and qualified, or until such director's
earlier resignation or removal. Directors need not be shareholders.
3.02. Vacancies. Except as provided in Section 3.14 of this Article,
---------
vacancies and newly created directorships resulting from any increase in the
authorized numbers of directors by the directors may be filled by a majority of
the directors then in office, though less than a quorum, and any director so
chosen shall hold office until the next annual election and until such
director's successor is duly elected and shall qualify, unless such director
resigns or is removed.
3.03. Management. The business of the Corporation shall be managed by its
----------
Board of Directors which may exercise all such powers of the Corporation and do
all such
3
<PAGE>
lawful acts and things as are not by law or by the Certificate of Incorporation
or by these Bylaws directed or required to be exercised or done by the
shareholders.
3.04. Meetings. The Board of Directors of the Corporation may hold
--------
meetings, both regular and special, either within or without the State of
Oklahoma.
3.05. Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held at such time and at such place as shall from time to time be determined by
the Board. Five (5) days' notice of all regular meetings shall be given, and
such notice shall state the place, date, hour and the business to be transacted
at and purpose of such meeting.
3.06. Special Meetings. Special meetings of the Board may be called by
----------------
the President on three (3) days' notice to each director either personally or by
mail or by telegram. Special meetings shall be called by the President or
Secretary in like manner and on like notice on the written request of two (2)
directors unless the Corporation has at that time less than three (3) directors,
in which latter event the request of only one (1) director shall be required.
Notice of any special meeting shall state the place, date, hour and the business
to be transacted at and the purpose of such meeting.
3.07. Quorum; Majority Vote. At all meetings of the Board, a majority of
---------------------
the directors shall constitute a quorum for the transaction of business, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.08. Committees. The Board of Directors may, by resolution, passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one (1) or more of the directors of the Corporation, which, to the
extent provided in the resolution, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors.
3.09. Committee Minutes. Each committee shall keep regular minutes of its
-----------------
meetings and report the same to the Board of Directors when required.
4
<PAGE>
3.10. Committee Participation. Members of the Board of Directors, or of
-----------------------
any committee thereof, may participate in a meeting of such Board or committee
by means of conference telephone or similar communications equipment that
enables all persons participating in the meeting to hear each other. Such
participation shall constitute presence in person at such meeting.
3.11. Committee Action. Unless otherwise restricted by the Certificate of
----------------
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board or of such committee as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.
3.12. Compensation. The directors may be paid their expenses, if any, of
------------
attendance at such meeting of the Board of Directors and may be paid a fixed sum
for attendance at such meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of the special or standing committees may be allowed like compensation for
attending committee meetings.
3.13. Removal of Officers. The Board of Directors at any time may, by
-------------------
affirmative vote of a majority of the members of the Board then in office,
remove any officer elected or appointed by the Board of Directors for cause or
without cause.
3.14. Removal of Directors. Any director may be removed, for cause or
--------------------
without cause, by a majority vote of the shareholders entitled to vote for the
election of such director at any annual or special meeting of the shareholders.
Upon such removal of a director, the shareholders (and not the remaining
directors) shall elect a director to replace such removed director at the same
shareholders' meeting at which such removal took place or at a subsequent
shareholders' meeting.
ARTICLE FOUR: NOTICES
---------------------
4.01. Method. Notices to directors and shareholders shall be in writing
------
and delivered personally or mailed to the directors or shareholders at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given at the time when the same shall be deposited in the United
States mail, postage prepaid. Notice to directors may also be given by telegram.
Notice by telegram shall be deemed to be given when delivered to the sending
telegraph office.
5
<PAGE>
4.02. Waiver. Whenever any notice is required to be given under the
------
provisions of law or of the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice.
ARTICLE FIVE: OFFICERS
----------------------
5.01. Number. The officers of the Corporation shall be chosen by the
------
Board of Directors and shall, at a minimum, consist of a President and a
Secretary. The Board of Directors may also choose additional officers,
including a Chairman or Vice-Chairman of the Board of Directors, one or more
Vice-Presidents who may be classified by their specific function, a Secretary, a
Treasurer and one or more Assistant Secretaries and Assistant Treasurers.
5.02. Election. The Board of Directors at its first meeting and after
--------
each annual meeting of shareholders shall choose a President and a Secretary,
and may choose such other officers and agents as it shall deem necessary.
5.03. Salaries. The salaries of all officers and agents of the
--------
Corporation shall be fixed by the Board of Directors.
5.04. Term. The officers of the Corporation shall hold office until their
----
successors are chosen and qualify, until their earlier resignation or removal.
Any vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors.
5.05. Chairman. The Chairman, or, in the absence of the Chairman, a Vice-
--------
Chairman of the Board of Directors, if chosen, shall preside at all meetings of
the Board of Directors, and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
5.06. President. The President shall be the chief executive officer of
---------
the Corporation, shall preside at all meetings of the shareholders and, unless a
Chairman or Vice-Chairman of the Board has been chosen, at all meetings of the
Board of Directors, and shall have general and active management of the business
of the Corporation and shall see that all orders and resolutions of the Board of
Directors, are carried into effect.
5.07. Seal. The President shall execute bonds, mortgages and other
----
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution
6
<PAGE>
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
5.08. Vice-President. The Vice-President, or if there shall be more than
--------------
one, the Vice-Presidents in the order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
5.09. Secretary. The Secretary shall attend all meetings of the Board of
---------
Directors and all meetings of the shareholders and record all the proceedings of
the meetings of the Corporation and the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and regular and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision the Secretary shall be.
Additionally, the Secretary shall have custody of the corporate seal of the
Corporation, and the Secretary or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it, and when so affixed, it may be
attested by the Secretary's signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by the
Secretary's signature.
5.10. Assistant Secretary. The Assistant Secretary, or if there be more
-------------------
than one, the Assistant Secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors from time to time
prescribe.
5.11. Treasurer. The Treasurer, if one is chosen or, if not, the
---------
Secretary, shall have the custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors.
5.12. Disbursements. The Treasurer, if one is chosen or, if not, the
-------------
Secretary, shall disburse the funds of the Corporation as may be ordered by the
Board of Directors taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an
7
<PAGE>
account of all transactions performed by the Treasurer (or Secretary, as the
case may be) and of the financial condition of the Corporation.
5.13. Bond. If required by the Board of Directors, the Treasurer, if one
----
is chosen or, if not, the Secretary, shall give the Corporation a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of the office of a treasurer and for the restoration
to the Corporation, in case of the Treasurer's (or Secretary's, as the case may
be) death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the possession or under
the control of the Treasurer (or Secretary, as the case may be) belonging to the
Corporation.
5.14. Assistant Treasurer. The Assistant Treasurer, or if there shall be
-------------------
more than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers at the Board of Directors may from time to
time prescribe.
ARTICLE SIX:
CERTIFICATES OF STOCK, TRANSFERS
OF STOCK, CLOSING OF TRANSFER
BOOKS AND REGISTERED SHAREHOLDERS
---------------------------------
6.01. Certificates. Every holder of stock in the Corporation shall be
------------
entitled to have a certificate, signed by, or in the name of, the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the President or a
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by the shareholder in the Corporation.
6.02. Signatures. Any or all the signatures on the certificate may be a
----------
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if the
person who signed the certificate was such officer, transfer agent or registrar
at the date of issue.
8
<PAGE>
6.03. Lost or Stolen. The Board of Directors may direct a new certificate
--------------
or certificates to be issued in place of any certificates theretofore issued by
the Corporation alleged to have been lost or stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or such owner's legal
representative, advertise the same in such manner as the Corporation shall
require and/or to give the Corporation a bond in such sum as the Corporation may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
6.04. Registration of Transfer. Subject to transfer restrictions
------------------------
permitted by Section 1055 of Title 18 of the Oklahoma Statutes and to stop
transfer orders directed in good faith by the Corporation to any transfer agent
to prevent possible violations of federal or state securities laws, rules or
regulations, upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
6.05. Record Date. The Board of Directors may fix a record date, which
-----------
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of shareholders, nor more than sixty (60) days prior to the time for
the other action herein after described, as of which there shall be determined
the shareholders who are entitled: to notice of or to vote at any meeting of
shareholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.
6.06. Owner. The Corporation shall be entitled to treat the person in
-----
whose name any share of stock is registered on the books of the Corporation as
the owner thereof for all purposes and shall not be bound to recognize any
equitable or other claim or other interest in such shares in the part of any
other person, whether or not the Corporation shall have express or other notice
thereof.
6.07. Additional Transfer Requirements. The Corporation shall not
--------------------------------
register a transfer of a stock certificate presented to it for transfer unless:
9
<PAGE>
a) there are effective registration statements under the Securities Act
of 1933 and the Oklahoma Securities Act with regard to such shares; or
b) the Corporation has been provided with an opinion of counsel in form
and substance satisfactory to the Corporation and its counsel, that such
registration is not necessary;
In addition, within a nine (9) months and one (1) day period following the
termination of any issue of securities by the Corporation pursuant to the
intrastate exemption from registration under the Securities Act of 1933, as
amended, and the rules and regulations thereunder existing at the date of
presentation for transfer, the Corporation shall require evidence of bona fide
residency in Oklahoma, which shall consist of a minimum of the following: (a) a
valid Oklahoma Driver's License, and (b) a current Oklahoma Voter's Registration
card.
The person so presenting the certificate for transfer shall also execute an
Affidavit, as supplied by the Corporation, as to his bona fide residency in
Oklahoma, along with such other and further instruments as the Corporation may
reasonably require. Contemporaneously with, and as a prerequisite to, any
transfer of certificates by the Corporation, the Corporation may require the
person presenting the certificate for transfer to enter into such further
warranties, representations, undertakings and/or agreements running to the
Corporation as it may, on advise of counsel, reasonably require. Requirements of
compliance with the Securities Act of 1933, as amended, and/or the Oklahoma
Securities Act, as amended, and the rules and regulations under either or both
of these Acts, shall for all purposes be deemed reasonable.
6.08. Share Transfer Restrictions. Any shareholder desiring to sell any
---------------------------
of the shares of the Corporation shall offer such shares first to the
Corporation and then to the other shareholders in the following manner:
1) Such shareholders shall give written notice by registered mail to
the Secretary of the Corporation of his intention to sell such shares. Said
notice shall specify the number of shares to be sold, the price per share,
the name of the person desiring to purchase and the terms upon which the
sale is to be made. The Corporation shall have 20 days from the receipt of
such notice within which to exercise its option to purchase all or any
number of the shares so offered. Such purchase may be authorized by the
Board of Directors or Executive Committee without any action by the
shareholders of the Corporation.
10
<PAGE>
2) In the event that the Corporation should fail to purchase all or a
part of such shares within the said 20 day period, the Secretary of the
Corporation shall, within 5 days thereafter, give written notice to each of
the other shareholders of record, stating the number of shares offered for
sale but not purchased by the Corporation, the price per share, and the
terms upon which the sale is being made. Such notice shall be sent by mail
addressed to each shareholder at his last address as it appears on the
books of the Corporation. Within 15 days after the mailing of such
notices, any shareholder desiring to purchase part or all of such shares
shall deliver by mail or otherwise to the Secretary of the Corporation a
written offer for the number of shares desired by him, accompanied by the
purchase price therefor with authorization to pay such purchase price
against delivery of such shares.
3) If the shareholders offer to purchase more than the total number of
shares available for purchase by them, then the shareholders offering to
purchase shall be entitled to purchase such proportion of said shares as
the number of shares of the Corporation which he holds bears to the total
number of shares held by all shareholders offering to purchase. In the
event that the proportion of said shares to which a shareholder should be
entitled to purchase is more than the number of shares he desires to
purchase, each remaining shareholder desiring to purchase additional shares
shall be entitled to purchase such proportion of the over-plus as the
number of shares which he holds bears to the total number of shares held by
all shareholders desiring to participate.
4) If none or only a part of the shares offered for sale is purchased by
the Corporation or shareholder(s), or both, then the shareholder who
offered the same for sale shall have thereafter the right to sell said
shares not so purchased to such person specified in the notice; provided,
however, that he shall not: (a) sell such shares at a lower price or on
terms more favorable to the purchaser than those specified in the written
notice he gave to the Corporation, and (b) attempt to transfer such shares
without first complying or causing compliance to be made with paragraph
6.07 of these By-Laws.
5) In the event that the shareholder who offers the shares for sale
should be permitted to sell the same under sub-paragraph 4) hereof, this
right shall extend for a period of one month following the last date any
other shareholder could have made an offer to purchase such shares. After
such one month period such shares shall again become subject to the
restrictions imposed by this paragraph 6.08.
6) Any sale of the shares of the Corporation shall be null and void
unless the provisions of this paragraph 6.08 are strictly observed and
followed.
11
<PAGE>
6.09. Legends. The following legend shall be printed or typed
-------
conspicuously upon all of the share certificates issued by the Corporation:
Transfer of the shares represented by this certificate are
restricted pursuant to Sections 6.07 and 6.08 of the By-Laws of the
Corporation. A full statement of the restrictions will be furnished at no
charge upon request at the office of the Corporation. *******
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act") or the
Oklahoma Securities Act, and may not be offered or sold except pursuant to
(i) an effective registration statement under the Acts, (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) an opinion of counsel,
if such opinion shall be reasonably satisfactory to counsel to the issuer,
that an exemption from registration under such Acts is available.
The foregoing restrictions are cumulative. Stop transfer orders
appear in the Corporation's By-Laws which require that the Corporation will
not transfer any share transferred in contravention of any of the
foregoing. Any attempted transfer except in strict compliance with said
restrictions is void. *******
In addition, and without limitation, the Board of Directors may from time
to time modify or add to the foregoing legends in order to comply with any
federal or state statute, order, rule or regulation.
ARTICLE SEVEN: GENERAL PROVISIONS
---------------------------------
7.01. Dividends. Dividends upon the capital stock of the Corporation,
---------
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property or in shares of the
Corporation's capital stock.
7.02. Reserve. There may be set apart out of any of the funds of the
-------
Corporation available for dividends such amounts deems proper as a reserve or
reserves for working capital, depreciation, losses in value, or for any other
proper corporate purpose, and the Board of Directors may increase, decrease or
abolish any such reserve in the manner in which it was created.
12
<PAGE>
7.03. Business Condition. The Board of Directors shall present at each
------------------
annual meeting and set any special meeting of the shareholders when called for
by vote of the shareholders, a full and clear statement of the business and
condition of the Corporation.
7.04. Checks and Notes. All checks or demands for money and notes of the
----------------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
7.05. Fiscal Year. The fiscal year of the Corporation shall be as fixed
-----------
by the Board of Directors.
7.06. Seal. The Board of Directors may provide a suitable seal,
----
containing the name of the Corporation, which seal shall be in charge of the
Secretary. If and when so directed by the Board of Directors or a committee
thereof, duplicates of the seal may be kept and used by the Treasurer or by the
Assistant Secretary or Assistant Treasurer. The seal may be used by causing it,
or a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
7.07. Record Books. The books of account and other records of the
------------
Corporation may be kept (subject to any provisions of Oklahoma law) at the
principal place of business and chief executive office of the Corporation.
ARTICLE VIII:
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
-------------------------------
8.01. Indemnification. To the extent and in the manner permitted by the
---------------
laws of the State of Oklahoma and specifically as is permitted under Section
1031 of Title 18 of the Oklahoma Statutes, the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, other than an action by or in the
right of the Corporation, by reason of the fact that such person 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.
ARTICLE IX: AMENDMENTS
----------------------
13
<PAGE>
9.01. Amendments. The Bylaws may be amended or repealed, or new bylaws
----------
may be adopted, by the shareholders or by the Board of Directors at any regular
meeting of the shareholders or of the Board of Directors, or at any special
meeting of the shareholders or of the Board of Directors if notice of such
amendment, repeal, or adoption of new bylaws be contained in the notice of such
special meeting.
APPROVED AND RATIFIED as of this 29th day of December, 1989, by the
undersigned, constituting all of the directors of the Corporation.
________________________________________
Leo Woodard
______________________________________
John Penton
14
<PAGE>
EXHIBIT 3.5(a)
CERTIFICATE OF INCORPORATION
OF
CORAL RESERVES ENERGY CORP.
STATE OF OKLAHOMA )
) ss:
COUNTY OF OKLAHOMA )
TO: THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:
ARTICLE I
---------
The name of the corporation is Coral Reserves, Inc.
ARTICLE II
----------
The address of the corporation's registered office in the State of Oklahoma
is 100 Park Avenue Building, Suite 400, Oklahoma City, Oklahoma 73102. The name
of the corporation's registered agent at such address is Scott M. Rayburn.
ARTICLE III
-----------
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the general corporation law of the
State of Oklahoma.
ARTICLE IV
----------
The total number of shares of stock which the corporation shall have
authority to issue is 10,000 shares, each of the shares having a par value of
$0.10, thereby resulting in the corporation having total authorized capital
stock in the amount of $1,000, all of which shall be Common Stock.
<PAGE>
The Board of Directors of the corporation shall have full authority, to the
extent permitted by law, to increase, decrease or otherwise adjust the capital
stock of the corporation, to designate the classes or series thereof and to
determine whether all or any part of such stock shall have voting powers, full
or limited, or no voting powers, and to determine such designations, and such
powers, preferences, relative, participating or optional, or other special
rights and qualifications, limitations or restrictions thereof as the Board
shall from time to time determine in duly adopted resolutions.
At any time and from time to time, when authorized by resolution of the
Board of Directors and without any action by its shareholders, the corporation
may issue or sell any shares of its capital stock of any class or series,
whether out of the unissued shares thereof authorized by the Certificate of
Incorporation of the corporation as originally filed or by an amendment thereof
or out of shares of its capital stock acquired by it after the issue thereof,
and whether or not the shares thereof so issued or sold shall confer upon the
holders thereof the right to exchange or convert such shares for or into other
shares of capital stock of the corporation of any class or classes or any series
thereof. When similarly authorized, but without any action by its share
holders, the corporation may issue or grant rights, warrants or options, in
bearer or registered or such other form as the Board of Directors may determine,
for the purchase of shares of the capital stock of any class or series of the
corporation within such period of time, or without limit as to time, to such
aggregate number of shares, and at such price per share, as the Board of
Directors may determine. Such rights, warrants or options may be issued or
granted separately or in connection with the issue of any bonds, debentures,
notes, obligations or other evidences of indebtedness or shares of the capital
stock of any class or series of the corporation and for such
2
<PAGE>
consideration and on such terms and conditions as the Board of Directors in its
sole discretion may determine. In each case, the consideration to be received by
the corporation for any such shares so issued or sold shall be such as shall be
fixed from time to time by resolution of the Board of Directors.
ARTICLE V
---------
The name and mailing address of each incorporator is as follows:
Name Mailing Address
---- ---------------
Scott M. Rayburn 100 Park Avenue, Suite 400
Oklahoma City, Oklahoma 73102
ARTICLE VI
----------
The name and address of each director who will serve until the first annual
meeting of the shareholders or until their successors are elected and qualified
is as follows:
Name Mailing Address
---- ---------------
Leo Woodard 3313 Arrowhead Drive
Edmond, OK 73013
John Penton 1807 Huntington
Oklahoma City, OK 73116
ARTICLE VII
-----------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
(a) To adopt, amend or repeal the Bylaws of the corporation.
(b) To authorize and cause to be executed or granted mortgages, security
interests and liens upon the real and personal property of the
corporation.
3
<PAGE>
(c) To set apart out of any of the funds of the corporation available to
dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
(d) By a majority of the whole Board of Directors, to designate one or
more committees, each committee to consist of one (1) or more of the
directors of the corporation. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution or in the
Bylaws of the corporation, shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; provided, however, the
Bylaws may provide that in the absence or disqualification of any
member of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
(e) When and as authorized by the affirmative vote of the holders of a
majority of the stock issued and outstanding having voting power
given at a shareholders' meeting duly called upon such notice as is
required by law, or when authorized by the written consent of the
holders of a majority of the voting stock issued and outstanding, to
sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its goodwill and its corporate
franchises, upon such terms and conditions and for such consideration,
which may consist in whole or in part of money or property including
shares of stock in, and/or other securities of, any other corporation
or corporations, as its Board of Directors shall deem expedient and
for the best interests of the corporation.
ARTICLE VIII
------------
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
shareholders or any class of them, any court of equitable jurisdiction within
the State of Oklahoma, on the application in a summary way of this corporation
or of any creditor or shareholder thereof, or on the application of any receiver
or receivers appointed for this corporation under the provisions of Section 1106
4
<PAGE>
of Title 18 of the Oklahoma Statutes or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation under
the provisions of Section 1106 of Title 18 of the Oklahoma Statutes order a
meeting of the creditors or class of creditors, and/or of the shareholders or
class of shareholders of this corporation, as the case may be, to be summoned in
such manner as the court directs. If a majority in number representing three-
fourths (3/4) in value of the creditors or class of creditors, and/or of the
shareholders or class of shareholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the compromise or
arrangement and the reorganization shall, if sanctioned by the court to which
the application has been made, be binding on all the creditors or class of
creditors and/or on all the shareholders of this corporation, as the case may
be, and also on this corporation.
ARTICLE IX
----------
Meetings of shareholders may be held within or without the State of
Oklahoma, as the Bylaws may provide. The books of the corporation may be kept
(subject to applicable law) inside or outside the State of Oklahoma at such
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the corporation. Elections of directors need not be by
written ballot unless the Bylaws of the corporation shall so provide.
ARTICLE X
---------
To the extent permitted by law, no contract or transaction between the
corporation and one or more of its directors or officers, or between the
corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or
5
<PAGE>
solely because the directors or officers are present at or participate in the
meeting of the Board or committee thereof which authorizes the contract or
transaction, or solely because the directors or officers or their votes are
counted for such purpose.
ARTICLE XI
----------
The Board of Directors shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, 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
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
The Board of Directors shall have 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
6
<PAGE>
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 interests of the
corporation and except that no indemnification shall be made in respect to 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 indemnity for such expenses
which the court shall deem proper.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized by the provisions of this section. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
The indemnification and advancement of expenses provided by or granted
pursuant to this Article shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of
7
<PAGE>
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
ARTICLE XII
-----------
No director shall be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director;
provided, however, this provision shall not eliminate or limit the liability of
a director: (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 1053 of Title Eighteen of the Oklahoma General Corporation Act; or (iv)
for any transaction from which the director derived an improper personal
benefit.
ARTICLE XIII
------------
In furtherance and not in limitation of the powers conferred by the laws of
the State of Oklahoma, the Board of Directors is expressly authorized to adopt,
or amend or repeal the Bylaws of the corporation.
ARTICLE XIV
-----------
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by law, and all rights conferred upon the shareholders
herein are granted subject to this reservation.
THE UNDERSIGNED (whether one or more), being the incorporator hereinbefore
named, for the purpose of forming a corporation pursuant to the Oklahoma General
Corporation Act, makes this Certificate, hereby declaring and certifying that
this is the act and deed of the undersigned and that the facts herein stated are
true, as of this 17th day of January, 1990.
8
<PAGE>
_____________________________________
Scott M. Rayburn, Incorporator
9
<PAGE>
EXHIBIT 3.5(b)
BYLAWS OF
CORAL RESERVES ENERGY CORP.
The within and following Bylaws were read and discussed, section by
section, by the Directors, who have authority to adopt Bylaws which shall remain
effective until legally amended or repealed.
They were adopted on the 24th day of January, 1991.
To certify which, witness my hand and seal of the Corporation this 24th day
of January, 1991.
____________________________________
Jody Lueb, Secretary
<PAGE>
BYLAWS OF
CORAL RESERVES ENERGY CORP.
Contents
ARTICLE ONE
- -----------
Offices
1.01 Registered Office and Agent
1.02 Other Offices
ARTICLE TWO
- -----------
Meetings of Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Written Notice of Annual Meeting
2.04 Voting List
2.05 Special Meetings
2.06 Written Notice of Special Meeting
2.07 Business Limited to Purposes
2.08 Quorum
2.09 Majority Vote; Withdrawal of Quorum
2.10 Method of Voting; Record Date; Closing Transfer Books
2.11 Action Without Meeting
ARTICLE THREE
- -------------
Directors
3.01 Number; Qualification; Election; Term
3.02 Vacancies
3.03 Management
3.04 Meetings
3.05 Regular Meetings
<PAGE>
3.06 Special Meetings
3.07 Quorum; Majority Vote
3.08 Committees
3.09 Committee Minutes
3.10 Committee Participation
3.11 Committee Action
3.12 Compensation
3.13 Removal of Officers
3.14 Removal of Directors
ARTICLE FOUR
- ------------
Notices
4.01 Method
4.02 Waiver
ARTICLE FIVE
- ------------
Officers
5.01 Number
5.02 Election
5.03 Salaries
5.04 Term
5.05 Chairman
5.06 President
5.07 Seal
5.08 Vice-President
5.09 Secretary
5.10 Assistant Secretary
5.11 Treasurer
5.12 Disbursements
5.13 Bond
5.14 Assistant Treasurer
ARTICLE SIX
- -----------
Certificates of Stock, Transfers of Stock, Closing of Transfer Books and
Registered Shareholders
6.01 Certificates
<PAGE>
6.02 Signatures
6.03 Lost or Stolen
6.04 Registration of Transfer
6.05 Record Date
6.06 Owner
6.07 Additional Transfer Requirements
6.08 Share Transfer Restrictions
6.09 Legends
ARTICLE SEVEN
- -------------
General Provisions
7.01 Dividends
7.02 Reserve
7.03 Business Condition
7.04 Checks and Notes
7.05 Fiscal Year
7.06 Seal
7.07 Record Books
ARTICLE EIGHT
- -------------
Indemnification of Officers, Directors, Employees and Agents
8.01 Indemnification
ARTICLE NINE
- ------------
Amendments
9.01 Amendments
<PAGE>
ARTICLE ONE: OFFICES
---------------------
1.01. Registered Office and Agent. The registered office of the
---------------------------
Corporation shall be at 100 Park Avenue, Suite 400, in the City of Oklahoma
City, County of Oklahoma, State of Oklahoma. The name of the registered agent
at such address is Scott M. Rayburn.
1.02. Other Offices. The Corporation may also have offices at such other
-------------
places both within and without the State of Oklahoma as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE TWO: MEETINGS OF SHAREHOLDERS
--------------------------------------
2.01. Place of Meetings. Meetings of the shareholders for any purpose may
-----------------
be held at such time and place, within or without the State of Oklahoma, as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
2.02. Annual Meeting. Annual meetings of the shareholders, commencing
--------------
with the year 1992, shall be held on the second Tuesday of January, if not a
legal holiday, and if a legal holiday, then on the next secular day following,
at 10:00 a.m., at which they shall elect by a plurality vote by written ballot a
board of directors, and transact such other business as may be properly brought
before the meeting.
2.03. Written Notice of Annual Meeting. Written notice of the annual
--------------------------------
meeting, stating the place, date and hour of such meeting, shall be given to
each shareholder entitled to vote thereat not less than ten (10) days nor more
than sixty (60) days before the date of the meeting unless otherwise required by
law.
2.04. Voting List. The officer who has charge of the stock ledger of the
-----------
Corporation shall prepare and make, at least ten (10) days before every meeting
of shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the election, either at a place within the city where the meeting is to be held
and which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held, and the list shall be
produced and kept at the time and place of the meeting during the whole time
thereof, and subject to the inspection of any shareholder who may be present.
1
<PAGE>
2.05. Special Meetings. Special meetings of the shareholders, for any
----------------
purpose or purposes, unless otherwise prescribed by law or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of shareholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
2.06. Written Notice of Special Meeting. Written notice of a special
---------------------------------
meeting of shareholders, stating the place, date, hour and purpose or purposes
thereof, shall be given to each shareholder entitled to vote thereat, not less
than ten (10) days before the date fixed for the meeting unless otherwise
required by law.
2.07. Business Limited to Purposes. Business transacted at any special
----------------------------
meeting of the shareholders shall be limited to the purposes stated in the
notice.
2.08. Quorum. The holders of a majority of the shares of stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by law or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented; provided, however, that
if the date of any adjourned meeting is more than thirty (30) days after the
date for which the meeting was originally noticed, or if a new record date is
fixed for the adjourned meeting, written notice of the place, date and hour of
the adjourned meeting shall be given in conformity herewith. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted at the meeting as originally notified.
2.09. Majority Vote; Withdrawal of Quorum. When a quorum is present at
-----------------------------------
any meeting, the affirmative vote of the holders of a majority of the shares
having voting power present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which, by
express provision of law or of the Certificate of Incorporation, a different
vote is required, in which case such express provision shall govern and control
the decision of such question.
2.10. Method of Voting; Record Date; Closing Transfer Books. Each share-
-----------------------------------------------------
holder shall at every meeting of the shareholders be entitled to one vote in
person or by proxy for each share of the capital stock having voting power held
by such shareholders,
2
<PAGE>
but no proxy shall be voted or acted upon after three (3) years from its date
unless the proxy provides for a longer period, and, except where the transfer
books of the corporation have been closed or a date has been fixed as a record
date for the determination of its shareholders entitled to vote, no share of
stock shall be voted on at any election for directors which has been transferred
on the books of the corporation within twenty (20) days preceding such election
of directors.
2.11. Action Without Meeting. Any action required to or which may be
----------------------
taken at any annual or special meeting of the shareholders, may be taken without
a meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action by the shareholders without a meeting by less than unanimous
written consent shall be given to those shareholders who have not consented in
writing.
ARTICLE THREE: DIRECTORS
-------------------------
3.01. Number; Qualification; Election; Term. The number of directors
-------------------------------------
which shall constitute the whole Board shall be not less than one (1) nor more
than seven (7). As of January 24, 1991, the Board shall consist of two (2)
directors. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the Board of Directors or by the
shareholders at the annual or a special meeting of the shareholders. Except for
the election held by the incorporator(s) and except as provided in Section 3.02
and in Section 3.14 of this Article Three, the directors shall be elected at the
annual meeting of shareholders. Each director elected shall hold office until
such director's successor is elected and qualified, or until such director's
earlier resignation or removal. Directors need not be shareholders.
3.02. Vacancies. Except as provided in Section 3.14 of this Article,
---------
vacancies and newly created directorships resulting from any increase in the
authorized numbers of directors by the directors may be filled by a majority of
the directors then in office, though less than a quorum, and any director so
chosen shall hold office until the next annual election and until such
director's successor is duly elected and shall qualify, unless such director
resigns or is removed.
3.03. Management. The business of the Corporation shall be managed by its
----------
Board of Directors which may exercise all such powers of the Corporation and do
all such
3
<PAGE>
lawful acts and things as are not by law or by the Certificate of Incorporation
or by these Bylaws directed or required to be exercised or done by the
shareholders.
3.04. Meetings. The Board of Directors of the Corporation may hold
--------
meetings, both regular and special, either within or without the State of
Oklahoma.
3.05. Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held at such time and at such place as shall from time to time be determined by
the Board. Five (5) days' notice of all regular meetings shall be given, and
such notice shall state the place, date, hour and the business to be transacted
at and purpose of such meeting.
3.06. Special Meetings. Special meetings of the Board may be called by
----------------
the President on three (3) days' notice to each director either personally or by
mail or by telegram. Special meetings shall be called by the President or
Secretary in like manner and on like notice on the written request of two (2)
directors unless the Corporation has at that time less than three (3) directors,
in which latter event the request of only one (1) director shall be required.
Notice of any special meeting shall state the place, date, hour and the business
to be transacted at and the purpose of such meeting.
3.07. Quorum; Majority Vote. At all meetings of the Board, a majority of
---------------------
the directors shall constitute a quorum for the transaction of business, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.08. Committees. The Board of Directors may, by resolution, passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one (1) or more of the directors of the Corporation, which, to the
extent provided in the resolution, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors.
3.09. Committee Minutes. Each committee shall keep regular minutes of its
-----------------
meetings and report the same to the Board of Directors when required.
4
<PAGE>
3.10. Committee Participation. Members of the Board of Directors, or of
-----------------------
any committee thereof, may participate in a meeting of such Board or committee
by means of conference telephone or similar communications equipment that
enables all persons participating in the meeting to hear each other. Such
participation shall constitute presence in person at such meeting.
3.11. Committee Action. Unless otherwise restricted by the Certificate of
----------------
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board or of such committee as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.
3.12. Compensation. The directors may be paid their expenses, if any, of
------------
attendance at such meeting of the Board of Directors and may be paid a fixed sum
for attendance at such meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of the special or standing committees may be allowed like compensation for
attending committee meetings.
3.13. Removal of Officers. The Board of Directors at any time may, by
-------------------
affirmative vote of a majority of the members of the Board then in office,
remove any officer elected or appointed by the Board of Directors for cause or
without cause.
3.14. Removal of Directors. Any director may be removed, for cause or
--------------------
without cause, by a majority vote of the shareholders entitled to vote for the
election of such director at any annual or special meeting of the shareholders.
Upon such removal of a director, the shareholders (and not the remaining
directors) shall elect a director to replace such removed director at the same
shareholders' meeting at which such removal took place or at a subsequent
shareholders' meeting.
ARTICLE FOUR: NOTICES
----------------------
4.01. Method. Notices to directors and shareholders shall be in writing
------
and delivered personally or mailed to the directors or shareholders at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given at the time when the same shall be deposited in the United
States mail, postage prepaid. Notice to directors may also be given by telegram.
Notice by telegram shall be deemed to be given when delivered to the sending
telegraph office.
5
<PAGE>
4.02. Waiver. Whenever any notice is required to be given under the
------
provisions of law or of the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice.
ARTICLE FIVE: OFFICERS
----------------------
5.01. Number. The officers of the Corporation shall be chosen by the
------
Board of Directors and shall, at a minimum, consist of a President and a
Secretary. The Board of Directors may also choose additional officers, including
a Chairman or Vice-Chairman of the Board of Directors, one or more Vice-
Presidents who may be classified by their specific function, a Secretary, a
Treasurer and one or more Assistant Secretaries and Assistant Treasurers.
5.02. Election. The Board of Directors at its first meeting and after
--------
each annual meeting of shareholders shall choose a President and a Secretary,
and may choose such other officers and agents as it shall deem necessary.
5.03. Salaries. The salaries of all officers and agents of the
--------
Corporation shall be fixed by the Board of Directors.
5.04. Term. The officers of the Corporation shall hold office until their
----
successors are chosen and qualify, until their earlier resignation or removal.
Any vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors.
5.05. Chairman. The Chairman, or, in the absence of the Chairman, a Vice-
--------
Chairman of the Board of Directors, if chosen, shall preside at all meetings of
the Board of Directors, and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
5.06. President. The President shall be the chief executive officer of
---------
the Corporation, shall preside at all meetings of the shareholders and, unless a
Chairman or Vice-Chairman of the Board has been chosen, at all meetings of the
Board of Directors, and shall have general and active management of the business
of the Corporation and shall see that all orders and resolutions of the Board of
Directors, are carried into effect.
5.07. Seal. The President shall execute bonds, mortgages and other
----
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution
6
<PAGE>
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
5.08. Vice-President. The Vice-President, or if there shall be more than
--------------
one, the Vice-Presidents in the order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
5.09. Secretary. The Secretary shall attend all meetings of the Board of
---------
Directors and all meetings of the shareholders and record all the proceedings of
the meetings of the Corporation and the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and regular and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose Supervision the Secretary shall be.
Additionally, the Secretary shall have custody of the corporate seal of the
Corporation, and the Secretary or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it, and when so affixed, it may be
attested by the Secretary's signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by the
Secretary's signature.
5.10. Assistant Secretary. The Assistant Secretary, or if there be more
-------------------
than one, the Assistant Secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors from time to time
prescribe.
5.11. Treasurer. The Treasurer, if one is chosen or, if not, the
---------
Secretary, shall have the custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories
as may be designated by the Board of Directors.
5.12. Disbursements. The Treasurer, if one is chosen or, if not, the
-------------
Secretary, shall disburse the funds of the Corporation as may be ordered by the
Board of Directors taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an
7
<PAGE>
account of all transactions performed by the Treasurer (or Secretary, as the
case may be) and of the financial condition of the Corporation.
5.13. Bond. If required by the Board of Directors, the Treasurer, if one
----
is chosen or, if not, the Secretary, shall give the Corporation a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of the office of a treasurer and for the restoration
to the Corporation, in case of the Treasurer's (or Secretary's, as the case
may be) death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in the possession or
under the control of the Treasurer (or Secretary, as the case may be) belonging
to the Corporation.
5.14. Assistant Treasurer. The Assistant Treasurer, or if there shall be
-------------------
more than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers at the Board of Directors may from time to
time prescribe.
ARTICLE SIX:
CERTIFICATES OF STOCK, TRANSFERS
OF STOCK, CLOSING OF TRANSFER
BOOKS AND REGISTERED SHAREHOLDERS
---------------------------------
6.01. Certificates. Every holder of stock in the Corporation shall be
------------
entitled to have a certificate, signed by, or in the name of, the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the President or a
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by the shareholder in the Corporation.
6.02. Signatures. Any or all the signatures on the certificate may be a
----------
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if the
person who signed the certificate was such officer, transfer agent or registrar
at the date of issue.
8
<PAGE>
6.03. Lost or Stolen. The Board of Directors may direct a new certificate
--------------
or certificates to be issued in place of any certificates theretofore issued by
the Corporation alleged to have been lost or stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or such owner's legal
representative, advertise the same in such manner as the Corporation shall
require and/or to give the Corporation a bond in such sum as the Corporation may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
6.04. Registration of Transfer. Subject to transfer restrictions
------------------------
permitted by Section 1055 of Title 18 of the Oklahoma Statutes and to stop
transfer orders directed in good faith by the Corporation to any transfer agent
to prevent possible violations of federal or state securities laws, rules or
regulations, upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
6.05. Record Date. The Board of Directors may fix a record date, which
-----------
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of shareholders, nor more than sixty (60) days prior to the time for
the other action herein after described, as of which there shall be determined
the shareholders who are entitled: to notice of or to vote at any meeting of
shareholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.
6.06. Owner. The Corporation shall be entitled to treat the person in
-----
whose name any share of stock is registered on the books of the Corporation as
the owner thereof for all purposes and shall not be bound to recognize any
equitable or other claim or other interest in such shares in the part of any
other person, whether or not the Corporation shall have express or other notice
thereof.
6.07. Additional Transfer Requirements. The Corporation shall not
--------------------------------
register a transfer of a stock certificate presented to it for transfer unless:
9
<PAGE>
a) there are effective registration statements under the Securities Act
of 1933 and the Oklahoma Securities Act with regard to such shares; or
b) the Corporation has been provided with an opinion of counsel in form
and substance satisfactory to the Corporation and its counsel, that such
registration is not necessary;
In addition, within a nine (9) months and one (1) day period following the
termination of any issue of securities by the Corporation pursuant to the
intrastate exemption from registration under the Securities Act of 1933, as
amended, and the rules and regulations thereunder existing at the date of
presentation for transfer, the Corporation shall require evidence of bona fide
residency in Oklahoma, which shall consist of a minimum of the following: (a) a
valid Oklahoma Driver's License, and (b) a current Oklahoma Voter's Registration
card.
The person so presenting the certificate for transfer shall also execute an
Affidavit, as supplied by the Corporation, as to his bona fide residency in
Oklahoma, along with such other and further instruments as the Corporation may
reasonably require. Contemporaneously with, and as a prerequisite to, any
transfer of certificates by the Corporation, the Corporation may require the
person presenting the certificate for transfer to enter into such further
warranties, representations, undertakings and/or agreements running to the
Corporation as it may, on advise of counsel, reasonably require. Requirements of
compliance with the Securities Act of 1933, as amended, and/or the Oklahoma
Securities Act, as amended, and the rules and regulations under either or both
of these Acts, shall for all purposes be deemed reasonable.
6.08. Share Transfer Restrictions. Any shareholder desiring to sell any
---------------------------
of the shares of the Corporation shall offer such shares first to the
Corporation and then to the other shareholders in the following manner:
1) Such shareholders shall give written notice by registered mail to
the Secretary of the Corporation of his intention to sell such shares. Said
notice shall specify the number of shares to be sold, the price per share,
the name of the person desiring to purchase and the terms upon which the
sale is to be made. The Corporation shall have 20 days from the receipt of
such notice within which to exercise its option to purchase all or any
number of the shares so offered. Such purchase may be authorized by the
Board of Directors or Executive Committee without any action by the
shareholders of the Corporation.
10
<PAGE>
2) In the event that the Corporation should fail to purchase all or a
part of such shares within the said 20 day period, the Secretary of the
Corporation shall, within 5 days thereafter, give written notice to each of
the other shareholders of record, stating the number of shares offered for
sale but not purchased by the Corporation, the price per share, and the
terms upon which the sale is being made. Such notice shall be sent by mail
addressed to each shareholder at his last address as it appears on the
books of the Corporation. Within 15 days after the mailing of such notices,
any shareholder desiring to purchase part or all of such shares shall
deliver by mail or otherwise to the Secretary of the Corporation a written
offer for the number of shares desired by him, accompanied by the purchase
price therefor with authorization to pay such purchase price against
delivery of such shares.
3) If the shareholders offer to purchase more than the total number of
shares available for purchase by them, then the shareholders offering to
purchase shall be entitled to purchase such proportion of said shares as
the number of shares of the Corporation which he holds bears to the total
number of shares held by all share holders offering to purchase. In the
event that the proportion of said shares to which a shareholder should be
entitled to purchase is more than the number of shares he desires to
purchase, each remaining shareholder desiring to purchase additional shares
shall be entitled to purchase such proportion of the over-plus as the
number of shares which he holds bears to the total number of shares held by
all shareholders desiring to participate.
4) If none or only a part of the shares offered for sale is purchased by
the Corporation or shareholder(s), or both, then the shareholder who
offered the same for sale shall have thereafter the right to sell said
shares not so purchased to such person specified in the notice; provided,
however, that he shall not: (a) sell such shares at a lower price or on
terms more favorable to the purchaser than those specified in the written
notice he gave to the Corporation, and (b) attempt to transfer such shares
without first complying or causing compliance to be made with paragraph
6.07 of these By-Laws.
5) In the event that the shareholder who offers the shares for sale
should be permitted to sell the same under sub-paragraph 4) hereof, this
right shall extend for a period of one month following the last date any
other shareholder could have made an offer to purchase such shares. After
such one month period such shares shall again become subject to the
restrictions imposed by this paragraph 6.08.
6) Any sale of the shares of the Corporation shall be null and void
unless the provisions of this paragraph 6.08 are strictly observed and
followed.
11
<PAGE>
6.09. Legends. The following legend shall be printed or typed
-------
conspicuously upon all of the share certificates issued by the Corporation:
Transfer of the shares represented by this certificate are
restricted pursuant to Sections 6.07 and 6.08 of the By-Laws of the
Corporation. A full statement of the restrictions will be furnished at no
charge upon request at the office of the Corporation. *******
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act") or the
Oklahoma Securities Act, and may not be offered or sold except pursuant to
(i) an effective registration statement under the Acts, (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) an opinion of counsel,
if such opinion shall be reasonably satisfactory to counsel to the issuer,
that an exemption from registration under such Acts is available.
The foregoing restrictions are cumulative. Stop transfer orders
appear in the Corporation's By-Laws which require that the Corporation will
not transfer any share transferred in contravention of any of the
foregoing. Any attempted transfer except in strict compliance with said
restrictions is void. *******
In addition, and without limitation, the Board of Directors may from time
to time modify or add to the foregoing legends in order to comply with any
federal or state statute, order, rule or regulation.
ARTICLE SEVEN: GENERAL PROVISIONS
---------------------------------
7.01. Dividends. Dividends upon the capital stock of the Corporation,
---------
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property or in shares of the
Corporation's capital stock.
7.02. Reserve. There may be set apart out of any of the funds of the
-------
Corporation available for dividends such amounts deems proper as a reserve or
reserves for working capital, depreciation, losses in value, or for any other
proper corporate purpose, and the Board of Directors may increase, decrease or
abolish any such reserve in the manner in which it was created.
12
<PAGE>
7.03. Business Condition. The Board of Directors shall present at each
------------------
annual meeting and set any special meeting of the shareholders when called for
by vote of the shareholders, a full and clear statement of the business and
condition of the Corporation.
7.04. Checks and Notes. All checks or demands for money and notes of the
----------------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
7.05. Fiscal Year. The fiscal year of the Corporation shall be as fixed
-----------
by the Board of Directors.
7.06. Seal. The Board of Directors may provide a suitable seal,
----
containing the name of the Corporation, which seal shall be in charge of the
Secretary. If and when so directed by the Board of Directors or a committee
thereof, duplicates of the seal may be kept and used by the Treasurer or by the
Assistant Secretary or Assistant Treasurer. The seal may be used by causing it,
or a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
7.07. Record Books. The books of account and other records of the
------------
Corporation may be kept (subject to any provisions of Oklahoma law) at the
principal place of business and chief executive office of the Corporation.
ARTICLE VIII:
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
-------------------------------
8.01. Indemnification. To the extent and in the manner permitted by the
---------------
laws of the State of Oklahoma and specifically as is permitted under Section
1031 of Title 18 of the Oklahoma Statutes, the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, other than an action by or in the
right of the Corporation, by reason of the fact that such person 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.
ARTICLE IX: AMENDMENTS
----------------------
13
<PAGE>
9.01. Amendments. The Bylaws may be amended or repealed, or new bylaws
----------
may be adopted, by the shareholders or by the Board of Directors at any regular
meeting of the shareholders or of the Board of Directors, or at any special
meeting of the shareholders or of the Board of Directors if notice of such
amendment, repeal, or adoption of new bylaws be contained in the notice of such
special meeting.
APPROVED AND RATIFIED as of this 24th day of January, 1991, by the under-
signed, constituting all of the directors of the Corporation.
_________________________________
Leo Woodard
_________________________________
John Penton
14
<PAGE>
EXHIBIT 3.6(a)
PARTNERSHIP AGREEMENT
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
CORAL RESERVES ENERGY INCOME FUND
1996 LIMITED PARTNERSHIP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. THE PARTNERSHIP........................................................ -1-
1.01 Name.......................................................... -1-
1.02 Business...................................................... -1-
1.03 Office........................................................ -2-
1.04 Term.......................................................... -2-
1.05 Agent for Service of Process.................................. -2-
II. DEFINITIONS......................................................... -2-
III. PARTNERS AND CAPITAL CONTRIBUTIONS.................................... -5-
3.01 General Partners.............................................. -5-
3.02 Initial Limited Partners...................................... -5-
3.03 Limited Partners.............................................. -5-
3.04 Return of Capital Contributions............................... -6-
3.05 Liability of Limited Partners................................. -6-
3.06 Ownership of Partnership Property............................. -6-
3.07 Discounted Units.............................................. -6-
IV. PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS.............................. -6-
4.01 Capital Account Maintenance................................... -6-
4.02 Book Allocations.............................................. -8-
4.03 Tax Allocations............................................... -11-
4.04 Allocation Among Partners..................................... -13-
4.05 Cash Distributions............................................ -14-
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4.06 Distribution of Net Proceeds from Sales or
Other Dispositions............................................ -14-
V. DUTIES, POWERS, AND RESTRICTIONS OF THE GENERAL
PARTNERS........................................................... -15-
5.01 Management.................................................... -15-
5.02 Partnership Deposits and Disbursements........................ -20-
5.03 Books......................................................... -20-
5.04 Accounting.................................................... -20-
5.05 Other Ventures................................................ -21-
5.06 Right to Rely on Authority of the Managing General Partner.... -21-
5.07 Prohibition on Management Participation by Limited Partners... -21-
5.08 Liability of the General Partners; Indemnity.................. -21-
5.09 Removal of a General Partner.................................. -22-
VI. TRANSFER OF PARTNERS' INTEREST...................................... -23-
6.01 General Partners.............................................. -23-
6.02 Limited Partners.............................................. -23-
6.03 Section 754 Election.......................................... -24-
VII. DISSOLUTION OF PARTNERSHIP........................................... -25-
7.01 Limited Partners.............................................. -25-
7.02 General Partners.............................................. -25-
7.03 Procedure..................................................... -25-
7.04 Capital Accounts.............................................. -26-
VIII. MISCELLANEOUS....................................................... -26-
8.01 Agreement in Counterparts..................................... -26
8.02 Notices....................................................... -26-
8.03 Power of Attorney............................................. -26-
8.04 Amendment..................................................... -27-
8.05 Additional Documents.......................................... -27-
8.06 Meetings...................................................... -27-
8.07 Validity...................................................... -27-
8.08 Governing Law................................................. -27-
8.09 Waiver........................................................ -27-
8.10 Federal Tax Audits............................................ -27-
8.11 Delivery of Certificates...................................... -28-
Schedule A - Limited Partners
B - Subscription Agreement
</TABLE>
-ii-
<PAGE>
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED PARTNERSHIP
----------------------------------------------------------
AMENDED AND RESTATED AGREEMENT made as of the ____ day of
______________, 199___, by and among Coral Reserves Energy Corp., an Oklahoma
corporation as the Managing General Partner (the "Managing General Partner"),
Leo Woodard and John Penton, Individuals as Additional General Partners (the
"Additional General Partners") (the Managing General Partner and Additional
General Partners are collectively referred to as "General Partners"), Leo
Woodard and John Penton, Individuals as the Initial Limited Partners (the
"Initial Limited Partners"), and each of the persons (the "Limited Partners")
from time to time listed on Schedule A hereto.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the General Partners and the Initial Limited Partners have
formed a limited partnership pursuant to the provisions of the Oklahoma Revised
Uniform Limited Partnership Act (the "Partnership Act") under the name of "Coral
Reserves Energy Income Fund 1996 Limited Partnership" (the "Partnership") by
filing for record a Certificate of Limited Partnership of the Partnership with
the Oklahoma Secretary of State on April 18, 1996; and
WHEREAS, the General Partners and the Initial Limited Partners desire to
(i) amend and restate in its entirety their agreement as set forth in the
aforesaid Certificate of Limited Partnership, (ii) effect the withdrawal of the
Initial Limited Partners and (iii) provide for the admission of the Limited
Partners as provided in this Amended and Restated Agreement of Limited
Partnership (the "Agreement");
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants and agreements herein contained, the parties hereto do hereby certify
and swear and agree as follows:
I. THE PARTNERSHIP
---------------
1.01 Name. The name of the Partnership shall continue to be Coral
----
Reserves Energy Income Fund 1996 Limited Partnership.
1.02 Business. The Partnership will carry on the business of
--------
acquiring, managing, improving and selling or otherwise disposing of Production
Interests, as herein defined, in oil and gas properties located in Oklahoma or
in such other states as the
-1-
<PAGE>
Managing General Partner deems appropriate and will also engage in certain
related activities. The Partnership shall have authority to do all things
necessary or expedient to carry out its stated purposes.
1.03 Office. The office of the Partnership shall be located at 119
------
North Robinson, Suite 600, Oklahoma City, Oklahoma, 73102, or at such other
location in Oklahoma as the Managing General Partner may determine from time to
time upon prior written notice to the Limited Partners.
1.04 Term. The term of the Partnership commenced on the date that
----
the Partnership's Certificate and Agreement of Limited Partnership was filed in
the office of the Secretary of State of the State of Oklahoma and shall continue
until the date on which all Partnership assets are sold or otherwise disposed.
Notwithstanding the foregoing, the Partnership will terminate no later than
January 1, 2016, and may be sooner terminated in the manner provided in Article
VII hereof.
1.05 Agent for Service of Process. The Partnership's agent
----------------------------
for service of process of the Partnership shall be Scott M. Rayburn, an
individual with a business address at 100 Park Avenue, Oklahoma City, Oklahoma,
73102, and whose residence address is 6416 Winchester Drive, Oklahoma City,
Oklahoma, 73162.
II. DEFINITIONS
-----------
The following defined terms shall, unless the context requires
otherwise, have the meanings specified. The singular shall be deemed to refer
to the plural and the masculine gender shall be deemed to refer to the feminine
and neuter, and vice versa as the context requires.
"Additional General Partners" means Leo Woodard and John Penton, or
any substituted or Additional General Partners admitted in accordance herewith.
"Affiliate" of or a person or entity "affiliated with" a specified
person or entity means a person or entity that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the person or entity specified. For the purpose of this
definition, the term "control" (including the terms "controlling", "controlled
by" and "under common control with") means the possession, directly or
indirectly, alone or in concert with others, of the power to direct or cause the
direction of the management and policies of a person or entity, whether through
the ownership of securities, by contract or otherwise.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership, as the same may be subsequently amended.
-2-
<PAGE>
"Capital Account" means the account described and maintained in
accordance with Paragraph 4.01.
"Capital Contribution" means, with respect to each Partner, the total
amount of any money and the fair market value of any other property (other than
any debt obligations of such Partner) contributed to the Partnership by such
Partner (or the predecessor holder or holders of the Partnership interest of
such Partner) pursuant to Article III.
"Code" refers to the Internal Revenue Code of 1986, as amended.
"Distributable Cash" for any period means the proceeds from
Partnership operations on hand as of the end of such period, other than the
Capital Contributions, cash used to establish reserves or proceeds from
permitted borrowings or transactions described in Paragraph 4.06 hereof.
"General Partners" means the Managing General Partner and the
Additional General Partners.
"Gross Annual Revenues" means revenues of the Partnership from all
sources during any given year, including, without limitation, the proceeds of
the sale of Production Interests.
"Initial Limited Partners" means Leo Woodard and John Penton.
"Limited Partner" means each person who has executed and delivered to
the Partnership a Subscription Agreement substantially in the form of Schedule B
annexed hereto, from the date such Subscription Agreement is accepted by the
Managing General Partner, and any person thereafter becoming a limited partner
hereof and excluding any person thereafter withdrawing as a limited partner.
"Majority in Interest of the Limited Partners" means such of the
Limited Partners who have made (at the time of determination) more than 50% of
the Capital Contributions made by all Limited Partners.
"Managing General Partner" means Coral Reserves Energy Corp., an
Oklahoma corporation, or any substituted general partner admitted in accordance
herewith.
"Net Income" and "Net Loss" shall mean the income or loss of the
Partnership from the operation of the Partnership's business as reported for
federal income tax purposes. Net Income or Net Loss shall not include income,
gain or loss from transactions described in Paragraph 4.06 but shall include all
distributive items under Section 702 of the Code attributable to costs, if any,
incurred by the Partnership in respect of the operation and
-3-
<PAGE>
management of the Partnership's business, such as taxes, interest, financing
fees and management fees, if any.
"Partners" refers to the General Partners and the Limited Partners.
"Payout" means the date on which the amount of Distributable Cash and
proceeds from the transactions described in Paragraphs 4.05 and 4.06 distributed
to a Limited Partner equals the Capital Contributions of such Limited Partner.
"Payout Amount" shall mean with respect to a Limited Partner the
amount by which his Capital Contribution exceeds the amount of Distributable
Cash previously distributed pursuant to Paragraph 4.05 and proceeds previously
distributed pursuant to Paragraph 4.06 to such Limited Partner.
"Production Interests" means (i) any interests in the gross production
of oil and gas, including royalties, overriding royalties and production
payments, as such terms are commonly used in the oil and gas business, payable
in cash, free of all costs of drilling, exploration, production, operations and
marketing and all other costs incident to the production and sale of oil and
gas, whether or not limited in duration to the duration of the lease creating
such interests, and (ii) any operating interests under an oil and gas lease,
including working interests.
"Recapture Income" means any gain recognized by the Partnership, or,
in the case of gain required by Section 613A(c)(7)(D) of the Code to be computed
separately by a Partner (but computed without regard to any adjustment required
by Section 734 or 743 of the Code) upon the disposition of any property or asset
of the Partnership that is not capital gain because such gain represents the
recapture of deductions previously taken for federal income tax purposes with
respect to such property or assets.
"Related Acquisition Costs" means the direct expenses incurred by the
Partnership in connection with locating, investigating, evaluating and arranging
for the acquisition of Production Interests, including, without limitation,
direct expenses of the officers and employees of the Managing General Partner
reimbursable under the terms of this Agreement, the fees and disbursements of
attorneys, accountants and petroleum engineers and geologists, data processing
costs, well testing costs and other costs associated with the acquisition of
Production Interests, but not including any portion of the fees payable
hereunder to the General Partners and the Syndicate Manager and their
Affiliates.
"Simulated Basis" means the adjusted tax basis of any oil and gas
property (as defined in Section 614 of the Code), determined for federal income
tax purposes immediately following the acquisition of such property by the
Partnership, as adjusted to reflect (a) additions to basis and (b) the Simulated
Depletion Allowance.
-4-
<PAGE>
"Simulated Depletion Allowance" means a depletion allowance computed
(in accordance with federal income tax principles) for each taxable year with
respect to each oil and gas property (as defined in Section 614 of the Code),
using the cost method of depletion. For purposes of computing the Simulated
Depletion Allowance with respect to any property, the adjusted tax basis of such
property shall be deemed to be the Simulated Basis in such property and in no
event shall such allowance, in the aggregate, exceed such Simulated Basis.
"Syndicate Manager" means Canaan Securities, Inc.
"Unrealized Gain" attributable to a Partnership property means, as of
any date of determination, the excess, if any, of the fair market value of such
property as of such date of determination over the adjusted tax basis of such
property as of such date of determination.
"Unrealized Loss" attributable to a Partnership property means, as of
any date of determination, the excess, if any, of the adjusted tax basis of such
property as of such date of determination over the fair market value of such
property as of such date of determination.
III. PARTNERS AND CAPITAL CONTRIBUTIONS
----------------------------------
3.01 General Partners. Coral Reserves Energy Corp., shall continue to
----------------
be the Managing General Partner. Leo Woodard and John Penton shall continue to
be the Additional General Partners. Except as set forth in Paragraph 7.04(b),
the General Partners shall not be required to make any Capital Contribution to
the Partnership. No additional or substituted general partners, except for
entities controlled by Leo Woodard or John Penton, may be admitted to the
Partnership without the consent of all other Partners.
3.02 Initial Limited Partners. The Initial Limited Partners have each
------------------------
made a contribution to the Partnership capital in the amount of $10.00. The
Initial Limited Partners hereby withdraw from the Partnership and acknowledge
the return of their Capital Contribution and shall have no further obligation to
or any rights as Limited Partners in respect of the Partnership.
3.03 Limited Partners. (a) Limited Partnership interests have been
----------------
or will be sold to the Limited Partners whose names and addresses are set forth
on Schedule A hereto. At least five units at a purchase price of $100,000 per
unit (each, a "Unit") have been sold and a maximum of 50 Units, in the
aggregate, may be sold by the Partnership. The Managing General Partner may, in
its sole discretion, elect to sell more than 50 Units up to a maximum of 100
Units.
(b) The Managing General Partner may, in its sole discretion,
have an initial closing ("Closing") and admit the subscribers as Limited
Partners and
-5-
<PAGE>
the Partnership may continue to offer additional Units for sale until the
earlier of (i) the date on which all of the Units have been sold or (ii) April
30, 1997, however, the Managing General Partner may, in its sole discretion,
elect to extend the April 30, 1997, closing date.
(c) The Managing General Partner, in its sole discretion, may
elect to accept subscriptions for fractional Units. In such event, the purchase
price of such Unit shall be proportionately reduced.
3.04 Return of Capital Contributions. Except as otherwise expressly
-------------------------------
provided in this Agreement, the Capital Contributions of the Partners will be
returned to them only in the manner and to the extent provided in Paragraph
4.06(b), and no Partner shall have the right to demand redemption of their
interest, regardless of whether they withdraw from the Partnership. No Partner
will have the right to demand or receive property other than cash in return for
their Capital Contribution.
3.05 Liability of Limited Partners. The liability of each Limited
-----------------------------
Partner to the Partnership shall be limited to the amount of their agreed
Capital Contribution, and the Limited Partners shall have no further obligation
to contribute money to, or in respect of, the liabilities or the obligations of
the Partnership, nor shall the Limited Partners be personally liable for any
obligations of the Partnership, except as may be required by the Partnership
Act.
3.06 Ownership of Partnership Property. All property acquired by the
---------------------------------
Partnership shall be deemed to be owned by the Partnership, such ownership being
subject to the other terms and provisions of this Agreement, and no Partner,
individually, shall have ownership of such property. Each Partner hereby
expressly waives the right to require partition of any Partnership property or
any part thereof.
3.07 Discounted Units. The General Partners, the Syndicate Manager
----------------
and other registered broker-dealers participating in the sale of the Units,
certain planning firms and individual employees and Affiliates of the foregoing,
may, at the discretion of the Managing General Partner, purchase Units for which
no commissions will be charged, and the purchase price of such Units shall be
reduced by the amount of the foregone commissions.
IV. PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS
-----------------------------------------
4.01 Capital Account Maintenance. (a) A Capital Account shall be
---------------------------
established for each Partner on the books of the Partnership, which account,
shall be maintained in accordance with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv) and, to the extent not in conflict with such
Regulations, this Paragraph 4.01(a). As to a Limited Partner, the Capital
Account shall be initially equal to the capital contribution, if any, of such
Limited Partner and, as to a General Partner, shall be initially equal to zero
and thereafter, in each case, shall be increased by (i) additional cash
contributions, if any, made by the Partner to the Partnership, (ii) the fair
market value of any property contributed by the Partner to the
-6-
<PAGE>
Partnership (net of any liability considered to be assumed by the Partnership
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(c) and any liability
to which such property is subject); and (iii) the amount of any income or gain
allocated to the Partner pursuant to Paragraph 4.02 and decreased by (i) the
amount of any distributions of cash made to the Partner, (ii) the fair market
value of any property distributed by the Partnership to the Partner (net of any
liability considered to be assumed by the Partner pursuant to Treasury
Regulation Section 1.701-1(b)(2)(iv)(c) and any liability to which such property
is subject), (iii) the amount of any losses or deduction allocated to the
Partner pursuant to Paragraph 4.02 and, (iv) the amount of any allocation to the
Partner of expenditures of the Partnership (as described in Section 705(a)(2)(B)
of the Code).
(b) For purposes of computing the amount of any item of income,
gain, deduction or loss to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes; provided, however, that:
(i) Capital Accounts shall be adjusted for Simulated
Depletion Allowance. Any Simulated Depletion Allowance deductions attributable
to a separate oil and gas property (as defined in Section 614 of the Code) shall
be computed by the Partnership using cost depletion. The Simulated Depletion
Allowance determined with respect to an oil and gas property shall, in the
aggregate, reduce the Capital Accounts of the Partners only to the extent of the
Partnership's Simulated Basis with respect to such property. The allocations of
basis, depletion deductions and amount realized from the sale or other
disposition of oil and gas properties as provided in Paragraph 4.03 required by
Section 613A(c)(7)(D) of the Code shall not affect the Capital Accounts of the
Partners.
(ii) All fees and other expenses incurred by the
Partnership that can neither be deducted nor amortized under Section 709 of the
Code shall, for purposes of Capital Account maintenance, be treated as an item
of deduction and shall be allocated among the Partners pursuant to Paragraph
4.02.
(iii) The computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of the
Code.
(iv) Immediately prior to the actual or deemed distribution
of any Partnership property (other than cash) or the distribution of cash in
redemption of a Limited Partner's interest in the Partnership, the Capital
Accounts of all Partners shall be adjusted (consistent with the provisions
hereof and Section 704 of the Code) upwards or downwards to reflect any
Unrealized Gain or Unrealized Loss attributable to each Partnership property (as
if such Unrealized Gain or Unrealized Loss had been recognized upon an actual
sale of each such property, immediately prior to such distribution, and had been
allocated to the Partners at such time pursuant to Paragraph 4.02). In
determining such Unrealized Gain or
-7-
<PAGE>
Unrealized Loss, the aggregate fair market value of Partnership properties as of
any date of determination shall be determined by the Managing General Partner
using such methods of valuation as it, in its good faith judgment, deems
appropriate.
4.02 Book Allocations. (a) For purposes of maintaining the Capital
----------------
Accounts, and in determining the rights of the Partners among themselves, each
item of book income, gain, loss and deduction (computed in accordance with
Paragraph 4.01) shall be allocated (in the manner described in Paragraph 4.02)
to the Partners.
(b) (i) The Simulated Depletion Allowance shall be allocated
among the Partners in the same proportion that the Simulated Basis of the oil
and gas property (as defined in Section 614 of the Code) was allocated among the
Partners pursuant to Paragraph 4.03(b).
(ii) Nonrecourse Deductions (as defined in Treasury
Regulation Section 1.704-2(b)(i)) for any fiscal year or other period shall be
allocated 99% to the Limited Partners and 1% to the Managing General Partner.
(iii) Any Partner Nonrecourse Deductions (as defined in
Treasury Regulation Section 1.704-2(i)(2)) for any fiscal year or other period
shall be allocated to the Partner who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt (as defined in Treasury Regulation
Section 1.704-2(b)(4)) to which such Partner Nonrecourse Deductions are
attributable in accordance with the provisions of Treasury Regulation Section
1.704-2(i).
(iv) In the event that any fees paid to the General
Partners or their Affiliates pursuant to this Agreement and deducted by the
Partnership in reliance on Section 707(a) and/or 707(c) of the Code are
disallowed as deductions to the Partnership on its federal income tax return as
other than in compliance with the terms of such sections of the Code the General
Partners shall be allocated items of Partnership income, if any, in the year
such fees were paid, equal to the amount of such fees for which deductions were
thus disallowed.
(v) Except as otherwise required in this Section 4.02(b),
items of deduction resulting from the payment of the Organization Fees described
in Paragraph 5.01(f) hereof and expenses described in Paragraph 5.01(g) computed
as a percentage of each Partner's Capital Contribution shall be allocated to
each Partner who is charged with such expense and cost under such paragraphs and
Section 3.07. Depreciation deductions shall be allocated 99% to the Limited
Partners and 1% to the Managing General Partner; items of income attributable to
interest earned on capital contributions shall be allocated solely to the
Limited Partners.
-8-
<PAGE>
(vi) Except as otherwise specifically required in
Paragraph 4.02(b) (viii-xii), every item of income, gain, loss and deduction
other than those items allocated in Paragraph 4.02(b)(i-v and vii) shall be
allocated to each Partner as follows:
That amount of each allocable item that bears the same ratio to the
total of such item as the Capital Contribution of a Limited Partner
bears to the total Capital Contributions of all Limited Partners shall
be allocated 90% to such Limited Partner and 10% to the General Partners
(9% to the Managing General Partner and .5% to each of the Additional
General Partners) until the amount of the item so allocated bears the
same ratio to the total amount of the item to be allocated as the Payout
Amount at the beginning of the taxable period for such Limited Partner
bears to the total amount distributed and to be distributed with respect
to the taxable period to such Limited Partner, and thereafter, any
remaining amount of the allocable item shall be allocated 75% to such
Limited Partner and 25% to the General Partners (24% to the Managing
General Partner and .5% to each of the Additional General Partners).
(vii) Any income or gain generated from the sale or other
disposition of Production Interests or other Partnership Property in connection
with the complete liquidation of the Partnership, shall be allocated as follows:
(A) First, an amount of income and gain equal to the
aggregate deficit balances in the Capital Account of all Partners shall be
allocated to such Partners in proportion to any such deficits to the extent
necessary to eliminate such deficits;
(B) Second, an amount of income and gain remaining
after the allocation in Paragraph 4.02(b)(vii)(A) shall be allocated in the same
proportion as a Limited Partner's Capital Contribution bears to the total
Capital Contributions of all Limited Partners first to such Limited Partner
until such Limited Partner is allocated an amount which would increase the
positive balance of his Capital Account to an amount equal to its Payout Amount,
and thereafter, any remaining income and gain shall be allocated 75% to such
Limited Partner and 25% to the General Partners (24% to the Managing General
Partner and .5% to each Additional General Partner).
(viii) Any loss from the sale or other disposition of a
Production Interest or depreciable equipment, whether or not in liquidation,
shall be allocated with respect to Production Interests among all Partners in
proportion to their share of the Simulated Basis of such Production Interest to
the extent of their Simulated Basis and with respect to equipment, 99% to the
Limited Partners and 1% to the Managing General Partner. Thereafter, any
remaining loss will be allocated 100% to the Managing General Partner.
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<PAGE>
(ix) Notwithstanding anything to the contrary in this
Paragraph 4.02, a Limited Partner shall not be allocated losses and deductions
to the extent that such allocation would cause or increase a deficit in the
Limited Partner's Capital Account (as adjusted for adjustments, allocations or
distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6) and additions pursuant to Treasury Regulation Section 1.704-2(g)(i)
and 2(i)(5)). To the extent any allocation of losses and deductions would cause
or increase a deficit in the Capital Account Balance of a Limited Partner, then:
(A) Such amount of losses and deductions that would
cause or increase a deficit shall be allocated to the General Partners with
positive Capital Account balances in proportion to their positive Capital
Account balances until all such General Partners have been reduced to a zero
balance and any remaining losses and deductions shall be allocated to the
Managing General Partner; and
(B) After any such allocation in subparagraph (A)
above, items of Partnership gross income and gain that would otherwise be
allocated to a Limited Partner for any fiscal year shall be allocated instead to
the General Partners to whom the loss or deduction was allocated under clause
(A) above (pro rata in proportion to the amount of each General Partner's
allocation of such loss or deduction), until the amount of such gross income and
gain so allocated equals the amount of loss or deduction previously so allocated
to the General Partners under clause (A) above; provided, however, that no such
allocation of gross income and gain to any General Partner shall be made under
this clause (B) if the effect of such allocation would be to cause or increase a
deficit balance in any Limited Partner's Capital Account.
(x) Notwithstanding anything to the contrary in this
Paragraph 4.02, if any Limited Partner receives an adjustment, allocation or
distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6) which causes or increases a deficit Capital Account balance as
determined in (ix) above, such Limited Partner shall be allocated items of gross
income and gain in an amount and manner sufficient to eliminate such deficit
balance as quickly as possible. This Paragraph 4.02(b)(x) is intended to comply
with the qualified income offset provision contained in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
(xi) Notwithstanding anything to the contrary in this
Paragraph 4.02, if there is a net decrease in partnership minimum gain (as
defined in Treasury Regulation Section 1.704-2(d)) during any Partnership fiscal
year, each Partner shall be specially allocated items of Partnership gross
income and gain for such year (and, if necessary, subsequent years) in
proportion to, and to the extent provided in Treasury Regulation 1.704-2(f).
This Paragraph 4.02(b)(xi) is intended to comply with the Partnership Minimum
Gain chargeback provision contained in Treasury Regulation Section 1.704-2(f)
and shall be interpreted consistently therewith.
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<PAGE>
(xii) Notwithstanding anything to the contrary in this
Paragraph 4.02, if there is a net decrease in Partner Minimum Gain (as defined
below) with respect to a Partner Nonrecourse Debt (as defined in Treasury
Regulation Section 1.704-2(b)(4)) during any Partnership fiscal year, any
Partner with a share of such Partner Minimum Gain attributable to such Partner
Nonrecourse Debt shall be specially allocated items of Partnership gross income
and gain for such year (and, if necessary, subsequent years) in proportion to,
and to the extent provided in Treasury Regulation Section 1.704-2(i)(4). This
Paragraph 4.02(b)(xii) is intended to comply with the Partner Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(i) and shall be
interpreted consistently therewith. Partner Minimum Gain shall mean, with
respect to each Partner Nonrecourse Debt, an amount equal to the Partnership
Minimum Gain determined in accordance with Treasury Regulation Section 1.704-
2(i).
4.03 Tax Allocations. (a) For federal, state and local income tax
---------------
purposes, except as otherwise provided in this Paragraph 4.03, each item of
income, gain, loss, deduction and credit of the Partnership shall be allocated
among the Partners in accordance with the corresponding book allocations thereof
as provided in Paragraph 4.02.
(b) The deduction for depletion with respect to each separate
oil and gas property (as defined in Section 614 of the Code) shall be computed
for federal income tax purposes separately by the Partners rather than the
Partnership in accordance with Section 613A(c)(7)(D) of the Code. For purposes
of such computation, the proportionate share of the adjusted tax basis of each
such property (before taking into account any adjustments resulting from an
election made by the Partnership on behalf of such Partner under Section 614 of
the Code) shall be allocated to the Partners in proportion to and to the extent
they bear the cost of the acquisition, and in the case of acquisitions funded
from Capital Contributions under Paragraph 3.03 shall be allocated 99% to the
Limited Partners and 1% to the Managing General Partner; provided, however, that
the Managing General Partner shall have complete discretion to make these
allocations in any reasonable manner that is consistent with Section 704(c). The
purpose and intent of these allocations is to effect the allocations required by
Section 704(c) of the Code thereunder, and this provision shall be construed and
interpreted to achieve that result. The Managing General Partner may amend any
provision of this Agreement if such amendment is necessary to reflect
allocations among the Partners consistent with Section 704(c) of the Code. It is
the intent of these provisions to comply with Treasury Regulation 1.613A-3(e)
and consistent therewith, upon the admission of a Limited Partner (pursuant to
Section 3.03(b) hereof) subsequent to the Partnership's acquisition of any
Production Interest (for purposes of this Section 4.03, a "New Limited
Partner"): (i) the Partnership shall allocate to the New Limited Partner his or
her share of the aggregate of the existing Limited Partners' adjusted bases (as
determined pursuant to Treasury Regulation Section 1.613A-3(e)(3)(iii)) in each
existing property in the same proportion as the New Limited Partner's Capital
Contribution bears to the total of all Limited Partners' Capital Contributions;
and (ii) each existing Limited Partner's adjusted basis shall be reduced by the
percentage of the Partnership's aggregate basis in the property that is
allocated to the New Limited Partner. Each Partner shall separately keep records
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<PAGE>
of his share of the adjusted basis in each separate oil and gas property, adjust
such share of the adjusted basis for any cost or percentage depletion allowable
with respect to such property and use such adjusted basis in the computation of
his cost depletion or in the computation of his gain or loss on the disposition
of such property by the Partnership. It is the intent of the Partnership to
comply with Treasury Regulation Section 613A-3(e)(3). Consistent therewith, each
Partner hereto agrees to furnish to the Partnership, within 30 days of receipt
of written request by the Partnership, a written statement which clearly and
accurately states the amount of that Partner's adjusted basis or depletion
deductions with respect to each existing Partnership property. In determining
depletion deductions, each Partner must treat as actually deducted any amount
disallowed and carried over as a result of the 65 percent of income limitation
of Code Section 613A(d)(l).
(c) Except as otherwise required by Section 704(c) of the Code,
for the purpose of the separate computation of gain or loss by each Partner on
the sale or disposition of each separate oil and gas property (as defined in
Section 614 of the Code), the Partnership's allocable share of the "amount
realized" (as such term is defined in Section 1001(b) of the Code) from such
sale shall be allocated (A) first, to the Partners in an amount equal to the
Simulated Basis in each oil and gas property in the same proportions as such
Partners were allocated the Simulated Basis in (or attributable to) such
property (as determined in accordance with Paragraph 4.03(b)), and (B) second,
the balance to the Partners in proportion to and to the extent of their
respective share of gain from such sale under Paragraph 4.02(b).
(d) To the extent of any Recapture Income resulting from the
sale or other taxable disposition of a Partnership asset, the amount of any gain
from such disposition allocated to (or recognized by) a Partner for federal
income tax purposes pursuant to the above provisions shall be deemed to be
Recapture Income to the extent such Partner (or its predecessor in interest) has
been allocated or has claimed any deduction directly or indirectly giving rise
to the treatment of such gain as Recapture Income. Any recapture of tax credits
shall be taken into account by those Partners to whom such credits were
allocated as required under the Code and applicable Treasury Regulations.
(e) All items of income, gain, loss, deduction, credit and basis
allocation recognized by the Partnership for federal income tax purposes and
allocated to the Partners in accordance with the provisions hereof shall be
determined without regard to any election under Section 754 of the Code which
may be made by the Partnership; provided, however, such allocations, once made,
shall be adjusted as necessary or appropriate to take into account those
adjustments permitted by Sections 734 and 743 of the Code and, where
appropriate, to provide only Partners recognizing gain on Partnership
distributions covered by Section 734 of the Code with the federal income tax
benefits attributable to the increased basis in Partnership property resulting
from any election under Section 754 of the Code.
4.04 Allocation Among Partners. (a) Except as otherwise expressly
-------------------------
required in this Article IV, all allocations of income, gains, losses,
deductions, credits
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<PAGE>
and adjusted tax basis of depletable properties that are allocated to the
Limited Partners as a group shall be allocated among them in proportion to their
respective Capital Contributions as measured on the last day of the appropriate
period as determined pursuant to Paragraph 4.04(b).
(b) Partnership income, gain, loss, deduction, credits and
Distributable Cash attributable to any interest in the Partnership or portion
thereof which has been transferred shall be allocated between the transferor and
the transferee as follows:
(i) For the months prior to the transfer, to the
transferor;
(ii) For the months subsequent to the transfer, to the
transferee;
(iii) For the month of the transfer, to the transferee if
the transfer occurs on or before the 15th day of such month and to the
transferor if occurring after.
For purposes of the above allocation of income, gain, loss, deduction and
credit, Partnership items may be allocated equally among the months of the
Partnership's tax year without regard to Partner ship operations during such
months or may be allocated according to such other method as the Managing
General Partner may choose in its absolute discretion, as then permitted by the
Code.
(c) Partnership income, gain, loss, deduction and credit shall
be allocated among the Partners to take into account their varying interests
during the year in which Capital Contributions are made at different times
during such year in any manner determined by the Managing General Partner, in
its absolute discretion, as then permitted by the Code.
4.05 Cash Distributions. For at least the first year of the
------------------
Partnership, Distributable Cash shall be calculated and distributed monthly, and
thereafter at least quarterly (but more frequently in the discretion of the
Managing General Partner), by the Managing General Partner to each Partner as
follows:
(a) Distributable Cash in the proportion that a Limited
Partner's Capital Contribution bears to the total Capital Contributions of all
Limited Partners shall be distributed 90% to such Limited Partner and 10% to the
General Partners (9% to the Managing General Partner and .5% to each of the
Additional General Partners) until Payout is achieved for such Limited Partner
and any remaining amounts of Distributable Cash under this paragraph 4.05 shall
be distributed 75% to such Limited Partner and 25% to the General Partners (24%
to the Managing General Partner and .5% to each of the Additional General
Partners).
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<PAGE>
(b) If any Partner shall not withdraw the whole or any part of
his share of Distributable Cash, such Partner shall not be entitled to receive
any interest thereon, nor shall any such cash thus not withdrawn be deemed an
increase in such Partner's share of the capital of the Partnership without the
express, written consent of all other Partners.
(c) For Partners admitted under Paragraph 3.03(b), a Limited
Partner shall be treated as a Limited Partner for the month with respect to the
distributions referenced in Paragraph 4.05(a) if they acquire their interest on
or before the last day of the month.
4.06 Distribution of Net Proceeds from Sales or Other Dispositions.
-------------------------------------------------------------
(a) Except as provided in Paragraph 4.06(b), any net insurance proceeds, any net
proceeds of a condemnation, sale, exchange or other disposition of a Production
Interest or any portion of Partnership property or interest therein, other than
the disposition of all Partnership assets upon dissolution and liquidation,
shall be distributed in the following order of priority:
(i) First, to the creditors of the Partnership in payment
of the unpaid liabilities of the Partnership to the extent required under
agreements with such creditors; and
(ii) Next, to the setting up or replacing of any reserves
which the Managing General Partner may deem reasonably necessary for any
anticipated, contingent or unforeseen liabilities or obligations of the
Partnership arising out of, or in connection with, the conduct of the
Partnership's business;
(iii) Next, with respect to proceeds from the condemnation,
sale, exchange or other disposition of a Production Interest, to the Partners in
proportion to and to the extent of their respective share of the Simulated Basis
of the Production Interests; and
(iv) Next, any remaining net proceeds in the proportion
that a Limited Partner's Capital Contribution bears to the total Capital
Contributions of all Limited Partners shall be distributed 90% to such Limited
Partner and 10% to the General Partners (9% to the Managing General Partner and
.5% to each of the Additional General Partners) until Payout is achieved for
such Limited Partner and any remaining amount of net proceeds under this
paragraph 4.06(a)(iv) shall be distributed 75% to such Limited Partner and 25%
to the General Partners (24% to the Managing General Partner and .5% to each of
the Additional General Partners).
(b) After provisions have been made for payment of any unpaid
liabilities of the Partnership to the extent required under agreements with
creditors and the setting up of a liquidation reserve, all amounts distributed
in liquidation of the
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<PAGE>
Partnership or of the interest of one or more Partners, shall be distributed in
accordance with positive Capital Account balances of the Partners, the interest
of which are being liquidated (as determined after taking into account all
Capital Account adjustments for the taxable year to reflect the allocation of
gain or loss attributable to the transaction giving rise to such proceeds and
Unrealized Gain and Unrealized Loss pursuant to Paragraph 4.01(b)(iv)) in
proportion to such positive Capital Account balances. Distributions pursuant to
this Paragraph 4.06(b) shall be made by the end of such taxable year (or, if
later, within 90 days after the date of such liquidation).
(c) In the event that any reserves have been
established pursuant to the terms of this Agreement, distribution of such
reserves will be made to the Partners who received allocations of income or gain
from the sale of Production Interests corresponding to cash contributed to the
reserves at the time such reserves were created in proportion to such
allocations of income or gain from the sale of Production Interests, or, in the
case of a liquidation reserve, in proportion to the positive Capital Account
balances of the Partners after adjustment for the allocations of gain or loss
arising from the liquidating sale and Unrealized Gain or Unrealized Loss.
V. DUTIES, POWERS, AND RESTRICTIONS OF THE GENERAL
-----------------------------------------------
PARTNERS.
- ---------
5.01 Management. To the extent permitted by law, and
----------
subject to the terms of this Agreement, the Managing General Partner shall have
full charge of the conduct of the Partnership's business in all respects and
shall have the following specific powers which it agrees to exercise in a
commercially reasonable manner giving due consideration to its fiduciary
obligation to the other Partners:
(a) Acquisition of Production Interests. The
-----------------------------------
Managing General Partner is authorized and agrees to use its best efforts to
acquire Production Interests in oil and gas properties located in Oklahoma or
such other states as it deems appropriate, on such terms and conditions as it
believes are in the best interest of the Partnership, subject to the following
limitations:
(i) The Managing General Partner will
endeavor to diversify the Partnership's investments to the extent deemed to be
in the best interests of the Partnership by investing in properties in different
geographic locations and by balancing investments between properties having
predicted high rates of production in the early years, with possibly lower rates
in later years, and properties with more consistent levels of production over a
longer term.
(ii) The Managing General Partner will
endeavor to reduce the risks of investment further by limiting the amount of
Partnership funds
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<PAGE>
committed to any single property and will in no event commit in excess of 10% of
the total capital of the Partnership to Production Interests in a single well
without the consent of a Majority in Interest of the Limited Partners.
(iii) The Managing General Partner will
evaluate each property which is considered for acquisition using such
information as is available, including, for example, reserve reports, well logs,
and pressure and production records. In the event no current reserve report
exists in respect of any property in which the Managing General Partner intends
to acquire an interest, the Managing General Partner may cause such a report to
be prepared. The Managing General Partner may engage such consultants or other
technical advisors at the expense of the Partnership as it deems necessary or
advisable to advise the Partnership regarding acquisitions or dispositions of
Production Interests.
(iv) Production Interests may be
purchased from the General Partners or an Affiliate, but only if the purchase
price does not exceed the fair market value of such interest. All Production
Interests purchased from the General Partners or an Affiliate will be acquired
by the Partnership on terms which conform substantially to industry practice.
(v) Prior to the use of the Capital
Contributions in the manner contemplated by this Agreement, the Managing General
Partner shall invest such Capital Contributions in either United States treasury
bills or other securities guaranteed by the United States government, or in a
separately designated interest-bearing account or certificate of deposit of a
major United States bank, and any interest thereon shall be the property of the
Partnership; provided, however, that the Managing General Partner shall
distribute to the Limited Partners all Capital Contributions which have not been
used to purchase Production Interests or otherwise used to cover Partnership
expenses or for the establishment of reserves permitted hereunder by April 30,
1997, together with any interest earned thereon, in the proportion in which such
Capital Contributions were made by the Limited Partners.
(b) Other Operations. The Managing General
----------------
Partner will not cause the Partnership to engage in any exploratory or
developmental drilling or any related drilling or production enhancement
activities except to the extent provided herein.
(i) The Managing General Partner may
cause the Partnership to engage in the drilling of offset wells or the
reworking, recompletion, deepening or plugging back of existing wells to the
extent such activities are incident to the operation of leases in which the
partnership owns a Production Interest and such activities are, in the
determination of the Managing General Partner, in the best interests of the
Partnership.
(ii) The Managing General Partner may
cause the Partnership to engage in secondary or tertiary recovery operations and
other production enhancement techniques to the extent such activities are
incident to the operation of leases in
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<PAGE>
which the Partnership owns a Production Interest and such activities are, in the
determination of the Managing General Partner, in the best interests of the
Partnership.
(iii) The activities described in
subparagraphs (i) and (ii) may, in the discretion of the Managing General
Partner, be financed out of Partnership capital, Partnership borrowing permitted
under Paragraph 5.01(e) or out of Partnership revenues from Production
Interests.
(c) Sale of an Oil and Gas Interest. The
-------------------------------
Managing General Partner may, on behalf of the Partnership, sell or otherwise
dispose of any Production Interest owned by the Partnership upon such terms and
conditions as it believes to be in the best interests of the Partnership;
provided, however, that:
(i) Without the prior written consent
of a Majority in Interest of the Limited Partners, the Partnership shall not
sell or otherwise dispose of Partnership assets which had, at the time of their
acquisition, a fair market value in excess of 50% of the initial capital of the
Partnership;
(ii) Any Production Interest which is
transferred to an Affiliate by the Partnership shall be for a consideration not
less than the fair market value thereof; and
(iii) The Partnership may farm out a
Production Interest if the Managing General Partner determines that (a) the
Partnership lacks sufficient funds to drill on the Property in which it owns
such Production Interest, or (b) the best interests of the Partnership would
otherwise be served by such transaction.
(d) Miscellaneous. The Managing General
-------------
Partner shall have authority to take all such other action as may be necessary
to carry out the business of the Partnership, including but not limited to the
following:
(i) To arbitrate, compromise, settle,
sue on or defend any claim of or against the Partnership;
(ii) To insure the Partnership against
such risks and hazards and in such amounts as it shall determine;
(iii) To designate depositories for the
funds of the Partnership and to make deposits therein and withdrawals therefrom
in accordance with Paragraph 5.02;
(iv) To establish reserve accounts
reasonable in amount, to provide for any contingent or unforeseen liabilities or
obligations of the
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<PAGE>
Partnership, and to invest the funds held in such reserve account in United
States treasury bills or other securities guaranteed by the United States
Government, or in a separately designated interest-bearing bank account, or
certificate of deposit;
(v) To employ, engage, retain and
oversee any persons, firms or corporations to act as accountants or lawyers or
other personnel, and to pay such fees and other amounts in connection therewith,
as it may deem necessary or desirable;
(vi) To file for record a Certificate
of Limited Partnership or any amendment thereto in the appropriate office;
(vii) To execute, acknowledge and
deliver any and all instruments which may be deemed necessary or convenient to
effect the foregoing;
(viii) To pay all Partnership fees and
expenses of any kind, including, without limitation, the fees and expenses
related to developing the Production Interests;
(ix) Subject to the restriction set
forth in Paragraph 5.01(e)(i), to borrow funds on behalf of the Partnership and
to secure such borrowings with Partnership assets;
(x) To enter into any transactions
with Affiliates (including, without limitation, retaining Affiliates to manage
operations at the site of any property in which the Partnership has a Production
Interest), provided that the terms of such transactions are at least as
favorable to the Partnership as those which would have been available from
unaffiliated third parties; and
(xi) To perform all other necessary
business and take such other actions permitted by law as may be necessary,
advisable or expedient to carry on the business of the Partnership.
(e) Restrictions. Notwithstanding anything
------------
contained in this Agreement to the contrary, the Managing General Partner shall
not, without the prior written consent of a Majority in Interest of the Limited
Partners, do any of the following:
(i) Borrow funds in excess of 30% of
the total Capital Contributions of the Limited Partners to finance Partnership
activities (including acquiring and developing Production Interests); or
(ii) Confess a judgment against the
Partnership.
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<PAGE>
(f) Organization and Property Acquisition Fees.
------------------------------------------
For services rendered in connection with the organization of the Partnership,
the selection of oil and gas properties and negotiation of acquisition contracts
and the negotiation of the relationship with the Syndicate Manager the Managing
General Partner shall receive a fee in the amount of 6% of the Capital
Contributions of each Limited Partner, payable simultaneously with the
acceptance by the Partnership of such Capital Contributions.
(g) Syndication Expenses. The Managing General
--------------------
Partner is authorized to pay the Syndicate Manager brokerage commissions in the
amount of 8% of the purchase price of the Units and for its services rendered in
connection with rendering periodic reports to the Limited Partners regarding
Partnership activities, an annual Investor Services Fee in the amount of 1-1/2%
of the Gross Annual Revenues of the Partnership for such year. The Managing
General Partner is further authorized to enter into an agreement with the
Syndicate Manager pursuant to which the Syndicate Manager will be paid.
(h) Reimbursement of Expenses. The Managing
-------------------------
General Partner will be reimbursed by the Partnership for out-of-pocket expenses
incurred in its capacity as Managing General Partner. In addition, the Managing
General Partner will be reimbursed out of Partnership funds for the
Partnership's allocable share to the extent incurred by the Managing General
Partner of overhead expenses, including office rent and salaries for clerical
staff and appropriate production supervisory personnel, and any other overhead
expenses which the Managing General Partner deems reasonable. The audited
financial statements required to be provided until Payout are deemed to be
overhead expenses but audited financial statements provided after Payout will be
reimbursable out-of-pocket expenses. The reimbursement to the Managing General
Partner for overhead expenses will in no event exceed five (5%) percent of
Distributable Cash.
5.02 Partnership Deposits and Disbursements. In order
--------------------------------------
to insure that the books of the Partnership accurately reflect the receipts and
disbursements of the Partnership, all receipts of the Partnership, including
Capital Contributions from the Partners, will be deposited and maintained in the
name of the Partnership in such bank account(s) as shall be designated by the
Managing General Partner. The Managing General Partner will disburse only from
funds in said Partnership account any and all fees and all other Partnership
expenses and obligations, including any and all obligations owed to the Managing
General Partner.
5.03 Books. (a) The Managing General Partner will
-----
maintain or cause to be maintained full and accurate books and records of the
Partnership, and all Partners will have the right to inspect and examine the
same at reasonable times and upon reasonable notice. The books will be kept on
an accrual basis, and the fiscal year of the Partnership will be the calendar
year.
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<PAGE>
(b) The records to be kept at the Partnership's
office in Oklahoma shall include, without limitation, (i) a current list of the
full name and last known business address of each Partner set forth in
alphabetical order; (ii) a copy of the Certificate of Limited Partnership and
all certificates of amendment thereto, together with executed copies of any
powers of attorney pursuant to which any certificate has been executed, (iii)
copies of the Partnership's federal, state and local tax returns and reports, if
any, for the three most recent years, and (iv) copies of any then effective
written Partnership Agreement and any financial statements of the Partnership
for the three most recent years.
5.04 Accounting. The books will be closed and balanced at
----------
the end of each fiscal year, until Payout and will be audited, at the expense of
the Partnership by a firm of certified public accountants. After Payout the
Partnership will not have an audit prepared unless requested to do so by a
Majority in Interest of the Limited Partners. The Managing General Partner will,
to the extent possible, furnish to each Partner, within 90 days after the close
of each fiscal year, a Schedule K-1 (or any successor form thereto), and within
230 days after the close of each fiscal year, copies of the Partnership's annual
financial statements, including a written balance sheet and statement of income
or loss. Such financial statements will contain a report of said accountants
which shall include: (a) a statement that an audit, if required, of such
financial statements has been made in accordance with generally accepted
auditing standards on the accounting basis used by the Partnership for making
its federal income tax returns; (b) a statement of the opinion of such
accountant with respect to the financial statements and the accounting
principles and practices reflected therein and in regard to the consistency of
the application of the accounting principles; and (c) an identification of any
matters to which the accountant takes exception and a statement, to the extent
practicable, of the effect of each such exemption on such financial statements.
Such financial statements will also indicate the share of the Partners of the
Net Income, Net Loss and other relevant fiscal items of the Partnership for such
fiscal year. The Managing General Partner also agrees to arrange for the
preparation of all tax returns required to be filed for the Partnership. Each
Partner shall be entitled to receive, upon request, copies of all federal, state
and local income tax returns and information returns, if any, which the
Partnership is required to file. The Managing General Partner will engage on
behalf of the Partnership a firm of qualified certified public accountants to
prepare Partnership tax returns and to conduct the audits required under this
Agreement.
5.05 Other Ventures. Subject to their fiduciary
--------------
obligations to the Partnership, any of the Partners may engage in or possess an
interest in other business ventures of every nature and description,
independently or with others, whether or not such activities compete with the
business of the Partnership, and neither the Partnership nor the other Partners
shall have, nor have the right to acquire, any right by virtue of this Agreement
in and to such independent ventures or to the income or profits derived
therefrom.
5.06 Right to Rely on Authority of the Managing General
--------------------------------------------------
Partner. In no event shall any person dealing with the Managing General Partner
- -------
or its representatives with respect to any property of the Partnership be
obligated to ascertain that the terms of this
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<PAGE>
Agreement have been complied with, or be obligated to inquire into the necessity
or expediency of any act or action of the Managing General Partner or its
representatives; and every contract, agreement, promissory note, or the
instrument or document executed by the Managing General Partner on behalf of the
Partnership shall be conclusive evidence in favor of any and every person
relying thereon or claiming thereunder that (a) at the time of the execution
and/or delivery of such instrument or document, this Agreement was in full force
and effect, (b) such instrument or document was duly executed in accordance with
the terms and provisions of this Agreement and is binding upon the Partnership
and all of the Partners hereof, and (c) the Managing General Partner or its
representatives were duly authorized and empowered to execute and deliver any
and every such instrument or document for and on behalf of the Partnership.
5.07 Prohibition on Management Participation by Limited
--------------------------------------------------
Partners. (a) No Limited Partner, except for a Limited Partner who is also a
- --------
General Partner, shall participate in the management of the Partnership's
business. (b) Except as otherwise provided herein, no Limited Partner (other
than any Limited Partner who is also a General Partner) shall receive any
compensation for services rendered to the Partnership.
5.08 Liability of the General Partners; Indemnity. The
--------------------------------------------
General Partners and their Affiliates shall have no liability to the Partnership
or to any Partner for any loss suffered by the Partnership which arises out of
any action or inaction of the General Partners if the General Partners, in good
faith, determined that such course of conduct was in the best interests of the
Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partners. The General Partners and their Affiliates
will be indemnified by the Partnership against any losses, judgments,
liabilities, and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partners.
All amounts paid by the Partnership to the General Partners
by reason of the foregoing indemnification provisions of the Agreement will be
paid out of Partnership assets and in no event shall any Limited Partner have
any personal liability on account thereof.
Notwithstanding the foregoing, the General Partners and
their Affiliates and any person acting as a Broker-Dealer shall not be
indemnified for liabilities arising under federal and state securities laws
unless (a) there has been a successful adjudication on the merits of each count
involving securities laws violations; (b) such claims have been dismissed with
prejudice on the merits; or (c) a Court of competent jurisdiction approves a
settlement of the claims against a particular indemnitee.
In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall place before
the Court the position of the Securities and Exchange Commission and the
Massachusetts Securities Division with respect to the issue of indemnification
for securities law violations.
-21-
<PAGE>
The Partnership may advance the legal expenses and other
costs incurred in connection with any threatened, pending or contemplated
action, suit or proceeding to which the General Partners were or are a party or
are threatened to be made a party by reason of the fact that they are or were
the General Partners of the Partnership, provided that the following three
conditions are satisfied: (a) the legal action relates to the performance of
duties or services by the General Partners on behalf of the Partnership; (b) the
legal action is initiated by a third party who is not a Limited Partner; and (c)
the General Partners undertake to repay any funds advanced under this
subparagraph to the Partnership in any case in which the General Partners would
not be entitled to indemnification under this paragraph.
The Partnership shall not incur the cost of the portion of
any insurance which insures any party against any liability as to which such
party is herein prohibited from being indemnified.
5.09 Removal of a General Partner. (a) Without limiting
----------------------------
any rights of the Limited Partners otherwise provided at law or in equity, any
General Partner may be removed as general partner of the Partnership at any time
by a vote of 75% in interest of the Limited Partners for (i) fraud, gross
negligence or willful misconduct; or (ii) a material default by it in the
performance of its obligations to the Partnership under this Agreement.
(b) The Limited Partners agree that they will not
exercise their right to remove or enforce any of their rights against the
General Partners until such time as they have given written notice to the
General Partners of their intention to exercise such right and the default, or
act or action allegedly constituting fraud, gross negligence or willful
misconduct relating thereto and have provided such General Partner with a
reasonable time thereafter, not less than 30 days, within which to cure the
default. If such default is cured within the permitted time, the rights of the
Limited Partners under this Paragraph 5.09 with respect to that particular
default will terminate.
(c) Any removal of any General Partner under this
Paragraph 5.09 shall not relieve such removed General Partner from its
obligations to the Partnership incurred prior to such removal nor shall it deny
such removed General Partner the rights provided in Paragraph 7.02(b). Upon such
removal the Partnership shall file an amendment to this Agreement evidencing the
removal of the General Partner as General Partner of the Partnership.
VI. TRANSFER OF PARTNERS' INTEREST
------------------------------
6.01 General Partners. A General Partner may not assign or
----------------
transfer any portion of its interest in the Partnership without the consent of a
Majority in Interest of the Limited Partners. If a General Partner wishes to
assign or transfer any portion of its interest, it must give written notice of
such intention to the Limited Partners. Each Limited Partner shall have ten
business days to reply after such notice has been sent, and any limited
-22-
<PAGE>
Partner who does not vote against such assignment or transfer within such period
shall be deemed to have consented to such transfer or assignment.
Notwithstanding the foregoing, however, any such partial assignment or transfer
shall not discharge the General Partner from any liability or obligation to the
Partnership by reason of such partial assignment or transfer. The foregoing
shall not be deemed to prohibit a General Partner from assigning without the
consent of the Limited Partners all or a portion of its interest in the income
and profits of the Partnership to an Affiliate.
6.02 Limited Partners. (a) No Limited Partner may assign
----------------
or transfer their Partnership interest and have such transferee admitted as a
substituted Limited Partner in respect of such interest without the prior
written consent of the Managing General Partner. Any Limited Partner who desire
to secure permission to transfer their interest shall notify the Managing
General Partner in the manner referred to in Paragraph 8.02 hereof. The Managing
General Partner may withhold its consent to any proposed transfer in its sole
and absolute discretion and will in no event give such consent if the proposed
transfer violates applicable federal or state securities laws or other laws or
regulations.
(b) Any Limited Partner who desires to transfer
their interest shall arrange for their transferee to be bound by the provisions
of this Agreement by having such transferee execute such documents as shall be
required by the Managing General Partner to make the transferee a party to this
Agreement and by delivering the same to the Managing General Partner together
with any such other information that may be required by counsel to the Managing
General Partner to determine whether the proposed transfer violates applicable
federal or state securities or other laws or regulations. The Managing General
Partner in no event will give its consent to any proposed transfer unless and
until the Partnership receives payment in full from the proposed transferee of
any and all reasonable legal, accounting and other charges and fees incurred by
the Partnership and its counsel in connection with any such transfer. If and
when the consent of the Managing General Partner provided for in this Paragraph
is secured, the transferee shall become a substituted Limited Partner as to the
interest thus transferred.
(c) Anything contained herein to the contrary
notwithstanding, no transfer or assignment of interests in the Partnership shall
be effective if, in the opinion of counsel to the Partnership, (i) such transfer
would result in the termination of the Partnership pursuant to Section 708 of
the Code, or (ii) it would result in the Partnership being classified as an
association taxable as a corporation or a publicly traded partnership for
federal income tax purposes; and any such transfer shall be effected in such
manner as may be necessary to maintain such continuity or the classification of
the Partnership as a partnership for federal income tax purposes.
(d) Any transferee of an interest in the
partnership shall succeed to the transferor's Capital Account as of the date of
such transfer and shall be
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<PAGE>
deemed to have received the cash distributions received by the transferor and,
upon admission to the Partnership, shall be deemed to have made the Capital
Contribution made by the transferor.
(e) Notwithstanding anything contained herein to
the contrary, the Partnership shall not participate in the establishment of, or
the inclusion of Units thereon, an established securities market for the Units
within the meaning of Treasure Regulation section 1.7704-1(b) or a secondary
market or the substantial equivalent thereof for the Units within the meaning of
Treasury Regulation section 1.7704-1(c), and the Partnership shall not recognize
any transfers of Units (including a right to profits, losses and distributions)
made on any such market by redeeming the transferor Partner (in the case of a
redemption or repurchase by the Partnership) or admitting the transferee partner
or otherwise recognizing any rights of the transferee, such as a right of the
transferee to receive Partnership distributions (directly or indirectly) or to
acquire an interest in the capital or profits of the Partnership and any such
transfers shall be void ab initio.
6.03 Section 754 Election. In the event of a transfer of
--------------------
all or part of the interest of a Limited Partner in the Partnership by sale or
exchange or on the death of a Limited Partner, upon the request of the
transferee of such interest the Managing General Partner shall cause the
Partnership to elect, pursuant to Section 754 of the Code, or corresponding
provision of subsequent law, to adjust the basis of the Partnership property as
provided by Section 734 or 743 of the Code. This and all other elections
required or permitted to be made by the Partnership under the Code shall be made
by the Managing General Partner in such manner as in the Managing General
Partner's reasonable judgment will be most advantageous to the Limited Partners.
VII. DISSOLUTION OF PARTNERSHIP
--------------------------
7.01 Limited Partners. Neither the death or dissolution of
----------------
a Limited Partner nor an act of bankruptcy by a Limited Partner will dissolve
the Partnership or terminate the Partnership's business, but the rights of such
Partner to receive Partnership distributions and allocation will, on the
happening of such an event, devolve upon such Partner's legal representative or
successor in interest, as the case may be, subject to the terms and conditions
of this Agreement, and the Partnership shall continue as a limited partnership.
Such Partner's representative or successors in interest shall be liable for all
of the obligations of such Partner hereunder.
7.02 General Partners. (a) An act of bankruptcy, removal
----------------
or withdrawal of, or assignment for the benefit of creditors by any General
Partner shall dissolve the Partnership. Notwithstanding anything in this
Paragraph 7.02 to the contrary, if there is at least one remaining General
Partner, then the business of the Partnership may be continued without
dissolution and winding up if such General Partner(s) agrees. Additionally, the
Partnership may be continued without dissolution and winding up if, within
ninety (90) days after an event
-24-
<PAGE>
specified in this Paragraph 7.02, all the Partners agree in writing to continue
the business of the Partnership without dissolving and winding up and to
appoint, effective as of the date of bankruptcy, removal or withdrawal, one or
more additional General Partners if necessary. A Majority in Interest of the
Limited Partners shall select from the General Partners a Managing General
Partner. The General Partners (or their legal representatives, as the case may
be) are hereby deemed to consent to the continuation of the business of the
Partnership by the appointment of the new general partner(s).
(b) From and after the date of any event set forth
in Paragraphs 5.09 and 7.02(a), the bankrupt, removed or withdrawn General
Partner or its legal representatives, as the case may be, shall be a limited
partner of the Partnership and shall continue to hold its interest in
Partnership allocations and distributions in such capacity.
7.03 Procedure. Upon dissolution or termination of the
---------
Partnership, the assets of the Partnership shall be liquidated as promptly as
possible, but in an orderly and businesslike manner so as not to involve undue
sacrifice and in the manner provided for in Paragraph 4.06 hereof, and the
Managing General Partner shall cause to be prepared by the firm of certified
public accountants then retained by the Partnership a statement setting forth
the assets and liabilities of the Partnership as of the date of dissolution,
which statement shall be furnished to all of the Partners. Upon the dissolution
or termination of the Partnership, the net proceeds from the liquidation of the
assets of the Partnership and any capital gain or capital loss relating thereto
shall be distributed as provided in Paragraph 4.06(b) hereof.
7.04 Capital Accounts. (a) For the purposes of any
----------------
applicable state law, upon the dissolution or termination of the Partnership,
any negative Capital Account balances of the Partners shall in no event be
considered to be an asset of the Partnership and in no event shall the Partners
have any obligation to make any repayment thereof or contribution of capital in
respect thereto except as provided in Paragraph 7.04(b) hereof.
(b) Notwithstanding any other provisions of this
Agreement, upon dissolution or termination of the Partnership, or upon the
liquidation of a General Partner's interest in the Partnership, the General
Partner will be required to contribute to the Partnership capital an amount
equal to the deficit balance, if any, in their Capital Accounts on the date of
dissolution or termination. Any contribution required to be made by a General
Partner under this Paragraph 7.04(b) shall be made by the end of the tax year in
which such dissolution, termination or liquidation occurs (or, if later, within
90 days after the date of such dissolution, termination or liquidation).
VIII. MISCELLANEOUS
-------------
8.01 Agreement in Counterparts. This Agreement may be
-------------------------
executed in counterparts, each of which, when so executed, shall be deemed an
original, but all
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<PAGE>
of which, taken together, shall constitute one and the same agreement, binding
upon the parties hereto, their heirs, executors, administrators, successors and
permitted assigns.
8.02 Notices. All notices and demands under this Agreement
--------
shall be in writing, mailed, postage prepaid, by certified or registered mail,
return receipt requested, directed to the parties at their respective addresses
set forth in this Agreement, and to the Partnership at its office set forth and
the same shall be deemed to have been given and made four days following the
date thus mailed. Any Limited Partner may change their address by giving written
notice to the Managing General Partner stating their new address. Any General
Partner may change his address by giving written notice to all other Partners.
The business address of the Partnership, the Managing General Partner and the
Additional General Partners is 119 North Robinson, Suite 600, Oklahoma City,
Oklahoma, 73102.
8.03 Power of Attorney. The Subscription Agreement
-----------------
contains a special power of attorney granted by the limited Partners to the
president of the Managing General Partner. In the event of any conflict between
the provisions of this Agreement and any document executed or filed by the
Managing General Partner pursuant to the Special Power of Attorney granted in
the Subscription Agreement, this Agreement shall govern.
8.04 Amendment. This Agreement may be modified or amended
---------
at any time by a writing signed by all the General Partners and by a Majority in
Interest of the Limited Partners. No modification or amendment of this
Agreement, however, shall change the interests of any Partner in the capital,
profit or cash distributions of the Partnership or his rights of contribution or
withdrawal with respect thereto, or amend Paragraph 1.04 or Article VII hereof
or this Paragraph 8.04 without the express, written consent of each Partner
materially affected thereby.
8.05 Additional Documents. Each party hereto agrees to
--------------------
execute, with acknowledgment or affidavit, if required by the Managing General
Partner, any and all documents and writings which may be necessary or expedient
in connection with the creation of the Partnership and the achievement of its
purposes, specifically including the Partnership's Certificate of Limited
Partnership and all amendments thereto or cancellation thereof.
8.06 Meetings. Upon the written request of a Majority in
--------
Interest of the Limited Partners, the Managing General Partner will call a
meeting of the Partners to be held at the Partnership's office in Oklahoma or
such other location as is agreed to by the Partners requesting such meeting
within a reasonable time after such request.
8.07 Validity. In the event that any provision of this
--------
Agreement shall be held to be invalid, the same shall not affect in any respect
whatsoever the validity of the remainder of this Agreement.
-26-
<PAGE>
8.08 Governing Law. This Agreement shall be construed
-------------
according to, and the management of the Partnership shall be governed by, the
laws of the State of Oklahoma.
8.09 Waiver. The waiver by any party hereto of the breach
------
of any term, covenant, agreement or condition herein contained shall not be
deemed a waiver of any subsequent breach of the same or any other term,
covenant, agreement or condition herein, nor shall any custom, practice or
course of dealings arising among the parties hereto in the administration hereof
be construed as a waiver or diminution of the right of any party hereto to
insist upon the strict performance by any other part of the terms, covenants,
agreements and conditions herein contained.
8.10 Federal Tax Audits. (a) Each Limited Partner does
------------------
hereby appoint and designate the Managing General Partner as tax matters partner
("TMP"), as such term is defined in the Code and the regulations thereunder.
The TMP is authorized to take all action on behalf of the Partnership and the
Partners permitted under the Code. The Partnership may engage its accountants
or attorneys to assist the TMP in discharging its duties hereunder.
(b) The TMP shall be entitled to an indemnity from
the Partnership (subject to Paragraph 5.08) for any act performed by it within
the scope of its duties as tax matters partner, except for the negligent or
willful acts or failures to act as a tax matters partner, provided that any
indemnity under this Paragraph shall be provided out of and to the extent of
Partnership assets only and no Limited Partner shall have any personal liability
on account thereof.
(c) The TMP shall notify all Partners of the
commencement of any administrative proceeding by the Internal Revenue Service
and shall keep all Partners currently advised of developments in any such
proceedings.
(d) Notwithstanding anything to the contrary
contained in this Paragraph 8.10, the TMP shall have no authority to bind any
Limited Partner by any settlement agreement entered into by the TMP and the
IRS, unless such Limited Partner has expressly notified the TMP in writing that
the TMP is so authorized. Within thirty (30) days after the TMP has received
notice from the IRS of a final partnership administrative adjustment, the TMP
shall notify all of the Limited Partners of such final administrative adjustment
and the effect it will have on their individual tax returns on a per Unit basis.
Such notification shall also include information concerning the Limited
Partners' right to request the same settlement terms from the IRS.
(e) All reasonable expenses incurred by the TMP in
connection with any administrative proceeding before the IRS and/or judicial
review of such proceeding, including reasonable attorneys' fees, shall be deemed
a Partnership operating expense.
<PAGE>
(f) Any Partner other than the TMP who wishes to
participate in the administrative proceedings at the Partnership level may do,
but any legal, accounting or other expenses incurred by such Partner in
connection therewith shall not be deemed a Partnership expense but shall be paid
by such Partner.
8.11 Delivery of Certificates. The Managing General
------------------------
Partner shall not be required to deliver or mail to any Limited Partner a copy
of any Certificate of Limited Partnership or amendment thereto unless such
Partner specifically requests such certificate(s).
IN WITNESS WHEREOF, the parties hereto have hereunto set
their hands and seals as of the day and in the year first above written.
GENERAL PARTNERS
----------------
CORAL RESERVES ENERGY CORP.
By: _____________________________________________
Leo Woodard, President
_____________________________________________
Leo Woodard, Individually
_____________________________________________
John Penton, Individually
LIMITED PARTNERS
----------------
_____________________________________________
Leo Woodard, Withdrawing
Initial Limited Partner
_____________________________________________
John Penton, Withdrawing
Initial Limited Partner
_____________________________________________
Leo Woodard, as attorney-in-fact for the
Limited Partners whose names are listed on
Schedule A
-28-
<PAGE>
EXHIBIT 3.6(b)
EXHIBIT A
PARTNERSHIP AGREEMENT
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. THE PARTNERSHIP.............................................................. -1-
1.01 Name.................................................................. -1-
1.02 Business.............................................................. -1-
1.03 Office................................................................ -2-
1.04 Term.................................................................. -2-
1.05 Agent for Service of Process.......................................... -2-
II. DEFINITIONS.................................................................. -2-
III. PARTNERS AND CAPITAL CONTRIBUTIONS........................................... -5-
3.01 General Partners...................................................... -5-
3.02 Initial Limited Partners.............................................. -5-
3.03 Limited Partners...................................................... -5-
3.04 Return of Capital Contributions....................................... -6-
3.05 Liability of Limited Partners......................................... -6-
3.06 Ownership of Partnership Property..................................... -6-
3.07 Discounted Units...................................................... -6-
IV. PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS.................................... -6-
4.01 Capital Account Maintenance........................................... -6-
4.02 Book Allocations...................................................... -8-
4.03 Tax Allocations....................................................... -11-
4.04 Allocation Among Partners............................................. -13-
4.05 Cash Distributions.................................................... -14-
4.06 Distribution of Net Proceeds from Sales or Other Dispositions......... -14-
V. DUTIES, POWERS, AND RESTRICTIONS OF THE GENERAL PARTNERS..................... -16-
5.01 Management............................................................ -16-
5.02 Partnership Deposits and Disbursements................................ -20-
5.03 Books................................................................. -20-
5.04 Accounting............................................................ -21-
5.05 Other Ventures........................................................ -21-
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
5.06 Right to Rely on Authority of the Managing General Partner........... -22-
5.07 Prohibition on Management Participation by Limited Partners.......... -22-
5.08 Liability of the General Partners; Indemnity......................... -22-
5.09 Removal of a General Partner......................................... -23-
VI. TRANSFER OF PARTNERS' INTEREST.............................................. -24-
6.01 General Partners..................................................... -24-
6.02 Limited Partners..................................................... -24-
6.03 Section 754 Election................................................. -25-
VII. DISSOLUTION OF PARTNERSHIP.................................................. -26-
7.01 Limited Partners..................................................... -26-
7.02 General Partners..................................................... -26-
7.03 Procedure............................................................ -26-
7.04 Capital Accounts..................................................... -27-
VIII. MISCELLANEOUS............................................................... -27-
8.01 Agreement in Counterparts............................................ -27-
8.02 Notices.............................................................. -27-
8.03 Power of Attorney.................................................... -28-
8.04 Amendment............................................................ -28-
8.05 Additional Documents................................................. -28-
8.06 Meetings............................................................. -28-
8.07 Validity............................................................. -28-
8.08 Governing Law........................................................ -28-
8.09 Waiver............................................................... -28-
8.10 Federal Tax Audits................................................... -29-
8.11 Delivery of Certificates............................................. -29-
Schedule A - Limited Partners
B - Subscription Agreement
</TABLE>
-ii-
<PAGE>
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP
-----------------------------------------------------
AMENDED AND RESTATED AGREEMENT made as of the ____ day of
______________, 199___, by and among Coral Reserves, Inc., an Oklahoma
corporation as the Managing General Partner (the "Managing General Partner"),
Leo Woodard and John Penton, Individuals as Additional General Partners (the
"Additional General Partners") (the Managing General Partner and Additional
General Partners are collectively referred to as "General Partners"), Leo
Woodard and John Penton, Individuals as the Initial Limited Partners (the
"Initial Limited Partners"), and each of the persons (the "Limited Partners")
from time to time listed on Schedule A hereto.
W I T N E S E T H
- - - - - - - - -
WHEREAS, the General Partners and the Initial Limited Partners have
formed a limited partnership pursuant to the provisions of the Oklahoma Revised
Uniform Limited Partnership Act (the "Partnership Act") under the name of "Coral
Reserves 1996 Institutional Limited Partnership" (the "Partnership") by filing
for record a Certificate of Limited Partnership of the Partnership with the
Oklahoma Secretary of State on November 13, 1995; and
WHEREAS, the General Partners and the Initial Limited Partners desire to
(i) amend and restate in its entirety their agreement as set forth in the
aforesaid Certificate of Limited Partnership, (ii) effect the withdrawal of the
Initial Limited Partners and (iii) provide for the admission of the Limited
Partners as provided in this Amended and Restated Agreement of Limited
Partnership (the "Agreement");
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants and agreements herein contained, the parties hereto do hereby certify
and swear and agree as follows:
I. THE PARTNERSHIP
---------------
1.01 Name. The name of the Partnership shall continue to be
----
Coral Reserves 1996 Institutional Limited Partnership.
1.02 Business. The Partnership will carry on the business of
--------
acquiring, managing, improving and selling or otherwise disposing of Production
Interests, as herein defined, in oil and gas properties located in Oklahoma or
in such other states as the Managing General Partner deems appropriate and will
also engage in certain related activities. The Partnership shall have authority
to do all things necessary or expedient to carry out its stated purposes.
-1-
<PAGE>
1.03 Office. The office of the Partnership shall be located at
------
119 North Robinson, Suite 600, Oklahoma City, Oklahoma, 73102, or at such other
location in Oklahoma as the Managing General Partner may determine from time to
time upon prior written notice to the Limited Partners.
1.04 Term. The term of the Partnership commenced on the date
----
that the Partnership's Certificate and Agreement of Limited Partnership was
filed in the office of the Secretary of State of the State of Oklahoma and shall
continue until the date on which all Partnership assets are sold or otherwise
disposed. Notwithstanding the foregoing, the Partnership will terminate no
later than January 1, 2016, and may be sooner terminated in the manner provided
in Article VII hereof.
1.05 Agent for Service of Process. The Partnership's agent
----------------------------
for service of process of the Partnership shall be Scott M. Rayburn, an
individual with a business address at 100 Park Avenue, Oklahoma City, Oklahoma,
73102, and whose residence address is 6416 Winchester Drive, Oklahoma City,
Oklahoma, 73162.
II. DEFINITIONS
-----------
The following defined terms shall, unless the context requires
otherwise, have the meanings specified. The singular shall be deemed to refer to
the plural and the masculine gender shall be deemed to refer to the feminine and
neuter, and vice versa as the context requires.
"Additional General Partners" means Leo Woodard and John Penton,
or any substituted or Additional General Partners admitted in accordance
herewith.
"Affiliate" of or a person or entity "affiliated with" a
specified person or entity means a person or entity that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the person or entity specified. For the purpose of this
definition, the term "control" (including the terms "controlling", "controlled
by" and "under common control with") means the possession, directly or
indirectly, alone or in concert with others, of the power to direct or cause the
direction of the management and policies of a person or entity, whether through
the ownership of securities, by contract or otherwise.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership, as the same may be subsequently amended.
"Capital Account" means the account described and maintained in
accordance with Paragraph 4.01.
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<PAGE>
"Capital Contribution" means, with respect to each Partner, the
total amount of any money and the fair market value of any other property (other
than any debt obligations of such Partner) contributed to the Partnership by
such Partner (or the predecessor holder or holders of the Partnership interest
of such Partner) pursuant to Article III.
"Code" refers to the Internal Revenue Code of 1986, as amended.
"Distributable Cash" for any period means the proceeds from
Partnership operations on hand as of the end of such period, other than the
Capital Contributions, cash used to establish reserves or proceeds from
permitted borrowings or transactions described in Paragraph 4.06 hereof.
"General Partners" means the Managing General Partner and the
Additional General Partners.
"Gross Annual Revenues" means revenues of the Partnership from
all sources during any given year, including, without limitation, the proceeds
of the sale of Production Interests.
"Initial Limited Partners" means Leo Woodard and John Penton.
"Limited Partner" means each person who has executed and
delivered to the Partnership a Subscription Agreement substantially in the form
of Schedule B annexed hereto, from the date such Subscription Agreement is
accepted by the Managing General Partner, and any person thereafter becoming a
limited partner hereof and excluding any person thereafter withdrawing as a
limited partner.
"Majority in Interest of the Limited Partners" means such of the
Limited Partners who have made (at the time of determination) more than 50% of
the Capital Contributions made by all Limited Partners.
"Managing General Partner" means Coral Reserves, Inc., an
Oklahoma corporation, or any substituted general partner admitted in accordance
herewith.
"Net Income" and "Net Loss" shall mean the income or loss of the
Partnership from the operation of the Partnership's business as reported for
federal income tax purposes. Net Income or Net Loss shall not include income,
gain or loss from transactions described in Paragraph 4.06 but shall include all
distributive items under Section 702 of the Code attributable to costs, if any,
incurred by the Partnership in respect of the operation and
-3-
<PAGE>
management of the Partnership's business, such as taxes, interest, financing
fees and management fees, if any.
"Partners" refers to the General Partners and the Limited
Partners.
"Production Interests" means (i) any interests in the gross
production of oil and gas, including royalties, overriding royalties and
production payments, as such terms are commonly used in the oil and gas
business, payable in cash, free of all costs of drilling, exploration,
production, operations and marketing and all other costs incident to the
production and sale of oil and gas, whether or not limited in duration to the
duration of the lease creating such interests, and (ii) any operating interests
under an oil and gas lease, including working interests.
"Recapture Income" means any gain recognized by the Partnership,
or, in the case of gain required by Section 613A(c)(7)(D) of the Code to be
computed separately by a Partner (but computed without regard to any adjustment
required by Section 734 or 743 of the Code) upon the disposition of any property
or asset of the Partnership that is not capital gain because such gain
represents the recapture of deductions previously taken for federal income tax
purposes with respect to such property or assets.
"Related Acquisition Costs" means the direct expenses incurred by
the Partnership in connection with locating, investigating, evaluating and
arranging for the acquisition of Production Interests, including, without
limitation, direct expenses of the officers and employees of the Managing
General Partner reimbursable under the terms of this Agreement, the fees and
disbursements of attorneys, accountants and petroleum engineers and geologists,
data processing costs, well testing costs and other costs associated with the
acquisition of Production Interests, but not including any portion of the fees
payable hereunder to the General Partners and the Selling Agent and their
Affiliates.
"Selling Agent" means Canaan Securities, Inc.
"Simulated Basis" means the adjusted tax basis of any oil and gas
property (as defined in Section 614 of the Code), determined for federal income
tax purposes immediately following the acquisition of such property by the
Partnership, as adjusted to reflect (a) additions to basis and (b) the Simulated
Depletion Allowance.
"Simulated Depletion Allowance" means a depletion allowance
computed (in accordance with federal income tax principles) for each taxable
year with respect to each oil and gas property (as defined in Section 614 of the
Code), using the cost method of depletion. For purposes of computing the
Simulated Depletion Allowance with respect to any property, the adjusted tax
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<PAGE>
basis of such property shall be deemed to be the Simulated Basis in such
property and in no event shall such allowance, in the aggregate, exceed such
Simulated Basis.
"Unrealized Gain" attributable to a Partnership property means,
as of any date of determination, the excess, if any, of the fair market value of
such property as of such date of determination over the adjusted tax basis of
such property as of such date of determination.
"Unrealized Loss" attributable to a Partnership property means,
as of any date of determination, the excess, if any, of the adjusted tax basis
of such property as of such date of determination over the fair market value of
such property as of such date of determination.
III. PARTNERS AND CAPITAL CONTRIBUTIONS
----------------------------------
3.01 General Partners. Coral Reserves, Inc., shall continue
----------------
to be the Managing General Partner. Leo Woodard and John Penton shall continue
to be the Additional General Partners. Except as set forth in Paragraph 7.04(b),
the General Partners shall not be required to make any Capital Contribution to
the Partnership. No additional or substituted general partners, except for
entities controlled by Leo Woodard or John Penton, may be admitted to the
Partnership without the consent of all other Partners.
3.02 Initial Limited Partners. The Initial Limited Partners
------------------------
have each made a contribution to the Partnership capital in the amount of
$10.00. The Initial Limited Partners hereby withdraw from the Partnership and
acknowledge the return of their Capital Contribution and shall have no further
obligation to or any rights as Limited Partners in respect of the Partnership.
3.03 Limited Partners. (a) Limited Partnership interests
----------------
have been or will be sold to the Limited Partners whose names and addresses are
set forth on Schedule A hereto. At least one unit at a purchase price of
$500,000 per unit (each, a "Unit") have been sold and a maximum of 10 Units, in
the aggregate, may be sold by the Partnership. The Managing General Partner
may, in its sole discretion, elect to sell up to a maximum of 20 units.
(b) The Managing General Partner may, in its sole
discretion, have an initial closing ("Closing") and admit the subscribers as
Limited Partners and the Partnership may continue to offer additional Units for
sale until the earlier of (i) the date on which all of the Units have been sold
or (ii) December 3, 1996, however, the Managing General Partner may, in its sole
discretion, elect to extend the December 3, 1996, closing date.
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<PAGE>
(c) The Managing General Partner, in its sole discretion,
may elect to accept subscriptions for fractional Units. In such event, the
purchase price of such Unit shall be proportionately reduced.
3.04 Return of Capital Contributions. Except as otherwise
-------------------------------
expressly provided in this Agreement, the Capital Contributions of the Partners
will be returned to them only in the manner and to the extent provided in
Paragraph 4.06(b), and no Partner shall have the right to demand redemption of
their interest, regardless of whether they withdraw from the Partnership. No
Partner will have the right to demand or receive property other than cash in
return for their Capital Contribution.
3.05 Liability of Limited Partners. The liability of each
-----------------------------
Limited Partner to the Partnership shall be limited to the amount of their
agreed Capital Contribution, and the Limited Partners shall have no further
obligation to contribute money to, or in respect of, the liabilities or the
obligations of the Partnership, nor shall the Limited Partners be personally
liable for any obligations of the Partnership, except as may be required by the
Partnership Act.
3.06 Ownership of Partnership Property. All property acquired by
---------------------------------
the Partnership shall be deemed to be owned by the Partnership, such ownership
being subject to the other terms and provisions of this Agreement, and no
Partner, individually, shall have ownership of such property. Each Partner
hereby expressly waives the right to require partition of any Partnership
property or any part thereof.
3.07 Discounted Units. The General Partners, the Selling Agent
----------------
and other registered broker-dealers participating in the sale of the Units,
certain planning firms and individual employees and Affiliates of the foregoing,
may, at the discretion of the Managing General Partner, purchase Units for which
no commissions will be charged, and the purchase price of such Units shall be
reduced by the amount of the foregone commissions.
IV. PARTNERSHIP DISTRIBUTIONS AND ALLOCATIONS
-----------------------------------------
4.01 Capital Account Maintenance. (a) A Capital Account shall be
---------------------------
established for each Partner on the books of the Partnership, which account,
shall be maintained in accordance with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv) and, to the extent not in conflict with such
Regulations, this Paragraph 4.01(a). As to a Limited Partner, the Capital
Account shall be initially equal to the capital contribution, if any, of such
Limited Partner and, as to a General Partner, shall be initially equal to zero
and thereafter, in each case, shall be increased by (i) additional cash
contributions, if any, made by the Partner to the Partnership, (ii) the fair
market value
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of any property contributed by the Partner to the Partnership (net of any
liability considered to be assumed by the Partnership pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(c) and any liability to which such property
is subject); and (iii) the amount of any income or gain allocated to the Partner
pursuant to Paragraph 4.02 and decreased by (i) the amount of any distributions
of cash made to the Partner, (ii) the fair market value of any property
distributed by the Partnership to the Partner (net of any liability considered
to be assumed by the Partner pursuant to Treasury Regulation Section 1.701-
1(b)(2)(iv)(c) and any liability to which such property is subject), (iii) the
amount of any losses or deduction allocated to the Partner pursuant to Paragraph
4.02 and, (iv) the amount of any allocation to the Partner of expenditures of
the Partnership (as described in Section 705(a)(2)(B) of the Code).
(b) For purposes of computing the amount of any item of
income, gain, deduction or loss to be reflected in the Partners' Capital
Accounts, the determination, recognition and classification of any such item
shall be the same as its determination, recognition and classification for
federal income tax purposes; provided, however, that:
(i) Capital Accounts shall be adjusted for Simulated
Depletion Allowance. Any Simulated Depletion Allowance deductions attributable
to a separate oil and gas property (as defined in Section 614 of the Code) shall
be computed by the Partnership using cost depletion. The Simulated Depletion
Allowance determined with respect to an oil and gas property shall, in the
aggregate, reduce the Capital Accounts of the Partners only to the extent of the
Partnership's Simulated Basis with respect to such property. The allocations of
basis, depletion deductions and amount realized from the sale or other
disposition of oil and gas properties as provided in Paragraph 4.03 required by
Section 613A(c)(7)(D) of the Code shall not affect the Capital Accounts of the
Partners.
(ii) All fees and other expenses incurred by the
Partnership that can neither be deducted nor amortized under Section 709 of the
Code shall, for purposes of Capital Account maintenance, be treated as an item
of deduction and shall be allocated among the Partners pursuant to Paragraph
4.02.
(iii) The computation of all items of income, gain,
loss and deduction shall be made without regard to any election under Section
754 of the Code.
(iv) Immediately prior to the actual or deemed
distribution of any Partnership property (other than cash) or the distribution
of cash in redemption of a Limited Partner's interest in the Partnership, the
Capital Accounts of all Partners shall be adjusted (consistent with the
provisions hereof
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and Section 704 of the Code) upwards or downwards to reflect any Unrealized Gain
or Unrealized Loss attributable to each Partnership property (as if such
Unrealized Gain or Unrealized Loss had been recognized upon an actual sale of
each such property, immediately prior to such distribution, and had been
allocated to the Partners at such time pursuant to Paragraph 4.02). In
determining such Unrealized Gain or Unrealized Loss, the aggregate fair market
value of Partnership properties as of any date of determination shall be
determined by the Managing General Partner using such methods of valuation as
it, in its good faith judgment, deems appropriate.
4.02 Book Allocations. (a) For purposes of maintaining the
----------------
Capital Accounts, and in determining the rights of the Partners among
themselves, each item of book income, gain, loss and deduction (computed in
accordance with Paragraph 4.01) shall be allocated (in the manner described in
Paragraph 4.02) to the Partners.
(b) (i) The Simulated Depletion Allowance shall be
allocated among the Partners in the same proportion that the Simulated Basis of
the oil and gas property (as defined in Section 614 of the Code) was allocated
among the Partners pursuant to Paragraph 4.03(b).
(ii) Nonrecourse Deductions (as defined in Treasury
Regulation Section 1.704-2(b)(i)) for any fiscal year or other period shall be
allocated 99% to the Limited Partners and 1% to the Managing General Partner.
(iii) Any Partner Nonrecourse Deductions (as defined
in Treasury Regulation Section 1.704-2(i)(2)) for any fiscal year or other
period shall be allocated to the Partner who bears the economic risk of loss
with respect to the Partner Nonrecourse Debt (as defined in Treasury Regulation
Section 1.704-2(b)(4)) to which such Partner Nonrecourse Deductions are
attributable in accordance with the provisions of Treasury Regulation Section
1.704-2(i).
(iv) In the event that any fees paid to the General
Partners or their Affiliates pursuant to this Agreement and deducted by the
Partnership in reliance on Section 707(a) and/or 707(c) of the Code are
disallowed as deductions to the Partnership on its federal income tax return as
other than in compliance with the terms of such sections of the Code the General
Partners shall be allocated items of Partnership income, if any, in the year
such fees were paid, equal to the amount of such fees for which deductions were
thus disallowed.
(v) Except as otherwise required in this Section
4.02(b), items of deduction resulting from the payment of the Organization Fees
described in Paragraph 5.01(f) hereof and expenses described in Paragraph
5.01(g) computed as a
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<PAGE>
percentage of each Partner's Capital Contribution shall be allocated to each
Partner who is charged with such expense and cost under such paragraphs and
Section 3.07. Depreciation deductions shall be allocated 99% to the Limited
Partners and 1% to the Managing General Partner; items of income attributable to
interest earned on capital contributions shall be allocated solely to the
Limited Partners.
(vi) Except as otherwise specifically required in
Paragraph 4.02(b) (viii-xii), every item of income, gain, loss and deduction
other than those items allocated in Paragraph 4.02(b)(i-v and (vii) shall be
allocated to each Partner as follows:
That amount of each allocable item that bears the same ratio
to the total of such item as the Capital Contribution of a
Limited Partner bears to the total Capital Contributions of
all Limited Partners shall be allocated 87.5% to such
Limited Partner and 12.5% to the General Partners (12% to the
Managing General Partner and .25% to each of the Additional
General Partners).
(vii) Any income or gain generated from the sale or
other disposition of Production Interests or other Partnership Property in
connection with the complete liquidation of the Partnership, shall be allocated
as follows:
(A) First, an amount of income and gain equal
to the aggregate deficit balances in the Capital Account of all Partners shall
be allocated to such Partners in proportion to any such deficits to the extent
necessary to eliminate such deficits;
(B) Second, an amount of income and gain
remaining after the allocation in Paragraph 4.02(b)(vii)(A) shall be allocated
in the same proportion as a Limited Partner's Capital Contribution bears to the
total Capital Contributions of all Limited Partners 87.5% to such Limited
Partner and 12.5% to the General Partners (12% to the Managing General Partner
and .25% to each Additional General Partner).
(viii) Any loss from the sale or other disposition of
a Production Interest or depreciable equipment, whether or not in liquidation,
shall be allocated with respect to Production Interests among all Partners in
proportion to their share of the Simulated Basis of such Production Interest to
the extent of their Simulated Basis and with respect to equipment, 99% to the
Limited Partners and 1% to the Managing General Partner. Thereafter, any
remaining loss will be allocated 100% to the Managing General Partner.
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<PAGE>
(ix) Notwithstanding anything to the contrary in this
Paragraph 4.02, a Limited Partner shall not be allocated losses and deductions
to the extent that such allocation would cause or increase a deficit in the
Limited Partner's Capital Account (as adjusted for adjustments, allocations or
distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6) and additions pursuant to Treasury Regulation Section 1.704-2(g)(i)
and 2(i)(5)). To the extent any allocation of losses and deductions would cause
or increase a deficit in the Capital Account Balance of a Limited Partner, then:
(A) Such amount of losses and deductions that
would cause or increase a deficit shall be allocated to the General Partners
with positive Capital Account balances in proportion to their positive Capital
Account balances until all such General Partners have been reduced to a zero
balance and any remaining losses and deductions shall be allocated to the
Managing General Partner; and
(B) After any such allocation in subparagraph
(A) above, items of Partnership gross income and gain that would otherwise be
allocated to a Limited Partner for any fiscal year shall be allocated instead to
the General Partners to whom the loss or deduction was allocated under clause
(A) above (pro rata in proportion to the amount of each General Partner's
allocation of such loss or deduction), until the amount of such gross income and
gain so allocated equals the amount of loss or deduction previously so allocated
to the General Partners under clause (A) above; provided, however, that no such
allocation of gross income and gain to any General Partner shall be made under
this clause (B) if the effect of such allocation would be to cause or increase a
deficit balance in any Limited Partner's Capital Account.
(x) Notwithstanding anything to the contrary in this
Paragraph 4.02, if any Limited Partner receives an adjustment, allocation or
distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6) which causes or increases a deficit Capital Account balance as
determined in (ix) above, such Limited Partner shall be allocated items of gross
income and gain in an amount and manner sufficient to eliminate such deficit
balance as quickly as possible. This Paragraph 4.02(b)(x) is intended to comply
with the qualified income offset provision contained in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently there with.
(xi) Notwithstanding anything to the contrary in this
Paragraph 4.02, if there is a net decrease in partnership minimum gain (as
defined in Treasury Regulation Section 1.704-2(d)) during any Partnership fiscal
year, each Partner shall
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<PAGE>
be specially allocated items of Partnership gross income and gain for such year
(and, if necessary, subsequent years) in proportion to, and to the extent
provided in Treasury Regulation 1.704-2(f). This Paragraph 4.02(b)(xi) is
intended to comply with the Partner ship Minimum Gain chargeback provision
contained in Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
(xii) Notwithstanding anything to the contrary in this
Paragraph 4.02, if there is a net decrease in Partner Minimum Gain (as defined
below) with respect to a Partner Nonrecourse Debt (as defined in Treasury
Regulation Section 1.704-2(b)(4)) during any Partnership fiscal year, any
Partner with a share of such Partner Minimum Gain attributable to such Partner
Nonrecourse Debt shall be specially allocated items of Partnership gross income
and gain for such year (and, if necessary, subsequent years) in proportion to,
and to the extent provided in Treasury Regulation Section 1.704-2(i)(4). This
Paragraph 4.02(b)(xii) is intended to comply with the Partner Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(i) and shall be
interpreted consistently therewith. Partner Minimum Gain shall mean, with
respect to each Partner Nonrecourse Debt, an amount equal to the Partnership
Minimum Gain determined in accordance with Treasury Regulation Section 1.704-
2(i).
4.03 Tax Allocations. (a) For federal, state and local income
---------------
tax purposes, except as otherwise provided in this Paragraph 4.03, each item of
income, gain, loss, deduction and credit of the Partnership shall be allocated
among the Partners in accordance with the corresponding book allocations thereof
as provided in Paragraph 4.02.
(b) The deduction for depletion with respect to each
separate oil and gas property (as defined in Section 614 of the Code) shall be
computed for federal income tax purposes separately by the Partners rather than
the Partnership in accordance with Section 613A(c)(7)(D) of the Code. For
purposes of such computation, the proportionate share of the adjusted tax basis
of each such property (before taking into account any adjustments resulting from
an election made by the Partnership on behalf of such Partner under Section 614
of the Code) shall be allocated to the Partners in proportion to and to the
extent they bear the cost of the acquisition, and in the case of acquisitions
funded from Capital Contributions under Paragraph 3.03 shall be allocated 99% to
the Limited Partners and 1% to the Managing General Partner; provided, however,
that the Managing General Partner shall have complete discretion to make these
allocations in any reasonable manner that is consistent with Section 704(c). The
purpose and intent of these allocations is to effect the allocations required by
Section 704(c) of the Code thereunder, and this provision shall be construed and
interpreted to achieve that result. The Managing General Partner may amend any
provision of this Agreement if such
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<PAGE>
amendment is necessary to reflect allocations among the Partners consistent with
Section 704(c) of the Code. It is the intent of these provisions to comply with
Treasury Regulation 1.613A-3(e) and consistent therewith, upon the admission of
a Limited Partner (pursuant to Section 3.03(b) hereof) subsequent to the
Partnership's acquisition of any Production Interest (for purposes of this
Section 4.03, a "New Limited Partner"): (i) the Partnership shall allocate to
the New Limited Partner his or her share of the aggregate of the existing
Limited Partners' adjusted bases (as determined pursuant to Treasury Regulation
Section 1.613A-3(e)(3)(iii)) in each existing property in the same proportion as
the New Limited Partner's Capital Contribution bears to the total of all Limited
Partners' Capital Contributions; and (ii) each existing Limited Partner's
adjusted basis shall be reduced by the percentage of the Partnership's aggregate
basis in the property that is allocated to the New Limited Partner. Each Partner
shall separately keep records of his share of the adjusted basis in each
separate oil and gas property, adjust such share of the adjusted basis for any
cost or percentage depletion allowable with respect to such property and use
such adjusted basis in the computation of his cost depletion or in the
computation of his gain or loss on the disposition of such property by the
Partnership. It is the intent of the Partnership to comply with Regulation
Section 613A-3(e)(3). Consistent therewith, each Partner hereto agrees to
furnish to the Partnership, within 30 days of receipt of written request by the
Partnership, a written statement which clearly and accurately states the amount
of that Partner's adjusted basis or depletion deductions with respect to each
existing Partnership property. In determining depletion deductions, each Partner
must treat as actually deducted any amount disallowed and carried over as a
result of the 65 percent of income limitation of Code Section 613A(d)(1).
(c) Except as otherwise required by Section 704(c) of the
Code, for the purpose of the separate computation of gain or loss by each
Partner on the sale or disposition of each separate oil and gas property (as
defined in Section 614 of the Code), the Partnership's allocable share of the
"amount realized" (as such term is defined in Section 1001(b) of the Code) from
such sale shall be allocated (A) first, to the Partners in an amount equal to
the Simulated Basis in each oil and gas property in the same proportions as such
Partners were allocated the Simulated Basis in (or attributable to) such
property (as determined in accordance with Paragraph 4.03(b)), and (B) second,
the balance to the Partners in proportion to and to the extent of their
respective share of gain from such sale under Paragraph 4.02(b).
(d) To the extent of any Recapture Income resulting from
the sale or other taxable disposition of a Partnership asset, the amount of any
gain from such disposition allocated to (or recognized by) a Partner for federal
income tax purposes pursuant to the above provisions shall be deemed to be
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<PAGE>
Recapture Income to the extent such Partner (or its predecessor in interest) has
been allocated or has claimed any deduction directly or indirectly giving rise
to the treatment of such gain as Recapture Income. Any recapture of tax credits
shall be taken into account by those Partners to whom such credits were
allocated as required under the Code and applicable Treasury Regulations.
(e) All items of income, gain, loss, deduction, credit and
basis allocation recognized by the Partnership for federal income tax purposes
and allocated to the Partners in accordance with the provisions hereof shall be
determined without regard to any election under Section 754 of the Code which
may be made by the Partnership; provided, however, such allocations, once made,
shall be adjusted as necessary or appropriate to take into account those
adjustments permitted by Sections 734 and 743 of the Code and, where
appropriate, to provide only Partners recognizing gain on Partnership
distributions covered by Section 734 of the Code with the federal income tax
benefits attributable to the increased basis in Partnership property resulting
from any election under Section 754 of the Code.
4.04 Allocation Among Partners. (a) Except as otherwise
-------------------------
expressly required in this Article IV, all allocations of income, gains, losses,
deductions, credits and adjusted tax basis of depletable properties that are
allocated to the Limited Partners as a group shall be allocated among them in
proportion to their respective Capital Contributions as measured on the last day
of the appropriate period as determined pursuant to Paragraph 4.04(b).
(b) Partnership income, gain, loss, deduction, credits and
Distributable Cash attributable to any interest in the Partnership or portion
thereof which has been transferred shall be allocated between the transferor and
the transferee as follows:
(i) For the months prior to the transfer, to the
transferor;
(ii) For the months subsequent to the transfer, to
the transferee;
(iii) For the month of the transfer, to the
transferee if the transfer occurs on or before the 15th day of such month and to
the transferor if occurring after.
For purposes of the above allocation of income, gain, loss, deduction and
credit, Partnership items may be allocated equally among the months of the
Partnership's tax year without regard to Partnership operations during such
months or may be allocated according to such other method as the Managing
General Partner may choose in its absolute discretion, as then permitted by the
Code.
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<PAGE>
(c) Partnership income, gain, loss, deduction and credit
shall be allocated among the Partners to take into account their varying
interests during the year in which Capital Contributions are made at different
times during such year in any manner determined by the Managing General Partner,
in its absolute discretion, as then permitted by the Code.
4.05 Cash Distributions. For at least the first year of the
------------------
Partnership, Distributable Cash shall be calculated and distributed monthly, and
thereafter at least quarterly (but more frequently in the discretion of the
Managing General Partner), by the Managing General Partner to each Partner as
follows:
(a) Distributable Cash in the proportion that a Limited
Partner's Capital Contribution bears to the total Capital Contributions of all
Limited Partners shall be distributed 87.5% to such Limited Partner and 12.5%
to the General Partners (12% to the Managing General Partner and .25% to each of
the Additional General Partners).
(b) If any Partner shall not withdraw the whole or any
part of his share of Distributable Cash, such Partner shall not be entitled to
receive any interest thereon, nor shall any such cash thus not withdrawn be
deemed an increase in such Partner's share of the capital of the Partnership
without the express, written consent of all other Partners.
(c) For Partners admitted under Paragraph 3.03(b), a
Limited Partner shall be treated as a Limited Partner for the month with respect
to the distributions referenced in Paragraph 4.05(a) if they acquire their
interest on or before the last day of the month.
4.06 Distribution of Net Proceeds from Sales or Other
------------------------------------------------
Dispositions. (a) Except as provided in Paragraph 4.06(b), any net insurance
- ------------
proceeds, any net proceeds of a condemnation, sale, exchange or other
disposition of a Production Interest or any portion of Partnership property or
interest therein, other than the disposition of all Partnership assets upon
dissolution and liquidation, shall be distributed in the following order of
priority:
(i) First, to the creditors of the Partnership in
payment of the unpaid liabilities of the Partnership to the extent required
under agreements with such creditors; and
(ii) Next, to the setting up or replacing of any
reserves which the Managing General Partner may deem reasonably necessary for
any anticipated, contingent or unforeseen liabilities or obligations of the
Partnership arising
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<PAGE>
out of, or in connection with, the conduct of the Partnership's business;
(iii) Next, with respect to proceeds from the
condemnation, sale, exchange or other disposition of a Production Interest, to
the Partners in proportion to and to the extent of their respective share of the
Simulated Basis of the Production Interests; and
(iv) Next, any remaining net proceeds in the
proportion that a Limited Partner's Capital Contribution bears to the total
Capital Contributions of all Limited Partners shall be distributed 87.5% to such
Limited Partner and 12.5% to the General Partners (12% to the Managing General
Partner and .25% to each of the Additional General Partners).
(b) After provisions have been made for payment of any
unpaid liabilities of the Partnership to the extent required under agreements
with creditors and the setting up of a liquidation reserve, all amounts
distributed in liquidation of the Partnership or of the interest of one or more
Partners, shall be distributed in accordance with positive Capital Account
balances of the Partners, the interest of which are being liquidated (as
determined after taking into account all Capital Account adjustments for the
taxable year to reflect the allocation of gain or loss attributable to the
transaction giving rise to such proceeds and Unrealized Gain and Unrealized Loss
pursuant to Paragraph 4.01(b)(iv)) in proportion to such positive Capital
Account balances. Distributions pursuant to this Paragraph 4.06(b) shall be made
by the end of such taxable year (or, if later, within 90 days after the date of
such liquidation).
(c) In the event that any reserves have been established
pursuant to the terms of this Agreement, distribution of such reserves will be
made to the Partners who received allocations of income or gain from the sale of
Production Interests corresponding to cash contributed to the reserves at the
time such reserves were created in proportion to such allocations of income or
gain from the sale of Production Interests, or, in the case of a liquidation
reserve, in proportion to the positive Capital Account balances of the Partners
after adjustment for the allocations of gain or loss arising from the
liquidating sale and Unrealized Gain or Unrealized Loss.
V. DUTIES, POWERS, AND RESTRICTIONS OF THE GENERAL PARTNERS.
---------------------------------------------------------
5.01 Management. To the extent permitted by law, and subject
----------
to the terms of this Agreement, the Managing General Partner shall have full
charge of the conduct of the Partnership's business in all respects and shall
have the following specific powers which it agrees to exercise in a commercially
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reasonable manner giving due consideration to its fiduciary obligation to the
other Partners:
(a) Acquisition of Production Interests. The Managing
------------------------------------
General Partner is authorized and agrees to use its best efforts to acquire
Production Interests in oil and gas properties located in Oklahoma or such other
states as it deems appropriate, on such terms and conditions as it believes are
in the best interest of the Partnership, subject to the following limitations:
(i) The Managing General Partner will endeavor to
diversify the Partnership's investments to the extent deemed to be in the best
interests of the Partnership by investing in properties in different geographic
locations and by balancing investments between properties having predicted high
rates of production in the early years, with possibly lower rates in later
years, and properties with more consistent levels of production over a longer
term.
(ii) The Managing General Partner will endeavor to
reduce the risks of investment further by limiting the amount of Partnership
funds committed to any single property and will in no event commit in excess of
10% of the total capital of the Partnership to Production Interests in a single
well without the consent of a Majority in Interest of the Limited Partners.
(iii) The Managing General Partner will evaluate each
property which is considered for acquisition using such information as is
available, including, for example, reserve reports, well logs, and pressure and
production records. In the event no current reserve report exists in respect of
any property in which the Managing General Partner intends to acquire an
interest, the Managing General Partner may cause such a report to be prepared.
The Managing General Partner may engage such consultants or other technical
advisors at the expense of the Partnership as it deems necessary or advisable to
advise the Partnership regarding acquisitions or dispositions of Production
Interests.
(iv) Production Interests may be purchased from the
General Partners or an Affiliate, but only if the purchase price does not exceed
the fair market value of such interest. All Production Interests purchased from
the General Partners or an Affiliate will be acquired by the Partnership on
terms which conform substantially to industry practice.
(v) Prior to the use of the Capital Contributions in
the manner contemplated by this Agreement, the Managing General Partner shall
invest such Capital Contributions in either United States treasury bills or
other
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<PAGE>
securities guaranteed by the United States government, or in a separately
designated interest-bearing account or certificate of deposit of a major United
States bank, and any interest thereon shall be the property of the Partnership;
provided, however, that the Managing General Partner shall distribute to the
Limited Partners all Capital Contributions which have not been used to purchase
Production Interests or otherwise used to cover Partnership expenses or for the
establishment of reserves permitted hereunder by December 3, 1998, together with
any interest earned thereon, in the proportion in which such Capital
Contributions were made by the Limited Partners.
(b) Other Operations. The Managing General Partner will not
----------------
cause the Partnership to engage in any exploratory or developmental drilling or
any related drilling or production enhancement activities except to the extent
provided herein.
(i) The Managing General Partner may cause the
Partnership to engage in the drilling of offset wells or the reworking,
recompletion, deepening or plugging back of existing wells to the extent such
activities are incident to the operation of leases in which the partnership owns
a Production Interest and such activities are, in the determination of the
Managing General Partner, in the best interests of the Partnership.
(ii) The Managing General Partner may cause the
Partnership to engage in secondary or tertiary recovery operations and other
production enhancement techniques to the extent such activities are incident to
the operation of leases in which the Partnership owns a Production Interest and
such activities are, in the determination of the Managing General Partner, in
the best interests of the Partnership.
(iii) The activities described in subparagraphs (i)
and (ii) may, in the discretion of the Managing General Partner, be financed out
of Partnership capital, Partnership borrowing permitted under Paragraph 5.01(e)
or out of Partner ship revenues from Production Interests.
(c) Sale of an Oil and Gas Interest. The Managing General
-------------------------------
Partner may, on behalf of the Partnership, sell or otherwise dispose of any
Production Interest owned by the Partnership upon such terms and conditions as
it believes to be in the best interests of the Partnership; provided, however,
that:
(i) Without the prior written consent of a Majority
in Interest of the Limited Partners, the Partnership shall not sell or otherwise
dispose of Partnership assets which had, at the time of their acquisition, a
fair market value in excess of 50% of the initial capital of the Partnership;
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(ii) Any Production Interest which is transferred to
an Affiliate by the Partnership shall be for a consideration not less than the
fair market value thereof; and
(iii) The Partnership may farm out a Production
Interest if the Managing General Partner determines that (a) the Partnership
lacks sufficient funds to drill on the Property in which it owns such Production
Interest, or (b) the best interests of the Partnership would otherwise be served
by such transaction.
(d) Miscellaneous. The Managing General Partner shall have
-------------
authority to take all such other action as may be necessary to carry out the
business of the Partnership, including but not limited to the following:
(i) To arbitrate, compromise, settle, sue on or
defend any claim of or against the Partnership;
(ii) To insure the Partnership against such risks and
hazards and in such amounts as it shall determine;
(iii) To designate depositories for the funds of the
Partnership and to make deposits therein and withdrawals therefrom in accordance
with Paragraph 5.02;
(iv) To establish reserve accounts reasonable in
amount, to provide for any contingent or unforeseen liabilities or obligations
of the Partnership, and to invest the funds held in such reserve account in
United States treasury bills or other securities guaranteed by the United States
Government, or in a separately designated interest-bearing bank account, or
certificate of deposit;
(v) To employ, engage, retain and oversee any
persons, firms or corporations to act as account ants or lawyers or other
personnel, and to pay such fees and other amounts in connection therewith, as it
may deem necessary or desirable;
(vi) To file for record a Certificate of Limited
Partnership or any amendment thereto in the appropriate office;
(vii) To execute, acknowledge and deliver any and all
instruments which may be deemed necessary or convenient to effect the foregoing;
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<PAGE>
(viii) To pay all Partnership fees and expenses of any kind,
including, without limitation, the fees and expenses related to developing the
Production Interests;
(ix) Subject to the restriction set forth in Paragraph
5.01(e)(i), to borrow funds on behalf of the Partnership and to secure such
borrowings with Partnership assets;
(x) To enter into any transactions with Affiliates
(including, without limitation, retaining Affiliates to manage operations at the
site of any property in which the Partnership has a Production Interest),
provided that the terms of such transactions are at least as favorable to the
Partnership as those which would have been available from unaffiliated third
parties; and
(xi) To perform all other necessary business and take such
other actions permitted by law as may be necessary, advisable or expedient to
carry on the business of the Partnership.
(e) Restrictions. Notwithstanding anything contained in this
------------
Agreement to the contrary, the Managing General Partner shall not, without the
prior written consent of a Majority in Interest of the Limited Partners, do any
of the following:
(i) Borrow funds in excess of 30% of the total Capital
Contributions of the Limited Partners to finance Partnership activities
(including acquiring and developing Production Interests); or
(ii) Confess a judgment against the Partnership.
(f) Organization and Property Acquisition Fees. For services
------------------------------------------
rendered in connection with the organization of the Partnership, the selection
of oil and gas properties and negotiation of acquisition contracts and the
negotiation of the relationship with the Selling Agent the Managing General
Partner shall receive a fee in the amount of 3% of the Capital Contributions
of each Limited Partner, payable simultaneously with the acceptance by the
Partnership of such Capital Contributions.
(g) Syndication Expenses. The Managing General Partner is
--------------------
authorized to pay the Selling Agent brokerage commissions in the amount of 3% of
the purchase price of the Units. The Managing General Partner is further
authorized to enter into an agreement with the Selling Agent pursuant to which
the Selling Agent will be paid.
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<PAGE>
(h) Reimbursement of Expenses. The Managing General Partner
-------------------------
will be reimbursed by the Partnership for out-of-pocket expenses incurred in its
capacity as Managing General Partner. In addition, the Managing General Partner
will be reimbursed out of Partnership funds for the Partnership's allocable
share to the extent incurred by the Managing General Partner of overhead
expenses, including office rent and salaries for clerical staff and appropriate
production supervisory personnel, and any other overhead expenses which the
Managing General Partner deems reasonable. The reimbursement to the Managing
General Partner for overhead expenses will in no event exceed three (3%) percent
of Distributable Cash.
5.02 Partnership Deposits and Disbursements. In order to insure that
--------------------------------------
the books of the Partnership accurately reflect the receipts and disbursements
of the Partnership, all receipts of the Partnership, including Capital
Contributions from the Partners, will be deposited and maintained in the name of
the Partnership in such bank account(s) as shall be designated by the Managing
General Partner. The Managing General Partner will disburse only from funds in
said Partnership account any and all fees and all other Partnership expenses and
obligations, including any and all obligations owed to the Managing General
Partner.
5.03 Books. (a) The Managing General Partner will maintain or cause
-----
to be maintained full and accurate books and records of the Partnership, and all
Partners will have the right to inspect and examine the same at reasonable times
and upon reasonable notice. The books will be kept on an accrual basis, and the
fiscal year of the Partnership will be the calendar year.
(b) The records to be kept at the Partnership's office in
Oklahoma shall include, without limitation, (i) a current list of the full name
and last known business address of each Partner set forth in alphabetical order;
(ii) a copy of the Certificate of Limited Partnership and all certificates of
amendment thereto, together with executed copies of any powers of attorney
pursuant to which any certificate has been executed, (iii) copies of the
Partnership's federal, state and local tax returns and reports, if any, for the
three most recent years, and (iv) copies of any then effective written
Partnership Agreement and any financial statements of the Partnership for the
three most recent years.
5.04 Accounting. The books will be closed and balanced at the end of
----------
each fiscal year, but the Partnership will not have an audit prepared unless
requested to do so by a Majority in Interest of the Limited Partners. The
Managing General Partner will, to the extent possible, furnish to each Partner,
within 90 days after the close of each fiscal year, a Schedule K-1 (or any
successor form thereto), and within 230 days after the close of each fiscal
year, copies of the Partnership's annual financial
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<PAGE>
statements, including a written balance sheet and statement of income or loss.
Such financial statements will contain a report of said accountants which shall
include: (a) a statement that an audit, if required, of such financial
statements has been made in accordance with generally accepted auditing
standards on the accounting basis used by the Partnership for making its federal
income tax returns; (b) a statement of the opinion of such accountant with
respect to the financial statements and the accounting principles and practices
reflected therein and in regard to the consistency of the application of the
accounting principles; and (c) an identification of any matters to which the
accountant takes exception and a statement, to the extent practicable, of the
effect of each such exemption on such financial statements. Such financial
statements will also indicate the share of the Partners of the Net Income, Net
Loss and other relevant fiscal items of the Partnership for such fiscal year.
The Managing General Partner also agrees to arrange for the preparation of all
tax returns required to be filed for the Partnership. Each Partner shall be
entitled to receive, upon request, copies of all federal, state and local income
tax returns and information returns, if any, which the Partnership is required
to file. The Managing General Partner will engage on behalf of the Partnership a
firm of qualified certified public accountants to prepare Partnership tax
returns and to conduct the audits required under this Agreement.
5.05 Other Ventures. Subject to their fiduciary obligations to the
--------------
Partnership, any of the Partners may engage in or possess an interest in other
business ventures of every nature and description, independently or with others,
whether or not such activities compete with the business of the Partnership, and
neither the Partnership nor the other Partners shall have, nor have the right to
acquire, any right by virtue of this Agreement in and to such independent
ventures or to the income or profits derived therefrom.
5.06 Right to Rely on Authority of the Managing General Partner. In
----------------------------------------------------------
no event shall any person dealing with the Managing General Partner or its
representatives with respect to any property of the Partnership be obligated to
ascertain that the terms of this Agreement have been complied with, or be
obligated to inquire into the necessity or expediency of any act or action of
the Managing General Partner or its representatives; and every contract,
agreement, promissory note, or the instrument or document executed by the
Managing General Partner on behalf of the Partner ship shall be conclusive
evidence in favor of any and every person relying thereon or claiming thereunder
that (a) at the time of the execution and/or delivery of such instrument or
document, this Agreement was in full force and effect, (b) such instrument or
document was duly executed in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership and all of the Partners hereof,
and (c) the Managing General Partner or its representatives were duly authorized
and empowered to execute and
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deliver any and every such instrument or document for and on behalf of the
Partnership.
5.07 Prohibition on Management Participation by Limited Partners. (a)
-----------------------------------------------------------
No Limited Partner, except for a Limited Partner who is also a General Partner,
shall participate in the management of the Partnership's business. (b) Except as
otherwise provided herein, no Limited Partner (other than any Limited Partner
who is also a General Partner) shall receive any compensation for services
rendered to the Partnership.
5.08 Liability of the General Partners; Indemnity. The General
--------------------------------------------
Partners and their Affiliates shall have no liability to the Partnership or to
any Partner for any loss suffered by the Partnership which arises out of any
action or inaction of the General Partners if the General Partners, in good
faith, determined that such course of conduct was in the best interests of the
Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partners. The General Partners and their Affiliates
will be indemnified by the Partnership against any losses, judgments,
liabilities, and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partners.
All amounts paid by the Partnership to the General Partners by reason
of the foregoing indemnification provisions of the Agreement will be paid out of
Partnership assets and in no event shall any Limited Partner have any personal
liability on account thereof.
Notwithstanding the foregoing, the General Partners and their
Affiliates and any person acting as a Broker-Dealer shall not be indemnified for
liabilities arising under federal and state securities laws unless (a) there has
been a successful adjudication on the merits of each count involving securities
laws violations; (b) such claims have been dismissed with prejudice on the
merits; or (c) a Court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee.
In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the Court the
position of the Securities and Exchange Commission and the Massachusetts
Securities Division with respect to the issue of indemnification for securities
law violations.
The Partnership may advance the legal expenses and other costs
incurred in connection with any threatened, pending or contemplated action, suit
or proceeding to which the General Partners were or are a party or are
threatened to be made a party by reason of the fact that they are or were the
General Partners of
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<PAGE>
the Partnership, provided that the following three conditions are satisfied: (a)
the legal action relates to the performance of duties or services by the General
Partners on behalf of the Partnership; (b) the legal action is initiated by a
third party who is not a Limited Partner; and (c) the General Partners undertake
to repay any funds advanced under this subparagraph to the Partnership in any
case in which the General Partners would not be entitled to indemnification
under this paragraph.
The Partnership shall not incur the cost of the portion of any
insurance which insures any party against any liability as to which such party
is herein prohibited from being indemnified.
5.09 Removal of a General Partner. (a) Without limiting any rights
----------------------------
of the Limited Partners otherwise provided at law or in equity, any General
Partner may be removed as general partner of the Partnership at any time by a
vote of 75% in interest of the Limited Partners for (i) fraud, gross negligence
or willful misconduct; or (ii) a material default by it in the performance of
its obligations to the Partnership under this Agreement.
(b) The Limited Partners agree that they will not exercise their
right to remove or enforce any of their rights against the General Partners
until such time as they have given written notice to the General Partners of
their intention to exercise such right and the default, or act or action
allegedly constituting fraud, gross negligence or willful misconduct relating
thereto and have provided such General Partner with a reasonable time
thereafter, not less than 30 days, within which to cure the default. If such
default is cured within the permitted time, the rights of the Limited Partners
under this Paragraph 5.09 with respect to that particular default will
terminate.
(c) Any removal of any General Partner under this Paragraph 5.09
shall not relieve such removed General Partner from its obligations to the
Partnership incurred prior to such removal nor shall it deny such removed
General Partner the rights provided in Paragraph 7.02(b). Upon such removal the
Partnership shall file an amendment to this Agreement evidencing the removal of
the General Partner as General Partner of the Partnership.
VI. TRANSFER OF PARTNERS' INTEREST
------------------------------
6.01 General Partners. A General Partner may not assign or transfer
----------------
any portion of its interest in the Partnership without the consent of a
Majority in Interest of the Limited Partners. If a General Partner wishes to
assign or transfer any portion of its interest, it must give written notice of
such intention to the Limited Partners. Each Limited Partner shall have ten
-23-
<PAGE>
business days to reply after such notice has been sent, and any Limited Partner
who does not vote against such assignment or transfer within such period shall
be deemed to have consented to such transfer or assignment. Notwithstanding the
foregoing, however, any such partial assignment or transfer shall not
discharge the General Partner from any liability or obligation to the
Partnership by reason of such partial assignment or transfer. The foregoing
shall not be deemed to prohibit a General Partner from assigning without the
consent of the Limited Partners all or a portion of its interest in the income
and profits of the Partnership to an Affiliate.
6.02 Limited Partners. (a) No Limited Partner may assign or transfer
----------------
their Partnership interest and have such transferee admitted as a substituted
Limited Partner in respect of such interest without the prior written consent of
the Managing General Partner. Any Limited Partner who desires to secure
permission to transfer their interest shall notify the Managing General Partner
in the manner referred to in Paragraph 8.02 hereof. The Managing General Partner
may withhold its consent to any proposed transfer in its sole discretion and
will in no event give such consent if the proposed transfer violates applicable
federal or state securities laws or other laws or regulations.
(b) Any Limited Partner who desires to transfer their interest
shall arrange for their transferee to be bound by the provisions of this
Agreement by having such transferee execute such documents as shall be required
by the Managing General Partner to make the transferee a party to this Agreement
and by delivering the same to the Managing General Partner together with any
such other information that may be required by counsel to the Managing General
Partner to determine whether the proposed transfer violates applicable federal
or state securities or other laws or regulations. The Managing General Partner
in no event will give its consent to any proposed transfer unless and until the
Partnership receives payment in full from the proposed transferee of any and
all reasonable legal, accounting and other charges and fees incurred by the
Partnership and its counsel in connection with any such transfer. If and when
the consent of the Managing General Partner provided for in this Paragraph is
secured, the transferee shall become a substituted Limited Partner as to the
interest thus transferred.
(c) Anything contained herein to the contrary notwithstanding,
no transfer or assignment of interests in the Partnership shall be effective if,
in the opinion of counsel to the Partnership, (i) such transfer would result in
the termination of the Partnership pursuant to Section 708 of the Code, (ii) it
would result in the Partnership being classified as an association taxable as a
corporation or publicly traded partnership for federal income tax purposes, and
any such transfer shall be effected in such manner as may be necessary to
maintain such continuity or the
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<PAGE>
classification of the Partnership as a partnership for federal income tax
purposes.
(d) Any transferee of an interest in the partnership
shall succeed to the transferor's Capital Account as of the date of such
transfer and shall be deemed to have re ceived the cash distributions received
by the transferor and, upon admission to the Partnership, shall be deemed to
have made the Capital Contribution made by the transferor.
(e) Notwithstanding anything contained herein to the
contrary, the Partnership shall not participate in the establishment of, or
inclusion of Units thereon, an established securities market within the meaning
of Treasury Regulation Section 1.7704-1(b) or a secondary market or the
substantial equivalent thereof within the meaning of Treasury Regulation Section
1.7704-(c), and the Partnership shall not recognize any transfers made on any
such market by redeeming the transferor Partner (in the case of a redemption or
repurchase by the Partnership) or admitting the transferee Partner or otherwise
recognizing any rights of the transferee, such as a right of the transferee to
receive Partner ship distributions (directly or indirectly) or to acquire an
interest in the capital or profits of the Partnership.
6.03 Section 754 Election. In the event of a transfer of
--------------------
all or part of the interest of a Limited Partner in the Partnership by sale or
exchange or on the death of a Limited Partner, upon the request of the
transferee of such interest the Managing General Partner shall cause the
Partnership to elect, pursuant to Section 754 of the Code, or corresponding
provision of subsequent law, to adjust the basis of the Partnership property as
provided by Section 734 or 743 of the Code. This and all other elections
required or permitted to be made by the Partnership under the Code shall be made
by the Managing General Partner in such manner as in the Managing General
Partner's reasonable judgment will be most advantageous to the Limited Partners.
VII. DISSOLUTION OF PARTNERSHIP
--------------------------
7.01 Limited Partners. Neither the death or dissolution of a
----------------
Limited Partner nor an act of bankruptcy by a Limited Partner will dissolve the
Partnership or terminate the Partnership's business, but the rights of such
Partner to receive Partnership distributions and allocation will, on the
happening of such an event, devolve upon such Partner's legal representative or
successor in interest, as the case may be, subject to the terms and conditions
of this Agreement, and the Partnership shall continue as a limited partnership.
Such Partner's representative or successors in interest shall be liable for all
of the obligations of such Partner hereunder.
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<PAGE>
7.02 General Partners. (a) An act of bankruptcy, removal
----------------
or withdrawal of, or assignment for the benefit of creditors by any General
Partner shall dissolve the Partnership. Notwithstanding anything in this
Paragraph 7.02 to the contrary, if there is at least one remaining General
Partner, then the business of the Partnership may be continued without
dissolution and winding up if such General Partner(s) agrees. Additionally, the
Partner ship may be continued without dissolution and winding up if, within
ninety (90) days after an event specified in this Paragraph 7.02, all the
Partners agree in writing to continue the business of the Partnership without
dissolving and winding up and to appoint, effective as of the date of
bankruptcy, removal or withdrawal, one or more additional General Partners if
necessary. A Majority in Interest of the Limited Partners shall select from the
General Partners a Managing General Partner. The General Partners (or their
legal representatives, as the case may be) are hereby deemed to consent to the
continuation of the business of the Partnership by the appointment of the new
general partner(s).
(b) From and after the date of any event set forth in
Paragraphs 5.09 and 7.02(a), the bankrupt, removed or withdrawn General Partner
or its legal representatives, as the case may be, shall be a limited partner of
the Partnership and shall continue to hold its interest in Partnership
allocations and distributions in such capacity.
7.03 Procedure. Upon dissolution or termination of the
---------
Partnership, the assets of the Partnership shall be liquidated as promptly as
possible, but in an orderly and businesslike manner so as not to involve undue
sacrifice and in the manner provided for in Paragraph 4.06 hereof, and the
Managing General Partner shall cause to be prepared by the firm of certified
public accountants then retained by the Partnership a statement setting forth
the assets and liabilities of the Partnership as of the date of dissolution,
which statement shall be furnished to all of the Partners. Upon the dissolution
or termination of the Partnership, the net proceeds from the liquidation of the
assets of the Partner ship and any capital gain or capital loss relating
thereto shall be distributed as provided in Paragraph 4.06(b) hereof.
7.04 Capital Accounts. (a) For the purposes of any
----------------
applicable state law, upon the dissolution or termination of the Partnership,
any negative Capital Account balances of the Partners shall in no event be
considered to be an asset of the Partnership and in no event shall the Partners
have any obligation to make any repayment thereof or contribution of capital in
respect thereto except as provided in Paragraph 7.04(b) hereof.
(b) Notwithstanding any other provisions of this
Agreement, upon dissolution or termination of the Partnership, or upon the
liquidation of a General Partner's inter est in the Partnership, the General
Partner will be required to
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<PAGE>
contribute to the Partnership capital an amount equal to the deficit balance, if
any, in their Capital Accounts on the date of dissolution or termination. Any
contribution required to be made by a General Partner under this Paragraph
7.04(b) shall be made by the end of the tax year in which such dissolution,
termination or liquidation occurs (or, if later, within 90 days after the date
of such dissolution, termination or liquidation).
VIII. MISCELLANEOUS
-------------
8.01 Agreement in Counterparts. This Agreement may be
-------------------------
executed in counterparts, each of which, when so executed, shall be deemed an
original, but all of which, taken together, shall constitute one and the same
agreement, binding upon the parties hereto, their heirs, executors,
administrators, successors and permitted assigns.
8.02 Notices. All notices and demands under this
-------
Agreement shall be in writing, mailed, postage prepaid, by certified or
registered mail, return receipt requested, directed to the parties at their
respective addresses set forth in this Agreement, and to the Partnership at its
office set forth and the same shall be deemed to have been given and made four
days following the date thus mailed. Any Limited Partner may change their
address by giving written notice to the Managing General Partner stating their
new address. Any General Partner may change his address by giving written notice
to all other Partners. The business address of the Partnership, the Managing
General Partner and the Additional General Partners is 119 North Robinson, Suite
600, Oklahoma City, Oklahoma, 73102.
8.03 Power of Attorney. The Subscription Agreement
-----------------
contains a special power of attorney granted by the Limited Partners to the
president of the Managing General Partner. In the event of any conflict between
the provisions of this Agreement and any document executed or filed by the
Managing General Partner pursuant to the Special Power of Attorney granted in
the Subscription Agreement, this Agreement shall govern.
8.04 Amendment. This Agreement may be modified or
---------
amended at any time by a writing signed by all the General Partners and by a
Majority in Interest of the Limited Partners. No modification or amendment of
this Agreement, however, shall change the interest of any Partner in the
capital, profit or cash distributions of the Partnership or his rights of
contribution or withdrawal with respect thereto, or amend Paragraph 1.04 or
Article VII hereof or this Paragraph 8.04 without the express, written consent
of each Partner materially affected thereby.
8.05 Additional Documents. Each party hereto agrees to
--------------------
execute, with acknowledgement or affidavit, if required by the Managing General
Partner, any and all documents and writings
-27-
<PAGE>
which may be necessary or expedient in connection with the creation of the
Partnership and the achievement of its purposes, specifically including the
Partnership's Certificate of Limited Partner ship and all amendments thereto or
cancellation thereof.
8.06 Meetings. Upon the written request of a Majority in
--------
Interest of the Limited Partners, the Managing General Partner will call a
meeting of the Partners to be held at the Part nership's office in Oklahoma or
such other location as is agreed to by the Partners requesting such meeting
within a reasonable time after such request.
8.07 Validity. In the event that any provision of this
--------
Agreement shall be held to be invalid, the same shall not affect in any respect
whatsoever the validity of the remainder of this Agreement.
8.08 Governing Law. This Agreement shall be construed
-------------
according to, and the management of the Partnership shall be governed by, the
laws of the State of Oklahoma.
8.09 Waiver. The waiver by any party hereto of the
------
breach of any term, covenant, agreement or condition herein contained shall not
be deemed a waiver of any subsequent breach of the same or any other term,
covenant, agreement or condition here in, nor shall any custom, practice or
course of dealings arising among the parties hereto in the administration hereof
be construed as a waiver or diminution of the right of any party hereto to
insist upon the strict performance by any other party of the terms, covenants,
agreements and conditions herein contained.
8.10 Federal Tax Audits. (a) Each Limited Partner does
------------------
hereby appoint and designate the Managing General Partner as tax matters partner
("TMP"), as such term is defined in the Code and the regulations thereunder.
The TMP is authorized to take all action on behalf of the Partnership and the
Partners permitted under the Code. The Partnership may engage its account ants
or attorneys to assist the TMP in discharging its duties hereunder.
(b) The TMP shall be entitled to an indemnity from the
Partnership (subject to Paragraph 5.08) for any act performed by it within the
scope of its duties as tax matters partner, except for the negligent or willful
acts or failures to act as a tax matters partner, provided that any indemnity
under this Paragraph shall be provided out of and to the extent of Partnership
assets only and no Limited Partner shall have any personal liability on account
thereof.
(c) The TMP shall notify all Partners of the
commencement of any administrative proceeding by the
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<PAGE>
Internal Revenue Service and shall keep all Partners currently advised of
developments in any such proceedings.
(d) Notwithstanding anything to the contrary contained in this
Paragraph 8.10, the TMP shall have no authority to bind any Limited Partner by
any settlement agreement entered into by the TMP and the IRS, unless such
Limited Partner has expressly notified the TMP in writing that the TMP is so
authorized. Within thirty (30) days after the TMP has received notice from the
IRS of a final partnership administrative adjust ment, the TMP shall notify all
of the Limited Partners of such final administrative adjustment and the effect
it will have on their individual tax returns on a per Unit basis. Such
notification shall also include information concerning the Limited Partners'
right to request the same settlement terms from the IRS.
(e) All reasonable expenses incurred by the TMP in connection
with any administrative proceeding before the IRS and/or judicial review of such
proceeding, including reasonable attorneys' fees, shall be deemed a Partnership
operating expense.
(f) Any Partner other than the TMP who wishes to participate in
the administrative proceedings at the Partnership level may do so, but any
legal, accounting or other expenses incurred by such Partner in connection
therewith shall not be deemed a Partnership expense but shall be paid by such
Partner.
8.11 Delivery of Certificates. The Managing General Partner shall
------------------------
not be required to deliver or mail to any Limited Partner a copy of any
Certificate of Limited Partnership or amendment thereto unless such Partner
specifically requests such certificate(s).
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the day and in the year first above written.
GENERAL PARTNERS
----------------
CORAL RESERVES, INC.
By: _______________________________________
Leo Woodard, President
_______________________________________
Leo Woodard, Individually
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<PAGE>
_________________________________________
John Penton, Individually
LIMITED PARTNERS
----------------
_________________________________________
Leo Woodard, Withdrawing
Initial Limited Partner
_________________________________________
John Penton, Withdrawing
Initial Limited Partner
_________________________________________
Leo Woodard, as attorney-in-fact
for the Limited Partners whose
names are listed on Schedule A
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<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF CROWE & DUNLEVY]
February 14, 2000
Canaan Energy Corporation
119 N. Robinson, Suite 600
Oklahoma City, OK 73102
Gentlemen:
We have acted as counsel to Canaan Energy Corporation ("Company") in
connection with registration under the Securities Act of 1933 as amended ("Act")
of 5,000,000 shares of common stock, par value $0.10 per share ("Common Stock")
of the Company to be issued and sold in connection with the proposed Plan of
Combination among the Company, Indian Oil Company, Canaan Securities, Inc.,
certain affiliated partnerships of the Company and various other parties.
A Registration Statement under the Act with respect to the 5,000,000
shares of common stock is being filed with the Securities and Exchange
Commission on or about February 14, 2000.
We have examined and are familiar with originals or copies, the
authenticity of which has been established to our satisfaction, of all such
documents, corporate records and other instruments as we have deemed necessary
to express the opinion hereinafter set forth. Based on the foregoing comment,
it is our opinion that the 5,000,000 authorized but unissued shares of Common
Stock of the Company to be issued in the manner described in the Registration
Statement will, upon issuance thereof in exchange for the consideration
described in the Plan of Combination be validly issued, fully paid and non-
assessable.
We consent to the use of this opinion as an exhibit to the above
mentioned Registration Statement and for the use of our name in such
Registration Statement and the Prospectus/Proxy included therein under the
heading "Legal Matters".
Respectfully submitted,
CROWE & DUNLEVY,
A Professional Corporation
By: /s/ Michael M. Stewart
----------------------
Michael M. Stewart
MMS:jh
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF CROWE & DUNLEVY]
February 14, 2000
Canaan Energy Corporation
119 N. Robinson, Suite 600
Oklahoma City, Oklahoma 73102
Gentlemen:
We have acted as counsel to Canaan Energy Corporation, an Oklahoma
corporation ("Canaan"), in connection with that certain Registration Statement
with respect to 5,000,000 shares of common stock of Canaan, filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
on or about February 14, 2000 (the "Registration Statement"). Except as
otherwise indicated, all terms used herein shall have the respective meanings
assigned to them in the Registration Statement. Canaan filed the Registration
Statement in connection with the proposed Plan of Combination.
You have requested our opinion regarding the material Federal income
tax consequences of certain aspects of the proposed Plan of Combination. Our
opinion assumes the accuracy and completeness of the facts set forth in the
Registration Statement and certain additional facts and assumptions set forth in
the certificates, attached hereto collectively as Exhibit A (the "Certificate").
Based upon the foregoing, in reliance thereon and subject thereto, and
subject to the other limitations set forth below, the statements made in the
preliminary Prospectus/Proxy Statement being filed with the Registration
Statement under the captions "Summary-Summary of Certain Federal Income Tax
Consequences" and "Certain Federal Income Tax Consequences" with respect to our
tax opinions represent our opinions of the tax consequences described therein.
(A) No opinion is expressed as to any matter not specifically
addressed above, including the reasonableness of the above-referenced
assumptions relied upon by us in rendering the opinion set forth above.
(B) Our opinions are based upon the Internal Revenue Code of 1986, as
amended ("Code"), the Treasury Regulations promulgated thereunder, judicial
decisions, published rulings of the Internal Revenue Service ("IRS"), and
other administrative pronouncements, all as in effect on the date hereof.
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Canaan Energy Corporation
February 14, 2000
Page 2
(C) The statutory, judicial, regulatory and administrative authorities
relied upon by us in rendering the above-referenced opinions may be amended
or revoked at any time. Any such changes may or may not be retroactive with
respect to transactions entered into or contemplated prior to the effective
date thereof and could significantly alter this opinion. There can be no
assurance that legislative, judicial or administrative changes affecting
the tax consequences described in the Prospectus/Proxy Statement will not
occur in the future. We assume no obligation to update or modify this
opinion to reflect any developments that occur after the date hereof.
(D) This opinion is being furnished to you solely for your exclusive
use and may not be relied upon by any person without our prior written
consent. We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Registration
Statement and Prospectus/Proxy Statement under the heading "Legal Matters".
(E) This opinion is not binding on the IRS or the courts and is
dependant upon the accuracy and completeness of the facts set forth in the
Registration Statement and the facts and assumptions set forth in the
Certificates. We have relied upon these facts and assumptions, and any
inaccuracy or incompleteness in our understanding of those facts or
assumptions could adversely affect the Federal income tax consequences of
the Plan of Combination transactions and, accordingly, could alter our
opinion.
Respectfully submitted,
CROWE & DUNLEVY
A Professional Corporation
By: /s/ Reeder E. Ratliff
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Reeder E. Ratliff
RER:CLA:clm
<PAGE>
Exhibit 10.1
STOCK OPTION PLAN
OF
CANAAN ENERGY CORPORATION
(effective January ____, 2000)
1. Purpose of the Plan
This Stock Option Plan (the "Plan") is intended as an incentive to
managerial and other key employees of Canaan Energy Corporation (the "Company"),
and its subsidiaries. Its purposes are to retain employees with a high degree
of training, experience, and ability, to attract new employees whose services
are considered unusually valuable, to encourage the sense of proprietorship of
such persons, and to stimulate the active interest of such persons in the
development and financial success of the Company. Options granted under the
Plan may be either "incentive stock options" as provided by Section 422 of the
Internal Revenue Code of 1986, as amended, and as may be further amended from
time to time ( the "Internal Revenue Code" or "Code") or options which do not
qualify as incentive stock options.
2. Administration of the Plan
(a) Administration. The Plan shall be administered by the Board of
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Directors of the Company, or if the Board so authorizes, by a committee (the
"Committee") of the Board of Directors consisting of not less than two (2)
members of the Board of Directors. Unless the context otherwise requires,
references herein to the Committee shall be references to the Board of Directors
or the Committee. Members of the Committee shall serve at the pleasure of the
Board, and the Board may from time to time remove members from, or add members
to, the Committee. A majority of the members of the Committee shall constitute
a quorum for the transaction of business. Action approved in writing by a
majority of the members of the Committee then serving shall be fully effective
as if the action had been taken by unanimous vote at a meeting duly called and
held.
(b) Authority. The Committee is authorized to construe and interpret the
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Plan, to promulgate, amend and rescind rules and regulations relating to the
implementation of the Plan and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee may designate
persons other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe, except that the
Committee may not delegate its authority with regard to selection for
participation of, and the granting of options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be final, conclusive and
binding upon all persons participating in the Plan and any person validly
claiming under or through persons participating in the Plan. The Company shall
effect the granting of options under the Plan in accordance with the
determinations made by the Committee, by execution of instruments in writing in
such form as approved by the Committee.
<PAGE>
3. Designation of Participants
Persons eligible for options under the Plan shall consist of managerial and
other key employees of the Company and/or its subsidiaries who hold positions of
significant responsibilities or whose performance or potential contribution, in
the sole judgment of the Committee, will benefit the future success of the
Company.
4. Shares Subject to the Plan
Subject to adjustment as provided in Paragraph 8 hereof, there shall be
subject to the Plan five hundred thousand (500,000) shares of common stock of
the Company, par value $0.01 per share. The shares subject to the Plan shall
consist of authorized but unissued shares or treasury shares held by the
Company. Any of such shares that may remain unsold and that are not subject to
outstanding options at the termination of the Plan shall cease to be subject to
the Plan, but until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
Should any option expire or be canceled prior to its exercise in full, or a
portion of an option is surrendered in payment for the exercise of an option or
satisfaction of any tax withholding obligations, the shares theretofore subject
to such options may again be subjected to an option under the Plan. Any shares
not subject to outstanding options at the expiration of the Plan or at any time
during the life of the Plan may be dedicated to other plans that the Company may
adopt and to the extent so dedicated, such shares shall not be subject to this
Plan.
5. Option Price
(a) Price. The purchase price for each share placed under option pursuant
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to the Plan shall be determined by the Committee, but shall in no event be less
than 100% of the Fair Market Value (as defined below) of such share on the date
the option is granted.
(b) Fair Market Value. "Fair Market Value" means the average of the high
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and low sales prices of the shares of Common Stock on any national securities
exchange on which the shares are listed on the day on which such value is to be
determined or, if no shares were traded on such day, on the next preceding day
on which shares were traded, as reported by such exchange, by National Quotation
Bureau, Inc. or other national quotation service. If the Common Stock is not
listed on a national securities exchange, Fair Market Value means the average of
the closing "bid" and "asked" prices of the shares of Common Stock in the over-
the-counter market on the date on which such value is to be determined or, if
such prices are not available, the last sales price on such day or, if no shares
were traded on such day, on the next preceding day on which the shares were
traded, as reported by the National Association of Securities Dealers Automatic
Quotation System (NASDAQ) or other national quotation service. If at any time
shares of Common Stock are not traded on an exchange or in the over-the-counter
market, Fair Market Value shall be the value determined by the Committee, taking
into consideration those factors affecting or reflecting value that they deem
appropriate. For purposes of determining the purchase price of an incentive
stock option, Fair Market Value shall in any event be determined in accordance
with Section 422 of the Code.
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<PAGE>
6. Terms and Exercise of Options
(a) General. The Committee, in granting options hereunder, shall have
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discretion to determine the times when, and the terms upon which, options shall
be exercisable, including such provisions as deemed advisable to permit
qualification as "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code, as the same may from time to time be amended for
options intended to qualify as such, and incentive stock options outstanding
under the Plan may be amended, if necessary, to permit such qualification. The
Committee shall designate at the time of granting of any option whether such
option or any portion thereof shall be an "incentive stock option." Each option
shall be evidenced by an agreement between the Company and the optionee
containing provisions consistent with this Plan and such other provisions as the
Committee may determine as provided herein. Unless otherwise determined by the
Committee at the time of grant, all options shall become exercisable at the rate
of 25% of the total shares subject to the option on each of the first four (4)
anniversary dates of the date of grant. The Committee shall also be entitled to
accelerate the date any outstanding option becomes exercisable at any time.
(b) Term. In the event of the death of an optionee while in the employ of
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the Company, any unvested portion of the option as of the date of death shall be
vested as of the date of death and the option shall be exercisable in full by
the heirs or other legal representatives of the optionee within twelve (12)
months following the date of death. In the event of termination of employment
for any reason other than death or termination for cause (and except as
otherwise provided in subsection (e) below) such option shall be exercisable by
the employee or his legal representative within three (3) months of the date of
termination as to all then vested portions. In addition, the Committee may in
its sole discretion, approve acceleration of the vesting of any unvested
portions of the option. If an optionee's employment with the Company is
terminated for cause, the option shall terminate as of the date of such
termination of employment and the optionee shall have no further rights to
exercise any portion of the option. "Termination for cause" means any discharge
for violation of the policies and procedures of the Company or for other job
performance or conduct that is detrimental to the best interests of the Company,
as determined by the Committee in its sole discretion. Notwithstanding any of
the foregoing, in no event may an option be exercised more than ten (10) years
after the date of its grant.
(c) Method of Exercise. Options may be exercised, whether in whole or in
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part, by written notification to the Company accompanied by cash or a certified
check for the aggregate purchase price of the number of shares being purchased,
or upon exercise of an option, the optionee shall be entitled (unless otherwise
provided in the agreement evidencing the option), without the requirement of
further approval or other action by the Committee, to pay for the shares (i) by
tendering stock of the Company that has been owned by the optionee for at least
six (6) months with such stock to be valued at the Fair Market Value (as
determined under Section 5) on the date immediately preceding the date of
exercise or (ii) with a combination of cash and stock that has been owned by the
optionee for at least six (6) months as provided above.
In addition, upon exercise of an option, the optionee may, with the prior
approval of the Committee, pay for the shares (a) by tendering stock of the
Company already owned by the optionee
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<PAGE>
but that has not been held by the optionee for at least six (6) months with such
---
stock to be valued at the Fair Market Value (as determined under Section 5) on
the date immediately preceding the date of exercise, (b) surrendering a portion
of the option with such surrendered option to be valued based on the difference
between the Fair Market Value (as determined under Section 5) of the shares
surrendered on the date immediately preceding the date of exercise and the
aggregate option purchase price of the shares surrendered ("Surrender Value"),
or (c) with a combination of cash, stock of the Company that has not been held
---
by the optionee for at least six (6) months or surrender of options.
The Committee may also permit optionees, either on a selective or aggregate
basis, to simultaneously exercise options and sell the shares of common stock
thereby acquired, pursuant to a brokerage or similar arrangement, approved in
advanced by the Committee, and use the proceeds from such sale as payment of the
purchase price of the shares being acquired upon exercise of any option.
(d) Limitations Applicable To Incentive Options. To the extent the
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aggregate Fair Market Value of stock (determined as of the date of grant) with
respect to which incentive stock options are exercisable for the first time by
any individual during any calendar year (under all Company plans) exceeds one
hundred thousand dollars ($100,000), such options shall be treated as options
that are not incentive stock options. Options intended to be incentive options
shall have such additional terms and provisions as required by the Internal
Revenue Code.
(e) Continued Service as a Director. Any provisions of the Plan to the
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contrary notwithstanding, for purposes of Section 6(b) above, in the event an
optionee who is also a director of the Company ceases to be employed by the
Company but continues to serve as a director of the Company, the Committee, in
its sole discretion, may determine that all or a portion of such optionee's
options shall not expire three (3) months following the date of termination of
employment with the Company as is provided in Section 6(b) above, but instead
shall continue in full force and effect until the such optionee ceases to be a
director of the Company, but in no event beyond the stated expiration date of
the options as set forth in the applicable option agreement. Termination of any
such option in connection with the optionee's termination of service as a
director shall be in accordance with the provisions of Section 6(b) above;
provided, however, that (i) the terms "employ" and "employment" as used therein
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shall be replaced with the terms "service" and "service on the Board of
Directors," respectively, and (ii) the phrase "termination for cause" shall mean
any removal from the Board of Directors for cause in accordance with applicable
law and the Certificate of Incorporation and By-Laws of the Company.
(f) Individual Limitation. Subject to adjustment from time to time, as
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provided in Section 8, not more than two hundred thousand (200,000) shares of
common stock of the Company may be made subject to Options under the Plan to any
individual in the aggregate in any one (1) calendar year, such limitations to be
applied in a manner consistent with the requirements of, and only to the extent
required for compliance with, the exclusion from the limitation or deductibility
of compensation under Section 162(m) of the Code.
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<PAGE>
7. Assignability
During an optionee's lifetime, an option may be exercisable only by the
optionee and options granted under the Plan and the rights and privileges
conferred thereby shall not be subject to execution, attachment or similar
process and may not be transferred, assigned, pledged or hypothecated in any
manner (whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution. Notwithstanding the foregoing or
any other provisions of the Plan, to the extent permitted by applicable law, the
Committee may, in its sole discretion, permit recipients of options that do not
qualify as incentive stock options under Section 422 of the Internal Revenue
Code to transfer such non-incentive options by gift or other means pursuant to
which no consideration is given for such transfer. The Committee shall impose
in connection with any non-incentive options transferred pursuant to the
foregoing sentence such limitations and restrictions as it deems appropriate.
Any other attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of any option under the Plan or of any right or privilege conferred thereby,
contrary to the provisions of the Plan, or the sale or levy or any attachment or
similar process upon the rights and privileges conferred thereby, shall be null
and void ab initio.
8. Changes in Capitalization
(a) No Effect on Company Rights. Subject to the other provisions of this
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Plan, the existence of the Plan and the options granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof, any issue of shares of Common
Stock or shares of any other class of capital stock or warrants or rights to
acquire such shares, the dissolution or liquidation of the Company or any sale
or transfer of all or any part of its assets or business, or any other corporate
act or proceeding.
(b) Changes in Capitalization. In the event of any change in
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capitalization affecting the common stock of the Company, such as a stock
dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, liquidation,
sale of assets or any other change affecting the common stock ("Change in
Capitalization"), such proportionate adjustments, shall be made with respect to
the aggregate number of shares of common stock for which options may be granted
under the Plan, the number of shares of common stock (or other securities)
covered by each outstanding option, and the price per share of outstanding
options to the end that the optionee shall be entitled to receive the same
number and kind of stock, securities, cash, property or other consideration as
if such option had been exercised immediately preceding such Change in
Capitalization.
(c) Other Distributions. The Committee may also make such adjustments in
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the number of shares covered by, and the price or other value of any outstanding
options in the event of a spin-off or other distribution (other than normal cash
dividends) of Company assets to shareholders.
5
<PAGE>
9. Change in Control
(a) Effect on Options. In the event of a Change in Control (as defined
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below) of the Company, in addition to any adjustments required by Section 8(b):
(i) all options outstanding on the date of such Change in Control
shall become immediately and fully exercisable, and
(ii) an optionee will be permitted to surrender for cancellation
within sixty (60) days after such Change in Control, any option or portion
of such option to the extent not yet exercised and the optionee will be
entitled to receive a cash payment in an amount equal to the excess, if
any, of (A) the Fair Market Value on the date preceding the date of
surrender, of the shares subject to the option or portion thereof
surrendered, over (B) the aggregate exercise price for the shares under the
option or portion thereof surrendered.
(b) Change in Control. A "Change in Control" of the Company shall mean the
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occurrence after the effective date of the Plan of:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Exchange Act) immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of fifty percent (50%) or more of the combined voting power of the
Company's then outstanding Voting Securities;
(ii) The individuals who, as of the date of adoption of the Plan by
the Board, are members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least two-thirds of the members of the Board;
provided, however, that if the election, or nomination for election by the
Company's common stockholders, of any new director was approved by a vote
of at least two-thirds of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be considered a member
of the Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened 'election contest' (as described
in Rule 14A-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy
Contest; or
(iii) The consummation of:
(A) A merger, consolidation or reorganization involving the
Company, unless
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<PAGE>
(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty percent (60%) of the combined
voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization,
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Corporation, and
(3) no Person, other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation, or any
Subsidiary or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of fifty
percent (50%) or more of the then outstanding Voting Securities,
has Beneficial Ownership of fifty percent (50%) or more of the
combined voting power of the Surviving Corporation's then
outstanding voting securities;
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company that, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur or
10. Registration and Listing
The Company from time to time shall take such steps as may be necessary to
cause the issuance of shares upon the exercise of options granted under the Plan
to be registered under the Securities Act of 1933, as amended, and such other
federal or state securities laws as may be
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<PAGE>
applicable. The Company shall also from time to time take such steps as may be
necessary to list the shares issuable upon exercise of options granted under the
Plan for trading on such stock exchanges on which the Company's then outstanding
shares are admitted to listed trading.
11. Effective and Expiration Dates of Plan
This Plan became effective as of January ____, 2000, the date of its
approval by the Board of Directors and the Shareholders of the Company. No
options shall be granted pursuant to this Plan after January ___, 2010.
12. Amendments or Termination
The Committee may at any time amend, alter or discontinue the Plan in such
manner as it may deem advisable. Any such amendment or alteration may be
effected without the approval of the shareholders of the Company, except to the
extent such approval may be required by applicable laws or by the rules of any
securities exchange upon which the Company's outstanding shares are admitted to
listed trading.
No amendment, alteration or discontinuation of the Plan shall adversely
affect any stock option grants made prior to the time of such amendment,
alteration or discontinuation, except with the consent of the holder of the
affected options.
13. Governmental Regulations
Notwithstanding any provision hereof, or any option granted hereunder, the
obligation of the Company to sell and deliver shares under any such option shall
be subject to all applicable laws, rules and regulations and to such approvals
by any governmental agencies or national securities exchange as may be required,
and the optionee shall agree that he will not exercise any option granted
hereunder, and that the Company will not be obligated to issue any shares under
any such option, if the exercise thereof or if the issuance of such shares shall
constitute a violation by the optionee or the Company of any applicable law or
regulation. The Company shall be entitled to require as a condition to the
issuance of any shares of Common Stock upon exercise of an option that the
optionee remit an amount sufficient, in the Company's opinion, to satisfy all
FICA, federal, state or other withholding tax requirements related thereto.
Unless otherwise provided in the Agreement evidencing the option, an optionee
shall be entitled, without the requirement of further approval or other action
by the Committee, to satisfy such obligation in whole or in part (i) by
tendering stock of the Company already owned by the optionee with such stock to
be valued at the Fair Market Value (as determined under Section 5) on the date
immediately preceding the date of exercise of the options, (ii) by surrendering
a portion of his or her option with such surrendered option to be valued at the
Surrender Value (as determined under Section 6(c)), or (iii) by a combination
of cash, stock of the Company and surrender of options.
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<PAGE>
14. Governing Law
The Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the state of Oklahoma and applicable
federal law.
15. Severability
If any provision of this Plan is determined to be invalid or unenforceable
for any reason, the remaining provisions of the Plan shall remain in effect and
be interpreted to reasonably effect the intent of the Plan.
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<PAGE>
EXHIBIT 10.2
CANAAN ENERGY CORPORATION
INDEMNIFICATION AGREEMENT
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This INDEMNIFICATION AGREEMENT is dated effective as of
[_______][___], [____], by and between Canaan Energy Corporation, an Oklahoma
corporation (the "Company"), and the director of the Company whose name appears
on the signature page of this Agreement ("Indemnitee") with reference to the
following circumstances.
A. Highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or in other capacities unless they
are provided with reasonable protection through insurance or
indemnification against risks of claims and actions against them arising
out of their service to and activities on behalf of the corporation.
B. It is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest
extent permitted by applicable law so that they will serve or continue to
serve the Company free from undue concern that they will not be so
indemnified.
C. Indemnitee is willing to serve, to continue to serve and to take
on additional service for or on behalf of the Company on the condition that
Indemnitee be so indemnified.
In consideration of the promises and the covenants contained herein,
the Company and Indemnitee hereby agree as follows:
1. Definitions. For purposes of this Agreement:
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(a) "Affiliate" shall mean any corporation, partnership, joint
venture, trust or other enterprise in respect of which the Indemnitee is or was
or will be serving as a director, advisory director or board committee member,
officer, trustee or employee at the request of the Company and including, but
not limited to, any employee benefit plan of the Company or any of the
foregoing.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Disinterested Director" shall mean a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is being sought by Indemnitee.
(d) "Expenses" shall include all attorneys' fees and costs, retainers,
court costs, transcripts, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees and all other disbursements or expenses incurred in
connection with asserting or defending claims.
(e) "Independent Counsel" shall mean a law firm or lawyer that at the
time of the determination neither is presently nor in the past year has been
retained to represent: (i) the Company or Indemnitee in any matter material to
any such party or (ii) any other party to the
<PAGE>
Proceeding giving rise to a claim for indemnification hereunder in any matter
material to such other party. Notwithstanding the foregoing, the term
"Independent Counsel" shall not include any firm or person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing the Company or Indemnitee in an action to
determine Indemnitee's right to indemnification under this Agreement.
(f) "Losses" shall mean all losses, claims, liabilities, judgments,
fines and amounts paid in settlement in connection with any Proceeding.
(g) "Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding whether civil, criminal, administrative or investigative; provided,
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however, that the term "Proceeding" shall include any action instituted by an
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Indemnitee (other than an action to enforce indemnification rights under this
Agreement) only if such action is authorized by the Board.
2. Service by Indemnitee. Indemnitee shall begin or continue to
---------------------
serve the Company and any Affiliates as a director, and/or officer and/or
trustee. Notwithstanding anything contained herein, this Agreement shall not
create a contract of employment between the Company and Indemnitee, and the
termination of Indemnitee's relationship with the Company or an Affiliate by
either party hereto shall not be restricted by this Agreement.
3. Indemnification. The Company shall indemnify Indemnitee for, and
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hold Indemnitee harmless from and against, any Losses or Expenses at any time
incurred by or assessed against Indemnitee arising out of or in connection with
the service of Indemnitee as a director, advisory director, Board Committee
member, officer or trustee of the Company or of an Affiliate (collectively
referred to as a "Company Official") to the fullest extent permitted by the laws
of the State of Oklahoma in effect on the date hereof or as such laws may from
time to time hereafter be amended to increase the scope of such permitted
indemnification. Without diminishing the scope of the indemnification provided
by this Section 3, the rights of indemnification of Indemnitee provided
hereunder shall include but shall not be limited to those rights set forth
hereinafter.
4. Action or Proceeding Other Than an Action by or in the Right of
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the Company. Indemnitee shall be entitled to the indemnification rights
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provided herein if Indemnitee is a person who was or is made a party or is
threatened to be made a party to any contemplated, pending or completed
Proceeding, other than an action by or in the right of the Company, as the case
may be, by reason of (a) the fact that Indemnitee is or was a Company Official,
or (b) anything done or not done by Indemnitee in any such capacity. Pursuant
to this Section, Indemnitee shall be indemnified against Losses or Expenses
incurred by Indemnitee or on Indemnitee's behalf in connection with any
Proceeding, if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, had no reasonable cause
to believe his conduct was unlawful.
-2-
<PAGE>
5. Actions by or in the Right of the Company. Indemnitee shall be
-----------------------------------------
entitled to the indemnification rights provided herein if Indemnitee is a person
who was or is made a party or is threatened to be made a party to any pending,
completed or threatened Proceeding brought by or in the right of the Company to
procure a judgment in its favor by reason of (a) the fact that Indemnitee is or
was a Company Official, or (b) anything done or not done by Indemnitee in any
such capacity. Pursuant to this Section, Indemnitee shall be indemnified
against Losses or Expenses incurred by Indemnitee or on Indemnitee's behalf in
connection with any Proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company. Notwithstanding the foregoing provisions of this Section, no such
indemnification shall be made in respect of any claim, issue or matter as to
which Oklahoma law expressly prohibits such indemnification by reason of an
adjudication of liability of Indemnitee to the Company; provided, however, that
-------- -------
in such event such indemnification shall nevertheless be made by the Company to
the extent that the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnification.
6. Indemnification for Losses and Expenses of Party Who is Wholly or
-----------------------------------------------------------------
Partly Successful. Notwithstanding any provision of this Agreement, to the
- -----------------
extent that Indemnitee has been wholly successful on the merits or otherwise in
any Proceeding on any claim, issue or matter, Indemnitee shall be indemnified
against all Losses or Expenses incurred by Indemnitee or on Indemnitee's behalf
in connection therewith. If Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
indemnify Indemnitee to the maximum extent permitted by law, against all Losses
and Expenses incurred by Indemnitee in connection with each successfully
resolved claim, issue or matter. In any review or Proceeding to determine the
extent of indemnification, the Company shall bear the burden of proving any lack
of success and which amounts sought in indemnity are allocable to claims, issues
or matters that were not successfully resolved. For purposes of this Section
and without limitation, the termination of any such claim, issue or matter by
dismissal with or without prejudice shall be deemed to be a successful
resolution as to such claim, issue or matter.
7. Payment for Expenses of a Witness. Notwithstanding any other
---------------------------------
provision of this Agreement, to the extent that Indemnitee is, by reason of the
fact that Indemnitee is or was a Company Official, a witness in any Proceeding,
the Company shall pay to Indemnitee all Expenses actually and reasonably
incurred by Indemnitee or on Indemnitee's behalf in connection therewith.
8. Advancement of Expenses and Costs. All Expenses incurred by or
---------------------------------
on behalf of Indemnitee (or reasonably expected by Indemnitee to be incurred by
Indemnitee within three months) in connection with any Proceeding shall be paid
by the Company in advance of the final disposition of such Proceeding within
twenty days after the receipt by the Company of a statement or statements from
Indemnitee requesting from time to time such advance or advances whether or not
a determination to indemnify has been made under Section 9. Indemnitee's
entitlement to such advancement of Expenses shall include those incurred in
connection with any Proceeding by
-3-
<PAGE>
Indemnitee seeking an adjudication or award in arbitration pursuant to this
Agreement. Such statement or statements shall evidence such Expenses incurred
(or reasonably expected to be incurred) by Indemnitee in connection therewith
and shall include or be accompanied by a written undertaking in form and
substance satisfactory to the Company and the Indemnitee by or on behalf of
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified therefor pursuant to the terms of
this Agreement.
9. Procedure for Determination of Entitlement to Indemnification.
-------------------------------------------------------------
(a) When seeking indemnification under this Agreement (which shall not include
in any case the right of Indemnitee to receive payments pursuant to Section 7
and Section 8 hereof, which shall not be subject to this Section 9), Indemnitee
shall submit a written request for indemnification to the Company. Such request
shall include documentation or information that is reasonably necessary for the
Company to make a determination of Indemnitee's entitlement to indemnification
hereunder and that is reasonably available to Indemnitee. Determination of
Indemnitee's entitlement to indemnification shall be made promptly, but in no
event later than 90 days after receipt by the Company of Indemnitee's written
request for indemnification. The Company shall, promptly upon receipt of
Indemnitee's request for indemnification, advise the Board that Indemnitee has
made such request for indemnification.
(b) The entitlement of Indemnitee to indemnification under this
Agreement shall be determined in the specific case by a majority vote of a
quorum of the Board consisting of Disinterested Directors. If such a quorum is
not obtainable or the Board, by the majority vote of Disinterested Directors,
directs, the determination shall be made by Independent Counsel in a written
opinion.
(c) In the event the determination of entitlement is to be made by
Independent Counsel, such Independent Counsel shall be selected by the Board and
approved by Indemnitee. Upon failure of the Board to so select such Independent
Counsel or upon failure of Indemnitee to so approve, such Independent Counsel
shall be selected by the American Arbitration Association or such other person
as such Association shall designate to make such selection. All Expenses of the
Independent Counsel incurred in connection with acting pursuant to this
Agreement shall be borne by the Company.
(d) If the person or persons empowered pursuant to Section 9(b)
hereof to make a determination with respect to entitlement to indemnification
shall have failed to make the requested determination within 90 days after
receipt by the Company of such request, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be absolutely entitled to such indemnification, absent (i)
misrepresentation by Indemnitee of a material fact in the request for
indemnification or (ii) a final judicial determination that all or any part of
such indemnification is expressly prohibited by law.
(e) The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
---- ----------
of itself, adversely affect
-4-
<PAGE>
the rights of Indemnitee to indemnification hereunder except as may be
specifically provided herein, or create a presumption that Indemnitee did not
act in good faith and in a manner that Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company or create a presumption that
(with respect to any criminal action or proceeding) Indemnitee had reasonable
cause to believe that Indemnitee's conduct was unlawful.
(f) For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if in taking such action
Indemnitee relied on the records or books of account of the Company or an
Affiliate, including financial statements, or on information supplied to
Indemnitee by the officers of the Company or an Affiliate in the course of their
duties, or on the advice of legal counsel for the Company or an Affiliate or on
information or records given or reports made to the Company or an Affiliate by
an independent certified public accountant or by an appraiser, petroleum
engineer or other expert selected with reasonable care by the Company or an
Affiliate. The Company shall have the burden of establishing the absence of
good faith. The provisions of this Section 9(f) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee
may be deemed to have met the applicable standard of conduct set forth in this
Agreement.
(g) The knowledge and/or actions, for failure to act, of any
director, officer, agent or employee of the Company or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement.
10. Remedies in Cases of Determination not to Indemnify or to Advance
-----------------------------------------------------------------
Expenses. (a) In the event that (i) a determination is made that Indemnitee is
- --------
not entitled to indemnification hereunder, (ii) advances are not made pursuant
to Section 8 hereof or (iii) payment has not been timely made following a
determination of entitlement to indemnification pursuant to Section 9 hereof,
Indemnitee shall be entitled to seek a final adjudication either through an
arbitration proceeding or in an appropriate court of the State of Oklahoma or
any other court of competent jurisdiction of Indemnitee's entitlement to such
indemnification or advance.
(b) In the event a determination has been made in accordance with the
procedures set forth in Section 9 hereof, in whole or in part, that the
Indemnitee is not entitled to indemnification, any judicial proceeding or
arbitration referred to in paragraph (a) of this Section 10 shall be de novo and
-- ----
Indemnitee shall not be prejudiced by reason of any such prior determination
that Indemnitee is not entitled to indemnification, and the Company shall bear
the burdens of proof specified in paragraphs 6 and 9 hereof in such proceeding.
(c) If a determination is made or deemed to have been made pursuant
to the terms of Section 9 or 10 hereof that Indemnitee is entitled to
indemnification, the Company shall be bound by such determination in any
judicial proceeding or arbitration in the absence of (i) a misrepresentation of
a material fact by Indemnitee or (ii) a final judicial determination that all or
any part of such indemnification is expressly prohibited by law.
-5-
<PAGE>
(d) The Company and Indemnitee shall be precluded from asserting that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable. The Company and Indemnitee shall stipulate in any such court that
the Company and Indemnitee are bound by all of the provisions of this Agreement
and are precluded from making any assertion to the contrary.
(e) To the extent deemed appropriate by the court, interest shall be
paid by the Company to Indemnitee at a reasonable interest rate for amounts that
the Company indemnifies or is obliged to indemnify the Indemnitee for the period
commencing with the date on which Indemnitee requested indemnification (or
reimbursement or advance of an Expense) and ending with the date that such
payment is made to Indemnitee by the Company.
11. Expenses Incurred by Indemnitee to Enforce this Agreement. All
---------------------------------------------------------
Expenses incurred by Indemnitee in connection with the preparation and
submission of Indemnitee's request for indemnification hereunder shall be borne
by the Company. In the event that Indemnitee is a party to or intervenes in any
proceeding in which the validity or enforceability of this Agreement is at issue
or seeks an adjudication to enforce Indemnitee's rights under, or to recover
damages for breach of, this Agreement, Indemnitee, if Indemnitee prevails in
whole in such action, shall be entitled to recover from the Company, and shall
be indemnified by the Company against any Expenses incurred by Indemnitee. If
it is determined that Indemnitee is entitled to indemnification for part (but
not all) of the indemnification so requested, Expenses incurred in seeking
enforcement of such partial indemnification shall be reasonably prorated among
the claims, issues or matters for which the Indemnitee is entitled to
indemnification and for claims, issues or matters for which the Indemnitee is
not so entitled.
12. Non-Exclusivity. The rights of indemnification and to receive
---------------
advances as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, a certificate of incorporation, by-laws, any agreement, a vote of
stockholders or a resolution of directors or otherwise. To the extent
Indemnitee would be prejudiced thereby, no amendment, alteration, rescission or
replacement of this Agreement or any provision hereof shall be effective as to
Indemnitee with respect to any action taken or omitted by such Indemnitee in
Indemnitee's position with the Company or an Affiliate prior to such amendment,
alteration, rescission or replacement.
13. Duration of Agreement. This Agreement shall apply to any claim
---------------------
asserted and any Losses and Expenses incurred in connection with any claim
asserted on or after the effective date of this Agreement and shall continue
until and terminate upon the later of: (a) ten (10) years after Indemnitee has
ceased to serve as a Company Official; or (b) one (1) year after the final
termination of all pending or threatened Proceedings of the kind described
herein with respect to Indemnitee. This Agreement shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's spouse, assigns, heirs, devisee, executors,
administrators or other legal representatives.
-6-
<PAGE>
14. Maintenance of D&O Insurance. (a) So long as Indemnitee shall
----------------------------
continue to serve as a Company Official and thereafter so long as Indemnitee
shall be subject to any possible claim or threatened, pending or completed
Proceeding, whether civil, criminal or investigative, by reason of the fact that
Indemnitee was a Company Official, the Company shall use commercially reasonable
efforts to maintain in full force and effect directors' and officers' liability
insurance issued by reputable insurers and having policy amounts and deductibles
and other provisions as the Company deems to be commercially reasonable under
the circumstances. The Company will keep the Indemnitee advised of the amount
and terms of any D&O Insurance and will promptly notify Indemnitee of any
proposed non-renewal, cancellation or termination of D&O Insurance as soon as
practicable after receiving notice thereof.
15. Severability. Should any part, term or condition hereof be
------------
declared illegal or unenforceable or in conflict with any other law, the
validity of the remaining portions or provisions of this Agreement shall not be
affected thereby, and the illegal or unenforceable portions of the Agreement
shall be and hereby are redrafted to conform with applicable law, while leaving
the remaining portions of this Agreement intact.
16. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
17. Headings. Section headings are for convenience only and do not
--------
control or affect meaning or interpretation of any terms or provisions of this
Agreement.
18. Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by each
of the parties hereto.
19. No Duplicative Payment. The Company shall not be liable under
----------------------
this Agreement to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that Indemnitee has otherwise actually received such
payment (net of Expenses incurred in collecting such payment) under this
Agreement, any insurance policy, contract, agreement or otherwise.
20. Notices. All notices, requests, demands and other communications
-------
provided for by this Agreement shall be in writing (including telecopier or
similar writing) and shall be deemed to have been given at the time when mailed
in a registered or certified postpaid envelope in any general or branch office
of the United States Postal Service, or sent by Federal Express or other similar
overnight courier service, addressed to the address of the parties stated below
or to such changed address as such party may have fixed by notice or, if given
by telecopier, when such telecopy is transmitted and the appropriate answerback
is received.
(a) If to Indemnitee, to the address on the signature page
hereof.
-7-
<PAGE>
(b) If to the Company to:
Canaan Energy Corporation
119 North Robinson, Suite 600
Oklahoma City, Oklahoma 73102
21. Governing Law. The parties agree that this agreement shall be
-------------
governed by, and construed and enforced in accordance with, the internal laws of
the State of Oklahoma without giving effect to the conflicts of laws principles
thereof.
22. Entire Agreement. Subject to the provisions of Section 12
----------------
hereof, this Agreement constitutes the entire understanding between the parties
and supersedes all proposals, commitments, writings, negotiations and
understandings, oral and written, and all other communications between the
parties relating to the subject matter of this Agreement. This Agreement may
not be amended or otherwise modified except in writing duly executed by all of
the parties. A waiver by any party of any breach or violation of this Agreement
shall not be deemed or construed as a waiver of any subsequent breach or
violation thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CANAAN ENERGY CORPORATION
By:_______________________________
Title:____________________________
INDEMNITEE:
__________________________________
__________________________________
Address:__________________________
__________________________________
-8-
<PAGE>
Exhibit 10.3
CHANGE OF CONTROL AGREEMENT
This change of control agreement ("Agreement") is entered into effective as
of [_______][___], [____], by and between Canaan Energy Corporation ("Canaan")
and [NAME] ("Executive").
WHEREAS, Canaan desires to retain certain key employee personnel and,
accordingly, the Board of Directors of Canaan has approved Canaan entering into
a change of control agreement with Executive in order to encourage Executive's
continued service to Canaan.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, Canaan and Executive agree as follows:
1. DEFINITIONS.
-----------
(a) "Change in Duties" shall mean the occurrence, within two (2) years
after the date upon which a Change of Control occurs, of any one or
more of the following:
(i) a reduction in Executive's annual salary from the level in
effect immediately prior to the Change of Control;
(ii) failure of Canaan or its successor to provide Executive with an
annual bonus, incentive compensation or other employee benefits
(including but not limited to medical, dental, life insurance,
accidental, death and long-term disability plans) that are
materially consistent with such annual bonuses, incentive
compensation or other employee benefits provided by Canaan or
its successor to executives with comparable duties;
(iii) a significant adverse alteration in the nature or status of
Executive's duties, title, responsibilities, or the conditions
of Executive's employment from those in effect immediately prior
to such Change in Control; or
(iv) a change in the location of Executive's principal place of
employment by Canaan or its successor by more than fifty (50)
miles from the location where Executive was principally employed
immediately prior to the date on which a Change of Control
occurs.
(b) "Change of Control" shall mean the occurrence after the effective date
of this Agreement of:
(i) an acquisition (other than directly from Canaan) of any voting
securities of Canaan (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act")) immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under
the
<PAGE>
Exchange Act) of fifty percent (50%) or more of the combined
voting power of Canaan's then outstanding Voting Securities;
(ii) the individuals who, as of the effective date of this Agreement,
are members of the Board of Directors of Canaan (the "Incumbent
Board"), cease for any reason to constitute at least two-thirds
of the members of the Board of Directors of Canaan (the
"Board"); provided, however, that if the election, or nomination
for election by Canaan's common stockholders, of any new
director was approved by a vote of at least two-thirds of the
Incumbent Board, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or
threatened "election contest" (as described in Rule 14A-11
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(iii) consummation of:
(A) A merger, consolidation or reorganization involving Canaan,
unless:
(1) the stockholders of Canaan, immediately before such
merger, consolidation or reorganization, own directly
or indirectly immediately following such merger,
consolidation or reorganization, at least sixty percent
(60%) of the combined voting power of the outstanding
voting securities of the corporation resulting from
such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same
proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or
reorganization;
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or
reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving
Corporation; and
(3) no person other than Canaan, any subsidiary, any
employee benefit plan (or any trust forming a part
thereof) maintained by Canaan, the Surviving
Corporation, or any subsidiary, or
2
<PAGE>
any person who, immediately prior to such merger,
consolidation or reorganization had Beneficial
Ownership of fifty percent (50%) or more of the then
outstanding Voting Securities, has Beneficial Ownership
of fifty percent (50%) or more of the combined voting
power of the Surviving Corporation's then outstanding
voting securities.
(B) a complete liquidation or dissolution of Canaan; or
(C) an agreement for the sale or other disposition of all or
substantially all of the assets of Canaan to any Person
(other than a transfer to a subsidiary).
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted percent of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by Canaan
that, by reducing the number of Voting Securities outstanding, increases
the proportional number of shares Beneficially Owned by the Subject Person,
provided that if a Change of Control would occur (but for the operation of
this sentence) as a result of the acquisition of Voting Securities by
Canaan, and after such share acquisition by Canaan, the Subject Person
becomes the Beneficial Owner of any additional Voting Securities that
increases the percentage of the then outstanding Voting Securities
Beneficially Owned by the Subject Person, then a Change of Control shall
occur.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Compensation" shall mean the sum of:
(i) Executive's annual salary at the rate in effect immediately prior
to the date on which a Change of Control occurs; and
(ii) the highest annual bonus received by Executive during the three
(3) years immediately prior to the date on which a Change of
Control occurs.
(e) "Involuntary Termination" shall mean any termination of Executive's
employment with Canaan or its successor other than (i) termination for
cause; (ii) termination as a result of death or disability; (iii)
retirement; or (iv) resignation by Executive except resignation on or
before the date that is ninety (90) days after the date upon which
Executive receives notice of a Change in Duties.
(f) "Retirement" shall mean Executive's resignation on or after the date
Executive reaches age sixty-five (65).
3
<PAGE>
(g) "Severance Amount" shall mean an amount equal to three (3) times
Executive's Compensation.
(h) "Termination for Cause" shall mean an Executive's termination of
employment with Canaan or its successor because of:
(i) the continued failure by the Executive to devote reasonable time
and effort to the performance of Executive's duties after written
demand for improved performance has been delivered to the
Executive by Canaan that specifically identifies how Executive
has not devoted reasonable time and effort to the performance of
Executive's duties; or
(ii) the willful engaging by Executive in misconduct that is
materially injurious to Canaan, monetarily and otherwise.
2. SEVERANCE BENEFITS. If Executive's employment by Canaan or its successor
------------------
is subject to an Involuntary Termination that occurs within two (2) years after
the date upon which a Change of Control occurs, then Executive shall be entitled
to receive, as additional compensation for services rendered to Canaan or its
successor, a lump sum cash payment in an amount equal to Executive's Severance
Amount but in no event greater than the amount that would be deductible by
Canaan under Code Section 280G, after taking into consideration all payments to
such Executive covered by such section, which shall be limited to those payments
calculated in the manner required under Section 280G an Executive receives or is
deemed to receive (i) under this Agreement; (ii) under the Canaan Stock Option
Plan by reason of the acceleration of any vesting of options granted thereunder;
or (iii) under any other plan or arrangement that would otherwise be considered
a "parachute payment" under Section 280G. Such payment shall be accompanied by
a notice specifying the calculation of the payment as well as the amount of any
"parachute payments" and the Executive's deduction limit under section 280G.
Such notice shall contain sufficient detail to enable the Executive to challenge
Canaan's computation of any payment without significant additional information.
3. TERM. Within ninety (90) days after January 1, 2005, and within ninety
----
(90) days after each successive five-year (5) period of time thereafter that
this Agreement is in effect, Canaan shall have the right to review this
Agreement, and in its sole discretion either continue and extend this Agreement,
terminate this Agreement, and/or offer Executive a different agreement. Canaan
will notify Executive of such action within said ninety (90) day period. This
Agreement shall remain in effect until so terminated and/or modified by Canaan.
Failure of Canaan to take any action within said ninety (90) day period shall be
considered as an extension of this Agreement for an additional five-year (5)
period of time. If a Change of Control occurs while this Agreement is in
effect, then this Agreement shall not be subject to termination or modification
and shall remain in force for a period of two (2) years after such Change of
Control, and if within said two (2) years the contingency factors occur that
would entitle Executive to the benefits as provided herein, this Agreement shall
remain in effect in accordance with its terms.
4
<PAGE>
4. GENERAL.
-------
(a) Successors. This Agreement shall be binding upon and inure to the
----------
benefit of Canaan and any successor of Canaan, by merger or otherwise.
This Agreement shall also be binding upon and inure to the benefit of
the Executive and Executive's estate. If Executive shall die prior to
full payment of amounts due pursuant to this Agreement, such amounts
shall be payable pursuant to the terms of this Agreement to
Executive's estate.
(b) Severability. Any provision in this Agreement that is prohibited or
------------
unenforceable in any jurisdiction by reason of applicable law shall,
as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(c) Controlling Law. This Agreement shall be governed by, and construed
---------------
in accordance with, the laws of the State of Oklahoma.
(d) Release. As a condition to the receipt of any benefit under Paragraph
-------
2 hereof, Executive shall first execute a release, in the form
established by Canaan, releasing Canaan, its shareholders, officers,
directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character, including but not
limited to all claims or causes of action arising out of Executive's
employment with Canaan or the termination of such employment.
(e) Unfunded Obligation. The obligation to pay amounts under this
-------------------
Agreement is an unfunded obligation of Canaan and no such obligation
shall create a trust or be deemed to be secured by any pledge or
encumbrance on any property of Canaan.
(f) Not a Contract of Employment. This Agreement shall not be deemed to
----------------------------
constitute a contract of employment, nor shall any provision hereof
effect (i) the right of Canaan to discharge Executive at will or (ii)
the terms and conditions of any other agreement between Canaan and
Executive except as provided herein. No severance compensation shall
be payable hereunder as a result of any termination of employment
before a Change of Control.
(g) Nonalienation. No benefit payable hereunder may be assigned, pledged
-------------
or mortgaged and shall not be subject to legal process or attachment
for claims of creditors of Executive except to the extent required by
applicable law.
[SIGNATURES ON FOLLOWING PAGE]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
_____ day of ____________, _______.
"EXECUTIVE"
NAME
By: _______________________________________
Title: _______________________________________
Canaan
CANAAN ENERGY CORPORATION
By: _______________________________________
Title: _______________________________________
6
<PAGE>
EXHIBIT 10.4
================================================================================
SHAREHOLDER'S AGREEMENT
By and Between
CANAAN ENERGY CORPORATION
and
CERTAIN SHAREHOLDERS
================================================================================
<PAGE>
SHAREHOLDER'S AGREEMENT
This Shareholder's Agreement (the "Agreement") is made as of the ___
day of __________, 2000, by and between Canaan Energy Corporation, an Oklahoma
corporation (the "Company"), and Leo E. Woodard ("Woodard"), John Penton
("Penton"), Michael S. Mewbourn ("Mewbourn"), Thomas H. Henson ("Henson"),
Dunning Family Limited Partnership ("Dunning"), Larry D. Hartzog ("Hartzog"),
Michael C. Black, Trustee of the Michael C. Black Revocable Trust ("Black"), and
Anthony Lasuzzo ("Lasuzzo"), (individually sometimes referred to herein as
"Shareholder" and collectively sometimes referred to herein as "Shareholders").
Woodard, Penton, Mewbourn and Henson are sometimes collectively referred to
herein as the "Coral Shareholders" and Dunning, Hartzog, Black, and Lasuzzo are
sometimes collectively referred to herein as the "Indian Shareholders").
R E C I T A L S
WHEREAS, the Coral Shareholders are the record and beneficial owners
of all the shares of Common Stock of Coral Reserves, Inc. and Coral Reserves
Energy Corporation (collectively the "Coral Combining Entities");
WHEREAS, the Indian Shareholders are the record and beneficial owners
of all the shares of Common Stock of Indian Oil Company, an Oklahoma corporation
("Indian");
WHEREAS, concurrently with the execution and delivery of this
Agreement, the Company and the Shareholders are entering into a Plan of
Combination and Agreement of Merger dated as of the date hereof (the "Merger
Agreement"), pursuant to which the Shareholders will become owners of common
stock, par value $.01 per share of the Company ("Common Stock"), in exchange for
their respective shares of the Coral Combining Entities or Indian Common Stock
as provided for in the Merger Agreement; and
WHEREAS, the Merger Agreement further contemplates that the Company
and the Shareholders shall enter into this Agreement which sets forth the
understanding among the Company and the Shareholders, as to the matters set
forth herein with respect to, among other things, the holding, acquisition and
transfer of the Common Stock by the Shareholders and their Affiliates (as
defined below) following consummation of the transactions contemplated by the
Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, the parties hereto hereby agree
as follows:
1. Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following meanings:
1
<PAGE>
"Affiliate" shall have the meaning set forth in Rule 12b-2, as in
effect on the date hereof, under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and with respect to Dunning, Hartzog and Black shall
include Cibola Corporation.
"beneficially own" shall have the meaning set forth in Rule 13d-3, as
in effect on the date hereof, under the Exchange Act.
"Board" shall mean the Board of Directors of the Company.
"Effective Time" shall mean the Effective Time as defined in the
Merger Agreement.
"Employee Plan" shall mean any equity incentive plan, agreement,
bonus, award, stock purchase plan, stock option plan or other stock arrangement
with respect to any directors, officers or other employees of the Company.
"Family Member" shall mean the Shareholder's spouse and his or her
lineal descendants, and a trust, the income or principal of which is or may be
distributed exclusively to the Shareholder or one of the foregoing and any
business entity, the owners of which are any of the foregoing.
"Group" shall have the meaning set forth in Rule 13d-5, as in effect
on the date hereof, under the Exchange Act.
"Person" shall mean any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Exchange Act.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
"Company Stock" shall mean the Common Stock of the Company.
2. Additional Purchases. The Shareholders covenant and agree that
--------------------
during the term of this Agreement, the Shareholders and each of their Affiliates
and Family Members shall not, directly or indirectly, alone or through or with
others, acquire in any given three (3) month period an amount of shares of
Company Stock which exceeds one percent (1%) of the total voting power of shares
of Company Stock then outstanding, except:
(a) if the acquiring Shareholder, Affiliate or Family Member
makes a written notice of an offer to the other parties hereto of an opportunity
to buy their pro rata share of such amount of Company Stock which exceeds one
percent (1%) of the total voting power of the shares outstanding, on the same
terms as the acquiring Shareholder, Affiliate or Family Member, which offer
shall remain open for five (5) business days and if one of the parties hereto
fails to
2
<PAGE>
accept this offer, the other parties hereto can purchase such pro rata share of
those shares not purchased;
(b) such acquisition is from an Affiliate or Family Member; or
(c) such acquisition is from the Company pursuant to an Employee
Plan.
3. Sales and Other Dispositions.
----------------------------
(a) The Shareholders covenant and agree that during the term of
this Agreement, without the prior written consent of the Company approved by
two-thirds of the directors of the Company, neither they nor any of their
Affiliates or Family Members shall sell, transfer, hypothecate, pledge or
otherwise dispose of any shares of Company Stock except:
(i) to the Company;
(ii) in sales or distributions to any Person or Group in
amounts not to exceed one percent (1%) of the total voting power of shares
of Company Stock then outstanding in any given three (3) month period, so
long as any such sale, to the knowledge of the selling Shareholder, would
not result in such Person or Group acquiring such Company Stock
beneficially owning in the aggregate more than 10% of the total voting
power of shares of Company Stock then outstanding;
(iii) pursuant to a bona fide pledge of, or granting of a
security interest, in the Company Stock owned by the Shareholders and their
Affiliates or Family Members to an institutional lender for money borrowed
or pursuant to the foreclosure of any such pledge or security interest;
provided, however, that either (A) such pledge relates to no more than an
aggregate of 4% of the outstanding shares of Company Stock, or (B) such
lender (a "Lender") prior thereto acknowledges in a writing reasonably
satisfactory to the Company that it has received a copy of this Agreement
and agrees to be bound by all of the provisions hereof;
(iv) to an Affiliate of a Shareholder or a Family Member, if
such Affiliate or Family Member acknowledges in writing reasonably
satisfactory to the Company that it has received a copy of this Agreement
and agrees to be bound by all its provisions with respect to the Company
Stock as if he, she or it was the Shareholder;
(v) pursuant to a merger or consolidation in which the
Company is acquired, or a plan of liquidation of the Company; or
(vi) any sale complying with the provisions of Section 3(b).
3
<PAGE>
(b) In connection with any proposed sale of Company Stock not
permitted by Section 3(a)(i) through (v), the Shareholder proposing to make such
a transfer or sale must first give written notice to the Company of such
Shareholder's intent to sell such shares of Company Stock and the specific terms
and conditions of such proposed sale or transfer. Upon receipt of such notice,
the Company shall have the first option to purchase all (but no less than all)
of such shares of Company Stock on the same terms and under the same conditions
as set forth in the notice ("Company Option"). The Company shall have two (2)
business days to exercise its option to purchase such shares of Company Stock
pursuant to the Company Option. If the Company elects to exercise the Company
Option, the Company shall be required to pay for the shares of Company Stock
acquired under the Company Option within ten (10) days of the exercise of the
Company Option. If the Company fails to pay, the shares of Company Stock
proposed to be sold shall be released from this Agreement and may be sold or
transferred at any time thereafter without regard to the terms hereof. If the
Company fails to exercise the Company Option or notifies the Shareholder of its
intent to waive its right to exercise the Company Option, the Shareholder
proposing to transfer or sell the shares of Company Stock is free to transfer or
sell such shares of Company Stock for not less than the purchase price and for
not more favorable terms to the purchaser than as were offered to the Company in
the Company Option for a period of sixty (60) days thereafter. Upon the
expiration of such sixty (60) day period, a Shareholder wishing to make such
sale or disposition again must comply with this Section 3(b).
(c) Any purported sale or transfer of Company Stock not in compliance
with Section 3 of this Agreement during the term hereof shall be void and of no
force or effect and the Company shall not be required to transfer any Company
Stock to the new purported owner or recognize it as a Shareholder for any
purpose. The Company shall include the legend set forth in Section 3(d) on all
certificates representing shares of Company Stock subject to this Agreement and
shall notify the Transfer Agent of the Company Stock of this restriction.
(d) Any certificates nor or hereafter issued by the Company to
represent shares of Company Stock which are subject to this Agreement shall be
endorsed with a legend reading substantially as follows:
Any sale, assignment, transfer or other disposition of Common Stock
represented by this certificate is restricted by and subject to the
terms and provisions of the Shareholders Agreement, dated __________,
2000. Any transferee, including a lender, taking the Common Stock
represented by this Certificate as collateral, is subject to all the
restrictions and duties contained in such Agreement. A copy of such
Agreement is on file with the Secretary of the Company. By acceptance
of this Certificate the holder hereof agrees to be bound by the terms
of such Agreement.
4
<PAGE>
4. Representations; Covenants.
--------------------------
(a) The Company represents and warrants that it has the requisite
corporate power to enter into this Agreement, that it has duly authorized,
executed and delivered this Agreement and that the Agreement constitutes the
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
(b) Each Shareholder represents and warrants that:
(i) he or it has the requisite power to enter into this
Agreement, that he or it has duly executed this Agreement and that this
Agreement constitutes the valid and binding obligation of the Shareholder,
enforceable against the Shareholder and his or its Affiliates in accordance
with its terms; and
(ii) except for the Shareholder and his or its Affiliates,
no other Person, corporation, entity or association is, or may be deemed to
be, a member of a Group which includes the Shareholder or any of his or its
Affiliates with respect to the Company Stock.
(c) Each Shareholder agrees that (i) he or it will not permit
any Company Stock to be owned by any Affiliates of the Shareholder unless either
(a) the Shareholder owns at least a majority of the outstanding securities of
such Affiliate which are ordinarily entitled to vote for the election of
directors or others performing similar functions with respect to such Affiliate
or (B) with respect to an Affiliate that is a trust or partnership, the
Shareholder otherwise controls, or has the authority to control, such Affiliate
in the Shareholder's capacity as a trustee or general partner, as the case may
be, of such Affiliate, and (ii) that he or it will not sell or otherwise dispose
of any voting securities of any Affiliate of the Shareholder which owns Company
Stock so as to reduce its actual or potential (assuming the conversion of any
such convertible securities) ownership of the outstanding voting securities of
such Affiliate to below 50.1%, unless either (A) prior thereto the shares of
Company Stock held by such entity are transferred to the Shareholder or one or
more of his or its Affiliates in which the Shareholder owns at least a majority
of the outstanding securities which are ordinarily entitled to vote for the
election of directors or other performing similar functions with respect to such
Affiliate or (B) with respect to an Affiliate that is a trust or partnership,
such transfer will not result in the loss of control, or the loss of the
authority to control, such Affiliate in the Shareholder's capacity as a trustee
or general partner, as the case may be, of such Affiliate.
5. Term of Agreement; Amendments.
-----------------------------
(a) This Agreement shall be in full force and effect for a term
of five (5) years following the Effective Time (as defined in the Merger
Agreement), which five (5) year period shall constitute the term of this
Agreement. This Agreement shall be binding on the parties hereto and their
successors and assigns.
5
<PAGE>
(b) Neither this Agreement nor any provision hereof may be
amended or waived orally or in writing, except by a writing signed by the
parties hereto and approved by two-thirds of the Board;
6. Termination. This Agreement may be terminated under Section 5(a)
-----------
or upon the mutual written agreement of all the parties hereto.
7. Specific Enforcement. The Shareholders acknowledge and agree
--------------------
that the Company and its Shareholders (including the Shareholders executing this
Agreement) would be irreparably injured in the event that any provision of this
Agreement is breached or not performed by the Shareholders and their Affiliates
in accordance with its specific terms. Accordingly, it is agreed that each
party shall be entitled to temporary and permanent injunctive relief with
respect to each and any breach or purported repudiation of this Agreement by the
other and to specifically enforce strict adherence to this Agreement and the
terms and provisions hereof against the other in any action instituted in a
court of competent jurisdiction, in addition to any other remedy which such
aggrieved party may be entitled to obtain. Moreover, in the event of the breach
of any of the provisions of this Agreement, timeliness in obtaining relief is of
the essence.
8. Miscellaneous.
-------------
(a) Notices. All notices and other communications provided for
-------
herein shall be in writing and shall be delivered by hand, by facsimile,
telecopied or sent by certified or registered mail, return receipt requested,
postage prepaid, addressed in the manner set forth below (or in such other
manner for a party as shall be specified in a notice given in accordance with
this Section 8(a)):
(i) if to the Company, to:
Leo E. Woodard
119 North Robinson
Suite 600
Oklahoma City, Oklahoma 73102
Phone: (405) 232-3222
Fax: (405) 232-2226
(ii) if to the Shareholders, to such Shareholder's most
current address on record with the Company.
All such notices shall be conclusively deemed to be received and shall be
effective, if sent by facsimile, hand delivery or telecopied, upon receipt, or
if sent by registered or certified mail, on the fifth day after the day on which
such notice was mailed.
6
<PAGE>
(b) Expenses. Except as otherwise provided herein, all costs and
--------
expenses incurred in connection with this Agreement shall be paid by the party
incurring such costs and expenses.
(c) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and permitted assigns of each of
the parties hereto. This Agreement may not be assigned by the Shareholder
without the prior written consent of all the parties hereto.
(d) Third Party Beneficiaries. Nothing expressed or implied in this
-------------------------
Agreement is intended or shall be construed to give any Person, other than the
parties hereto and their respective successors and assigns, any legal or
equitable right, remedy or claim under or in respect of this Agreement.
(e) Entire Agreement. This Agreement is intended by the parties to
----------------
be a final expression of their Agreement and a complete and exclusive statement
of their Agreement and understanding 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.
(f) Severability. In the event that any provision contained herein,
------------
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected, it being
intended that all of the rights and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
(g) Waiver; Remedies. No delay on the part of any party hereto in
----------------
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party hereto of any right,
power or privilege hereunder operate as a waiver of any other right, power or
privilege hereunder, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
(h) Attorneys' Fees. In any action at law or in equity brought to
---------------
enforce or interpret any provision of this Agreement, the prevailing party shall
be entitled to recover reasonable attorneys' fees, costs and disbursements, in
addition to any other relief to which such party may be entitled.
(i) Waiver of Jury Trial. The Company and the Shareholder hereby
--------------------
irrevocably waive all right to trial by jury in any action or proceeding
(whether based on contract, tort or otherwise) arising out of or relating to
this Agreement.
7
<PAGE>
(j) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oklahoma applicable to agreements
made and to be performed entirely within that State.
(k) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(l) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
(m) Action as Director. Notwithstanding the restrictions contained
------------------
in this Agreement, actions taken by the Shareholders as members of the Board
pursuant to his responsibilities in such capacity shall not be deemed to violate
this Agreement.
(n) Gender and Number. Whenever required by the context, as used in
-----------------
this Agreement, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement in their individual capacity or caused it to be duly executed by their
respective authorized signatories thereunto duly authorized as of the date first
written above.
COMPANY: CANAAN ENERGY CORPORATION
By: _________________________________________
Name: Leo E. Woodard
Title: Chairman and Chief Executive Officer
SHAREHOLDERS:
_____________________________________________
Leo E. Woodard
_____________________________________________
John Penton
_____________________________________________
Michael S. Mewbourn
8
<PAGE>
_____________________________________________
Thomas H. Henson
DUNNING FAMILY LIMITED PARTNERSHIP
By: Dunning Management, L.L.C.
By:
_____________________________________________
Richard R. Dunning, Manager
_____________________________________________
Larry D. Hartzog
_____________________________________________
Michael C. Black, as Trustee of the Michael C.
Black Revocable Trust
_____________________________________________
Anthony Lasuzzo
9
<PAGE>
Exhibit 10.5(a)
CREDIT AGREEMENT
BETWEEN
INDIAN OIL COMPANY
an Oklahoma corporation
AND
BANK ONE, OKLAHOMA, N.A.
DATED: DECEMBER 22, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I................................................................................... 1
1 DEFINITIONS..................................................................... 1
1.1 Terms Defined Above....................................................... 1
1.2 Additional Defined Terms.................................................. 1
1.3 Undefined Financial Accounting Terms...................................... 12
1.4 References................................................................ 12
ARTICLE II.................................................................................. 12
2 AMOUNT AND TERMS OF CREDIT FACILITY............................................. 12
2.1 Revolving Line of Credit.................................................. 12
2.2 Manner of Borrowing....................................................... 12
2.3 Use of Proceeds........................................................... 13
2.4 Note...................................................................... 13
2.5 Interest.................................................................. 13
2.6 Interest Option........................................................... 14
2.7 Repayment of Advances and Interest Thereon................................ 15
2.8 Advances and Payments on Note............................................. 15
2.9 Borrowing Base Determinations and Monthly Borrowing Base Reductions....... 15
2.10 Voluntary Prepayments..................................................... 17
2.11 Fees...................................................................... 17
2.12 Advances to Satisfy Obligations of Borrower............................... 17
2.13 Pledge of and Security Interest in Accounts and Right of Offset or Lien... 17
2.14 General Provisions Relating to Interest................................... 18
2.15 Letters in Lieu of Transfer Orders........................................ 19
2.16 Power of Attorney......................................................... 19
ARTICLE III................................................................................ 19
3 COLLATERAL AND OTHER FORMS OF CREDIT ENHANCEMENT................................ 19
3.1 Mortgaged Properties...................................................... 19
3.2 New Properties............................................................ 20
3.3 MidFirst Collateral....................................................... 20
3.4 Subordination Agreements.................................................. 20
3.5 Guaranty.................................................................. 20
3.6 Release of MidFirst Collateral and Cibola Corporation Guaranty............ 20
ARTICLE IV.................................................................................. 21
4 CONDITIONS...................................................................... 21
4.1 Receipt of Loan Documents and Other Items................................. 21
4.2 Each Advance Under the Note............................................... 23
ARTICLE V................................................................................ 24
5 REPRESENTATIONS AND WARRANTIES.................................................. 24
5.1 Due Authorization and Existence........................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.2 Consents, Conflicts and Creation of Liens................................. 25
5.3 Valid and Binding Obligations............................................. 25
5.4 Title to Assets and Oil and Gas Properties................................ 25
5.5 Scope and Accuracy of Financial Statements................................ 25
5.6 Liabilities, Litigation, and Restrictions................................. 25
5.7 Authorizations and Consents............................................... 26
5.8 Compliance with Laws...................................................... 26
5.9 Proper Filing of Tax Returns and Payment of Taxes Due..................... 26
5.10 Environmental Laws........................................................ 26
5.11 Compliance with Federal Reserve Regulations............................... 27
5.12 Investment Company Act Compliance......................................... 27
5.13 Public Utility Holding Company Act Compliance............................. 27
5.14 Refunds................................................................... 27
5.15 Gas Contracts............................................................. 27
5.16 No Material Misstatements................................................. 27
5.17 Casualties or Taking of Property.......................................... 27
5.18 Locations of Business, Offices, and Property.............................. 28
5.19 Security Instruments...................................................... 28
5.20 Subsidiaries.............................................................. 28
5.21 Guarantors................................................................ 28
5.22 Assigned Debt............................................................. 28
ARTICLE VI.................................................................................. 28
6 AFFIRMATIVE COVENANTS........................................................... 28
6.1 Maintenance and Access to Records......................................... 28
6.2 Quarterly Financial Statements............................................ 29
6.3 Annual Financial Statements............................................... 29
6.4 Reserve Reports........................................................... 29
6.5 Monthly Production Report................................................. 30
6.6 Notices of Certain Events................................................. 30
6.7 Letters in Lieu of Transfer Orders........................................ 31
6.8 Division Orders........................................................... 31
6.9 Additional Information.................................................... 31
6.10 Compliance with Laws...................................................... 32
6.11 Payment of Assessments and Charges........................................ 32
6.12 Hazardous Substances Indemnification...................................... 32
6.13 Further Assurances........................................................ 33
6.14 Initial Fees and Expenses of Lender and/or Legal Counsel to Lender........ 33
6.15 Subsequent Fees and Expenses.............................................. 33
6.16 Maintenance and Inspection of Tangible Properties......................... 33
6.17 Maintenance of Insurance and Evidence Thereof............................. 34
6.18 Payment of Note and Performance of Obligations............................ 34
6.19 Operation of Oil and Gas Properties....................................... 34
6.20 Depository Accounts....................................................... 34
6.21 Existing Business......................................................... 34
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
6.22 MidFirst Obligation....................................................... 34
6.23 Cash Settlement........................................................... 34
6.24 MidFirst Debt............................................................. 34
6.25 Equity Offering........................................................... 34
6.26 Satisfaction of MidFirst Debt............................................. 34
ARTICLE VII................................................................................ 35
7 FINANCIAL COVENANTS............................................................. 35
7.1 Current Ratio............................................................. 35
7.2 Debt Service Coverage Ratio............................................... 35
7.3 Tangible Net Worth........................................................ 35
ARTICLE VIII................................................................................ 35
8 NEGATIVE COVENANTS.............................................................. 35
8.1 Indebtedness.............................................................. 35
8.2 Contingent Obligations.................................................... 35
8.3 Liens..................................................................... 36
8.4 Sales of Assets........................................................... 36
8.5 Loans or Advances......................................................... 36
8.6 Merger and Consolidation.................................................. 36
8.7 Dividends and Distributions............................................... 36
8.8 Cancellation of Insurance................................................. 36
8.9 Changes in Structure...................................................... 36
8.10 Transactions with Affiliates.............................................. 36
8.11 Organization or Acquisition of Subsidiaries............................... 37
8.12 Change in Management...................................................... 37
8.13 Limitation on Hedging Activities.......................................... 37
8.14 Sale/Leaseback Transactions............................................... 37
8.15 MidFirst Debt............................................................. 37
ARTICLE IX.................................................................................. 37
9 EVENTS OF DEFAULT............................................................... 37
9.1 Enumeration of Events of Default.......................................... 37
9.2 Remedies.................................................................. 40
ARTICLE X................................................................................... 41
10 MISCELLANEOUS................................................................... 41
10.1 Transfers and Participations.............................................. 41
10.2 Survival of Representations, Warranties and Covenants..................... 41
10.3 Notices and Other Communications.......................................... 41
10.4 Parties in Interest....................................................... 42
10.5 Rights of Third Parties................................................... 42
10.6 Articles and Sections..................................................... 42
10.7 Number and Gender......................................................... 42
10.8 Renewals and Extensions................................................... 42
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
10.9 No Waiver: Rights Cumulative.............................................. 42
10.10 Incorporation of Exhibits................................................. 43
10.11 Survival Upon Unenforceability............................................ 43
10.12 Amendments or Modifications............................................... 43
10.13 Controlling Provision Upon Conflict....................................... 43
10.14 Time, Place and Method of Payments........................................ 43
10.15 Time of Essence........................................................... 43
10.16 Disposition of Collateral................................................. 43
10.17 GOVERNING LAW............................................................. 44
10.18 Jurisdiction and Venue.................................................... 44
10.19 Entire Agreement.......................................................... 44
</TABLE>
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, made and entered into this 22nd day of December,
1997 by and between INDIAN OIL COMPANY, an Oklahoma corporation ("Borrower"),
and BANK ONE, OKLAHOMA, N.A. (the "Lender"), evidences the arrangements
concerning certain advances of funds to the Borrower by the Lender.
W I T N E S S E T H:
WHEREAS, Borrower and Lender desire to enter into a $50,000,000.00 loan
transaction in order to (i) refinance Borrower's existing debt at MidFirst Bank;
(ii) finance Borrower's acquisition of certain oil and gas reserves from Sonat;
(iii) finance drilling and development expenditures; and (iv) provide funding
for such other corporate purposes permitted by Lender in its sole discretion.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree as follows:
ARTICLE I
---------
1 DEFINITIONS
-----------
1.1 Terms Defined Above. As used in this Agreement, the terms "Borrower"
------------------- --------
and "Lender" shall have the meaning assigned to such terms hereinabove.
------
1.2 Additional Defined Terms. As used in this Agreement, each of the
------------------------
following terms shall have the meaning assigned thereto in this Section, unless
the context otherwise requires:
"Adjusted LIBOR Rate" shall mean a rate per annum calculated by Lender
-------------------
(rounded to the nearest .000%) determined on a daily basis equal to the LIBOR
Rate plus the Applicable Percentage.
"Advance" shall mean an advance of funds made by the Lender to the
-------
Borrower under this Agreement.
"Advance Ratio" shall mean that ratio determined by dividing the Loan
-------------
Balance plus any Letters of Credit issued by Lender by the then existing
Effective Borrowing Base.
"Affiliate" shall mean any person who has a relationship with the
---------
Borrower or any Guarantor whereby either such person or the Borrower or any
Guarantor directly or
<PAGE>
indirectly controls or is controlled by or is under common control with the
other, or holds or beneficially owns five percent (5%) or more of the equity
interest in the other or five percent (5%) or more of any class of voting
securities of the other. The term "Affiliates" also includes all officers and
----------
directors of the Borrower.
"Agreement" shall mean this Credit Agreement including all exhibits
---------
and schedules hereto, as the same may be amended, modified, supplemented or
restated from time to time according to the terms hereof.
"Applicable Percentage" shall mean for any day, the margin of interest
---------------------
over the LIBOR Rate that is applicable dependent upon the Interest Option
selected by Borrower. The Applicable Percentage is subject to upwards
adjustment based upon the Advance Ratio as follows (rounded to the nearest
percentage point):
Advance Ratio Applicable Percentage
------------- ---------------------
Greater than or equal to 51% 2.250%
Greater than or equal to 31%, but less than 51% 2.125%
Less than 31% 2.000%
The Applicable Percentage shall be adjusted only upon each Request for Advance
and upon each Rollover Notice. Neither the Advance Ratio nor Applicable
Percentage shall be recalculated during an Interest Period.
"Available Commitment" shall mean, at any time, an amount equal to the
--------------------
remainder, if any, of (a) the lesser of the Commitment Amount or the Effective
Borrowing Base, minus (b) the Loan Balance at such time.
-----
"Base Rate" shall mean, at any time, an interest rate per annum equal
---------
to the Bank One Prime Rate, being the rate then most recently announced or
published by Bank One, Oklahoma, N.A. as its "Prime" or "Base" rate of interest
for the guidance of its lending officers, which rate might or might not be the
lowest or best interest rate charged by Lender, and which Base Rate shall change
upon any change in such announced or published Bank One Prime Rate, all without
notice to the Borrower.
"Borrowing Base" shall mean the maximum amount of credit the Lender is
--------------
willing to lend against Borrower's Oil and Gas Properties as established from
time to time by the Lender based upon its evaluation of the Borrower's Oil and
Gas Properties as provided in Section 2.9 and which amount shall not exceed the
-----------
Commitment Amount; provided, however, in no event shall Lender be obligated to
increase the Borrowing Base beyond the amount thereof as it exists on the
Closing Date unless such an increase has been formally approved by Lender in its
sole discretion.
2
<PAGE>
"Borrowing Base Determination" shall mean a determination of the
----------------------------
Borrowing Base made by the Lender pursuant to Section 2.9.
-----------
"Business Day" shall mean a day other than a Saturday, Sunday or legal
------------
holiday for commercial banks under the laws of the State of Oklahoma.
"Closing Date" shall mean the effective date of this Agreement.
------------
"Collateral" shall mean the Mortgaged Properties, and any other
----------
Property of the Borrower, or any other Person, wherever located and whether now
owned or existing or hereafter acquired or arising, that are now or at any time
used or intended by the Borrower and the Lender to be subject to the Liens
created in the Security Instruments or otherwise as security for the payment or
performance of all or any portion of the Obligations, including, without
limitation, products and proceeds existing in connection with any of the
foregoing.
"Commitment" shall mean the obligation of the Lender, subject to
----------
applicable provisions of this Agreement, to make Advances to or for the benefit
of the Borrower pursuant to Article II.
----------
"Commitment Amount" shall mean the initial amount of up to but not to
-----------------
exceed $50,000,000.00.
"Commitment Fees" shall mean the fees payable to the Lender by the
---------------
Borrower pursuant to Section 2.11.
------------
"Commitment Period" shall mean the period from and including the
-----------------
Closing Date to, but not including, the Maturity Date.
"Compliance Certificate" shall mean each certificate, substantially in
----------------------
the form attached hereto as Exhibit C, executed by a Responsible Officer of the
---------
Borrower (or Guarantor as the case may be) and furnished to the Lender from time
to time in accordance with this Agreement.
"Contested in Good Faith" shall mean a matter (a) which is being
-----------------------
contested in good faith by or on behalf of any Person (b) in which foreclosure,
distraint, sale, forfeiture, levy, execution or other similar proceedings have
not been initiated or have been stayed and continue to be stayed, and (c) in
which a good faith contest will not materially detract from the value of the
Collateral, materially jeopardize the rights of the Lender or the Borrower with
respect thereto, materially interfere with the operation by the Borrower of its
business, or otherwise have a Material Adverse Effect.
"Contingent Obligation" shall mean, as to any Person, any obligation
---------------------
of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other
3
<PAGE>
obligations of any other Person (for purposes of this definition, a "primary
-------
obligation") in any manner, whether directly or indirectly, including, without
- ----------
limitation, any obligation of such Person, regardless of whether such obligation
is contingent, (a) to purchase any primary obligation or any Property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any primary obligation, or (ii) to
maintain working capital or equity capital of any other Person in respect of any
primary obligation, or otherwise to maintain the net worth or solvency of any
other Person, (c) to purchase Property, securities or services primarily for the
purpose of assuring the owner of any primary obligation of the ability of the
Person primarily liable for such primary obligation to make payment thereof, or
(d) otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof, with the amount of any Contingent
Obligation being deemed to be equal to the stated or determinable amount of the
primary obligation in respect of which such Contingent Obligation is made or, if
not stated or determinable, the maximum reasonably anticipated liability in
respect thereof as determined by such Person in good faith.
"Current Assets" and "Current Liabilities" shall mean, at any time,
-------------- -------------------
all assets or liabilities, respectively, that should, in accordance with GAAP,
be classified as current assets or current liabilities, respectively, on a
balance sheet of the Borrower.
"Default" shall mean any event or occurrence which with the lapse of
-------
time or the giving of notice or both would become an Event of Default.
"Default Rate" shall mean a per annum variable interest rate equal to
------------
the Base Rate plus "three" percent (3%), calculated on the basis of a year of
360 days and actual number of days elapsed (including the first day but
excluding the last day), but in no event exceeding the Highest Lawful Rate.
"Effective Borrowing Base" shall mean, for any point in time, the then
------------------------
existing Borrowing Base minus the sum of all Monthly Borrowing Base Reductions
which have occurred prior to or as of said date.
"Environmental Complaint" shall mean any written complaint, order,
-----------------------
directive, claim, citation, notice of environmental report or investigation or
other notice by any Governmental Authority with respect to (a) air emissions,
(b) spills, releases or discharges to soils or any improvements located thereon,
surface water, groundwater or the sewer, septic system or waste treatment,
storage or disposal systems servicing any Property of the Borrower, (c) solid or
liquid waste disposal, (d) either the use, generation, storage, transportation
or disposal of any Hazardous Substance, or (e) other environmental, health or
safety matters affecting any Property of the Borrower or having a Material
Adverse Effect upon the business conducted thereon.
"Environmental Laws" shall mean (a) the following federal laws as they
------------------
may be cited, referenced and amended from time to time: the Clean Air Act, the
Clean Water Act, the
4
<PAGE>
Safe Drinking Water Act, the Water Pollution Control Act, the Environmental
Pesticides Act, the Comprehensive Environmental Response, Compensation and
Liability Act, the Endangered Species Act, the Resource Conservation and
Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials
Transportation Act, the Superfund Amendments and Reauthorization Act, and the
Toxic Substances Control Act, (b) any and all equivalent environmental statutes
of any state in which Property of the Borrower is situated, as they may be
cited, referenced and amended from time to time, (c) any so-called federal,
state or local "Superfund" or "Superlien" statutes, (d) any rules or regulations
promulgated under or adopted pursuant to the above federal and state laws, and
(e) any other equivalent federal, state or local statute or any requirement,
rule, regulation, code, ordinance or order adopted pursuant thereto, including,
without limitation, those relating to the generation, transportation, treatment,
storage, recycling, disposal, handling or release of Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time, and the regulations thereunder and
interpretations thereof.
"Event of Default" shall mean any of the events specified in Article
---------------- -------
IX.
- --
"Financial Statements" shall mean statements of the financial
--------------------
condition of the Borrower as at the point in time and for the period indicated
and consisting of at least a balance sheet, statement of income, and statement
of contingent obligations, all of which shall be prepared in accordance with
GAAP, consistently applied and when applicable in comparative form with respect
to the corresponding period of the preceding fiscal period or as otherwise
required by Lender.
"GAAP" shall mean generally accepted accounting principles established
----
by the Financial Accounting Standards Board or the American Institute of
Certified Public Accountants and in effect in the United States from time to
time during the term of this Agreement.
"Governmental Authority" shall mean any nation, country, commonwealth,
----------------------
territory, government, state, county, parish, municipality or other political
subdivision and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.
"Guarantor" shall refer to Cibola Corporation, a Wyoming corporation.
---------
"Guaranty Agreement" shall refer to the limited guaranty agreement to
------------------
be executed by Guarantor in substantially the form of Exhibit B, attached
hereto.
"Hazardous Substances" shall mean flammables, explosives, radioactive
---------------------
materials, hazardous wastes, asbestos or any material containing asbestos,
polychlorinated biphenyls (PCB'S), toxic substances or related materials,
petroleum and petroleum products
5
<PAGE>
and associated oil or natural gas exploration, production and development wastes
or any substances defined as "hazardous substances," "hazardous materials",
"hazardous wastes" or "toxic substances" under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Superfund Amendments
and Reauthorization Act, as amended, the Hazardous Materials Transportation Act,
as amended, the Resource Conservation and Recovery Act, as amended, the Toxic
Substances Control Act, as amended, or any other law or regulation now or
hereafter enacted or promulgated by any Governmental Authority, including,
without limitation, those elements or compounds which are contained in the list
of hazardous substances adopted by the United States Environmental Protection
Agency and the list of toxic pollutants designated by Congress or the
Environmental Protection Agency or under any Environmental Law.
"Highest Lawful Rate" shall mean the maximum non-usurious interest
-------------------
rate permissible under applicable laws of the State of Oklahoma or those of the
United States of America applicable to the Lender, whichever authorizes the
greater rate.
"Indebtedness" shall mean, with respect to any Person, without
------------
duplication, (a) all liabilities which would appear on a balance sheet of such
Person, prepared in accordance with GAAP, (b) all obligations of such Person
evidenced by bonds, debentures, promissory notes or such similar evidences of
indebtedness, (c) all other indebtedness of such Person for borrowed money, and
(d) all obligations of others, to the extent any such obligation is secured by a
Lien, except a Permitted Lien, on the assets of such Person (whether or not such
Person has assumed or become liable for the obligation secured by such Lien).
"Insolvency Proceeding" shall mean application (whether voluntary or
---------------------
instituted by another Person) for or the consent to the appointment of a
receiver, trustee, conservator, custodian or liquidator of any Person or of all
or a substantial part of the Property of such Person, or the filing of a
petition (whether voluntary or instituted by another Person) commencing a case
under Title 11 of the United States Bankruptcy Code, seeking liquidation,
reorganization or rearrangement or taking advantage of any bankruptcy,
insolvency, debtor's relief or other similar Law of the United States, the State
of Oklahoma or any other jurisdiction.
"Interest Option" shall have the meaning assigned to such term in
---------------
Section 2.6.
- -----------
"Interest Period" shall mean with respect to any LIBOR Tranche
---------------
requested by Borrower:
(A) initially, the period commencing on the Closing Date with respect
to such LIBOR Tranche and ending one (1) month or three months (3)
thereafter; and
6
<PAGE>
(B) thereafter, each period commencing on the last day of the most
recently preceding Interest Period applicable to such LIBOR Tranche and
ending one (1) or three (3) months thereafter; and
(C) if any Interest Period pertaining to a LIBOR Tranche would
otherwise end on a day which is not a LIBOR Business Day, such Interest
Period shall be extended to the next succeeding LIBOR Business Day; and
(D) if, with respect to any Advance or LIBOR Tranche, Borrower shall
fail to give due notice as provided in Sections 2.2 or 2.6(b), as the case
----------------------
may be, Borrower shall be deemed to have selected the Base Rate to be
applicable to any portion of the Advance not constituting a part of a LIBOR
Tranche; and
(E) no Interest Period shall end after the Maturity Date.
"Law(s)" shall mean all applicable statutes, laws, ordinances, rules,
------
rulings, interpretations, regulations, judgments, requirements, governmental
authorizations (including licenses, permits, franchises and other governmental
consents necessary for the ownership or operation of Property), orders, writs,
injunctions or decrees (or interpretations of any of the foregoing) of any
Governmental Authority or Tribunal.
"LIBOR Business Day" shall mean a Business Day on which dealings in
------------------
dollars are conducted in the London Interbank Market.
"LIBOR Rate" shall mean, with respect to each LIBOR Tranche and with
----------
respect to the related Interest Period, the rate of interest per annum
determined by Lender in accordance with its customary general practices to be
representative of the rates at which deposits of dollars are offered to Lender
at approximately 9:00 a.m. Oklahoma City, Oklahoma time two Business Days prior
to the first day of such Interest Period (by prime banks in the London Interbank
Market which have been selected by Lender in accordance with its customary
general practices and which are published in the "Money Rates" section of The
Wall Street Journal (Southwest Edition) on the date of the Request for Advance).
"LIBOR Tranche" shall mean, with respect to any Interest Period, any
-------------
portion of the Loan which bears interest at the Adjusted LIBOR Rate for such
Interest Period.
"Lien" shall mean any lien, mortgage, security interest, tax lien,
----
pledge, conditional sale or title retention arrangement, or any other interest
in or encumbrance upon, property, which is designed to secure the repayment of
Indebtedness, whether arising by agreement, under any Law or otherwise.
"Litigation" shall mean any proceeding, claim, lawsuit, and/or
----------
investigation conducted by or before any Tribunal.
7
<PAGE>
"Loan Balance" shall mean, at any time, the outstanding principal
------------
balance of the Note.
"Loan Documents" shall mean this Agreement, the Note, the Guaranty
--------------
Agreement, the Security Instruments, and all other documents and instruments now
or hereafter delivered pursuant to the terms of or in connection with this
Agreement and all renewals and extensions of, or amendments or supplements to,
or restatements of any or all of the foregoing from time to time in effect.
"Material Adverse Effect" shall mean any set of circumstances or
-----------------------
events which (a) would have any material adverse effect upon the validity or
enforceability of any of the Loan Documents, (b) is or could reasonably be
expected to become material and adverse to the business, condition (financial or
otherwise), operations or prospects of the Borrower, (c) could reasonably be
expected to materially impair the Borrower's ability to fulfill its obligations
under the terms of the Loan Documents, or (d) causes a Default or an Event of
Default.
"Maturity Date" shall be January 15, 2000.
-------------
"MidFirst" shall refer to MidFirst Bank, a federally chartered savings
--------
association.
"MidFirst Collateral" shall have that meaning set forth at Section
-------------------
3.3.
"MidFirst Debt" shall mean Borrower's Indebtedness to MidFirst arising
-------------
from the loan documents executed on even date herewith in an amount not to
exceed $12,000,000.00.
"Monthly Borrowing Base Reduction" shall mean those certain monthly
--------------------------------
reductions, if necessary, to the Borrowing Base established or adjusted, as the
case may be, pursuant to Section 2.9(b), by Lender in its total discretion based
upon Lender's projection, at any point in time, of the Borrowing Base six months
in the future. No such reductions shall occur until, at the earliest, June 1,
1998.
"Mortgaged Properties" shall mean those Oil and Gas Properties of the
--------------------
Borrower and its subsidiaries, subject to perfected first-priority Liens
pursuant to the Security Instruments in favor of the Lender, subject only to
Permitted Liens, mortgaged, pledged and assigned as security for the Obligations
and as further described on Exhibit F appended hereto.
"New Properties" shall mean Oil and Gas Properties acquired or
--------------
developed by Borrower.
"Note" shall mean the promissory note made by the Borrower in the
----
original face amount of $50,000,000.00 in the form attached hereto as Exhibit A
---------
with any blanks
8
<PAGE>
completed in conformity herewith, together with any and all renewals, extensions
for any period, increases and rearrangements thereof.
"Obligations" shall mean, without duplication, (a) all Indebtedness
-----------
evidenced by the Note, (b) the obligation of the Borrower for the payment of the
Commitment Fees, and (c) all other obligations and liabilities of the Borrower
to the Lender, now existing or hereafter incurred, under, arising out of or in
connection with any Loan Document, and with respect to all of the foregoing to
the extent that any of the same includes or refers to the payment of amounts
deemed or constituting interest, only so much thereof as shall have accrued,
been earned and remains unpaid at each relevant time of determination.
"Oil and Gas Properties" shall mean fee, leasehold or other interests
----------------------
in or under mineral estates or oil, gas and other liquid or gaseous hydrocarbon
leases with respect to Properties situated in the United States or offshore from
any State of the United States, including, without limitation, overriding
royalty and royalty interests, leasehold estate interests, net profits
interests, production payment interests and mineral fee interests, together with
contracts executed in connection therewith and all tenements, hereditaments,
appurtenances and Properties appertaining, belonging, affixed or incidental
thereto.
"Permitted Liens" shall mean (a) Liens for Taxes incurred in the
---------------
course of business (which are not yet due or are being Contested in Good Faith);
(b) Liens in connection with workers' compensation, unemployment insurance or
other social security (other than Liens created by Section 4068 of ERISA), old-
age pension or public liability obligations which are not yet due or are being
Contested in Good Faith; (c) Liens in favor of vendors, carriers, warehousemen,
repairmen, mechanics, workmen, materialmen, construction or similar Liens
arising by operation of Law in the ordinary course of business in respect of
obligations which either do not in the aggregate materially detract from the
value of Borrower's interest in the Property or materially impair the use
thereof in the operation of Borrower's business; or (ii) are not yet due or are
being Contested in Good Faith; (d) Liens of operators and non-operators under
joint operating agreements arising in the ordinary course of the business of the
Borrower to secure amounts owing, which amounts are not yet due and will be paid
in accordance with the Borrower's customary business practices, as same exist on
the date hereof or are being Contested in Good Faith; (e) Liens under production
sales agreements, division orders, operating agreements and other agreements
customary in the oil and gas business for processing, producing and selling
hydrocarbons; (f) easements, rights of way, restrictions and other similar
encumbrances, and minor defects in the chain of title which are customarily
accepted in the oil and gas financing industry, none of which interfere with the
ordinary conduct of the business of the Borrower or materially detract from the
value or use of the Property to which they apply; (g) Liens of record under
terms and provisions of the leases, unit agreements, assignments and other
transfer of title documents in the chain of title under which the Borrower
acquired the relevant Property; (h) other Liens existing as of the Closing Date
and disclosed on Exhibit D attached hereto under the heading "Permitted Liens";
--------- ---------------
(i) Liens created in favor of the Lender and other Liens expressly permitted
under the Security
9
<PAGE>
Instruments; (j) liens arising in the ordinary course of business from pledges
or deposits to secure public or statutory obligations, or deposits to secure (or
in lieu of) surety, stay, appeal or customs bonds; encumbrances consisting of
easements, zoning restrictions, or other restrictions on the use of Property,
provided that such encumbrances do not materially impair the use of such
Property for the purposes intended, and none of which are violated by existing
or proposed structure or land use, and such other material encumbrances as have
been disclosed to and approved by Lender in writing; and (k) good faith deposits
in connection with bids, tenders, contracts or leases, performance or other
similar bonds.
"Person" shall mean any individual, corporation, partnership, joint
------
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof, or any other form of
entity.
"Principal Office" shall mean the principal office of the Lender in
----------------
Oklahoma City, Oklahoma County, Oklahoma presently located at 100 N. Broadway,
Oklahoma City, Oklahoma 73102.
"Property" shall mean any interest in any kind of property or asset,
--------
whether real, personal or mixed, tangible or intangible.
"Release of Hazardous Substances" shall mean any emission, spill,
-------------------------------
release, disposal or discharge, except in accordance with a valid permit,
license, certificate or approval of the relevant Governmental Authority, and
notice of which is required to be given thereof by the person responsible for
such emission, spill, release, disposal or discharge to a Governmental Authority
of any Hazardous Substance into or upon (a) the air, (b) soils or any
improvements located thereon, (c) surface water or groundwater, or (d) the
sewer, septic system or waste treatment, storage or disposal system servicing
any Property of the Borrower.
"Request for Advance" shall mean each request by a Responsible Officer
-------------------
of the Borrower to the Lender for an Advance pursuant to Article II each of
----------
which shall:
(A) specify the amount and the date of the Advance (which shall be a
Business Day); and
(B) be delivered to the Lender no later than 11:00 a.m., Central
Standard or Daylight Savings Time, as the case may be, on the Business Day
preceding the Business Day that the requested Advance is to be made.
"Requirement of Law" shall mean, as to any Person, the certificate or
------------------
articles of incorporation and by-laws or other organizational or governing
documents of such Person, and any applicable Law, treaty, ordinance, order,
judgment, rule, decree or regulation or determination of any Tribunal or other
Governmental Authority, including, without limitation, rules, regulations and
orders and requirements for permits, licenses, registrations, approvals
10
<PAGE>
or authorizations, in each case as such now exist or may be hereafter amended
and are applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject.
"Reserve Report" shall mean each report delivered to the Lender by the
--------------
Borrower pursuant to Section 6.4.
-----------
"Responsible Officer" shall mean, as to Borrower, its President, or
-------------------
such other person as shall be designated in writing to the Lender by Borrower.
"Rollover Notice" shall have that meaning set forth at Section 2.6(c).
--------------- --------------
"Security Instruments" shall mean the security instruments executed
--------------------
and delivered in satisfaction of the condition set forth in Section 3.1, and all
-----------
other documents and instruments at any time executed as security for all or any
portion of the Obligations, as the same may be amended from time to time.
"Subsidiary" shall mean, as to any Person, a corporation of which
----------
shares of stock having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation are at the time owned,
or the management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by such Person.
"Superfund Site" shall mean those sites listed on the Environmental
--------------
Protection Agency National Priority List (NPL) and eligible for remedial action,
or any comparable state registry or list in any state of the United States.
"Tangible Net Worth" shall mean, on any date as of which the amount
------------------
thereof is to be determined, the sum of the following for Borrower calculated in
accordance with GAAP: (i) the amount of stated capital (less cost of treasury
shares) plus (ii) the amount of surplus and retained earnings (or in the case of
----
surplus or retained earnings deficit, minus the amount of such deficit).
-----
"Taxes" shall mean all taxes, assessments, filing or other fees,
-----
levies, imposts, duties, deductions, withholdings, stamp taxes, interest
equalization taxes, capital transaction taxes, foreign exchange taxes or
charges, or other charges of any nature whatsoever from time to time or at any
time imposed by any Law or Tribunal.
"Transferee" shall mean any Person to which the Lender has sold,
----------
assigned, transferred or granted a participation in any of the Obligations, as
authorized pursuant to Section 10.1, and any Person acquiring, by purchase,
------------
assignment, transfer or participation, from any such purchaser, assignee,
transferee or participant, any part of such Obligations.
11
<PAGE>
"Tribunal" shall mean any court, governmental department or authority,
--------
commission, board, bureau, agency, arbitrator or instrumentality of any state,
political subdivision, commonwealth, nation, territory, county, parish, or
municipality, whether now or hereafter existing, having jurisdiction over the
Lender, the Borrower or their respective Property.
1.3 Undefined Financial Accounting Terms. Undefined financial accounting
------------------------------------
terms used in this Agreement shall be defined according to GAAP at the time in
effect.
1.4 References. References in this Agreement to Exhibit, Article or
----------
Section numbers shall be to Exhibits, Articles or Sections of this Agreement,
unless expressly stated to the contrary. References in this Agreement to
"hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof,"
"hereunder" and words of similar import shall be to this Agreement in its
entirety and not only to the particular Exhibit, Article or Section in which
such reference appears.
ARTICLE II
----------
2 AMOUNT AND TERMS OF CREDIT FACILITY
-----------------------------------
2.1 Revolving Line of Credit. Subject to the terms and conditions
------------------------
(including, without limitation, the right of the Lender to decline to make any
Advance so long as any Default or Event of Default exists and relying on the
representations and warranties contained in this Agreement) the Lender agrees,
during the Commitment Period, to make Advances, in immediately available funds
at the Principal Office to or for the benefit of the Borrower from time to time
in accordance with the terms and following receipt by the Lender of a Request
for Advance; provided, however, the sum of all unpaid Advances shall not
-------- -------
exceed, at any one time outstanding, the lesser of (a) the Effective Borrowing
Base or (b) the Commitment Amount. Subject to the terms of this Agreement,
during the Commitment Period, the Borrower may borrow, repay and reborrow in
respect of such Advances. No individual Advance shall exceed the then existing
Available Commitment. The Advances shall be made and the Note, as written
evidence thereof, shall be maintained at the Principal Office.
2.2 Manner of Borrowing.
-------------------
(a) Request for Advance. Borrower shall give Lender prior written
-------------------
notice (a "Request for Advance") of each requested Advance and/or interest rate
-------------------
change requested hereunder in substantially the form of Exhibit E specifying (i)
---------
the aggregate amount, if any, of such Advance, (ii) the requested date of such
Advance, and (iii) if Borrower desires to exercise its Interest Option, the
Interest Option selected in accordance with Section 2.6 hereof. In the case of
-----------
a LIBOR Tranche, Borrower shall give Lender the Request for Advance at least two
(2) LIBOR Business Days prior to the requested date of the Advance with the
requested LIBOR Rate being that rate which exists as of the date of the Advance.
12
<PAGE>
(b) Notice Irrevocable. Each Request for Advance shall be
------------------
irrevocable and binding on Borrower, and Borrower shall indemnify Lender against
any cost, loss or expense incurred by Lender as a result of Borrower's failure
to fulfill, on or before the date specified for an Advance, the conditions to
such Advance set forth herein, including without limitation, any cost, loss or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by Lender to fund the Advance to be made by Lender as part
of such Advance.
(c) Funding. After receiving a Request for Advance in the manner
-------
provided herein, Lender shall, before 11:00 a.m. (Oklahoma time) on the date an
Advance and/or interest rate change is requested as specified in a Request for
Advance, upon fulfillment of all applicable conditions set forth herein, pay or
deliver all funds so requested to the order of Borrower and/or effectuate such
interest rate change at the Principal Office of Lender.
2.3 Use of Proceeds. Proceeds of the Advances shall be used by the
---------------
Borrower to (i) refinance Borrower's debt at MidFirst Bank; (ii) finance
Borrower's acquisition of Oil and Gas Properties from Sonat; and (iii) finance
drilling and development expenditures; and (iv) other corporate purposes as may
be allowed by Lender in its sole discretion.
2.4 Note. The Advances shall be evidenced by the Note, which Note shall
----
(i) be dated the date hereof, (ii) be payable to the order of Lender, and (iii)
bear interest in accordance with Section 2.5 hereof. Notwithstanding the
-----------
principal amount of the Note as stated on the face thereof, the amount of
principal actually owing on the Note at any given time shall be the aggregate of
all Advances theretofore made to Borrower hereunder, less all payments of
principal theretofore actually received hereunder by Lender. Lender is
authorized, but is not required, to endorse on a schedule attached to the Note
appropriate notations evidencing the date and amount of each Advance as well as
the amount of each payment made by Borrower thereunder.
2.5 Interest. The Base Rate and the interest rate for the LIBOR Tranches
--------
pursuant to the Note shall be computed on the basis of a year of 360 days, but
counting the actual days elapsed (including the first day but excluding the last
day) during the period for which payable. The interest rate shall be determined
as set forth below and Borrower's election of a particular rate shall be set
forth in a Request for Advance.
(a) Base Rate. If the Base Rate is selected by Borrower or if the
---------
Borrower has failed to give notice to Lender as provided in Sections 2.2 or
---------------
2.6(b) with respect to a LIBOR Tranche, the unpaid principal balance of the Note
- ------
shall bear interest from the date of Advance to maturity (unless a LIBOR Tranche
is selected by Borrower) at a rate per annum which shall from day to day be
equal to the lesser of (i) the Base Rate in effect from day to day, or (ii) the
Highest Lawful Rate.
13
<PAGE>
(b) LIBOR Tranche. The unpaid principal of each LIBOR Tranche
-------------
pursuant to the Note shall bear interest for the Interest Period applicable
thereto at a rate per annum which shall be equal to the lesser of (i) the
Adjusted LIBOR Rate for the Interest Period applicable thereto, or (ii) the
Highest Lawful Rate.
(c) Past Due Principal. Past due principal on the Note shall bear
------------------
interest, and to the extent permitted by applicable law, past due interest shall
bear interest at a rate per annum equal to the Default Rate.
2.6 Interest Option. Subject to the provisions of this Section 2.6,
--------------- -----------
Borrower shall have the option of having all or any portion of the Note bear
interest at the Adjusted LIBOR Rate, or a rate based upon the Base Rate (an
"Interest Option"); provided, however, that each LIBOR Tranche shall be in the
- ---------------- -----------------
minimum amount of $1,000,000.00 and in multiples of $500,000.00 and provided
further that there shall be no more than three (3) LIBOR Tranches existing at
any one point in time.
(a) At Time of Borrowing. Borrower shall, in accordance with Section
-------------------- -------
2.2 hereof, give Lender notice of the Interest Option selected with respect to
- ---
each Advance made hereunder.
(b) Upon Request. Pursuant to Section 2.2, Borrower shall give Lender
------------ -----------
notice of any requested change in the interest rate applied to any portion of
the outstanding balance of the Note not currently accruing interest at the
Adjusted LIBOR Rate.
(c) At Expiration of Interest Periods. Prior to the termination of
---------------------------------
each Interest Period with respect to each LIBOR Tranche, Borrower shall give
written notice (a "Rollover Notice") to Lender of the Interest Option which
---------------
shall be applicable to such portion of the Loan upon the expiration of such
Interest Period. Such Rollover Notice shall be given to Lender at least two (2)
LIBOR Business Days prior to the termination of such Interest Period if a LIBOR
Tranche is requested. Each Rollover Notice shall be irrevocable and effective
upon notification thereof to Lender. If the required Rollover Notice shall not
have been timely received by Lender (in accordance with the above provisions of
this Section 2.6) prior to the expiration of the then relevant Interest Period
-----------
in effect when such notice was required to be given, Borrower shall be deemed to
have selected the Base Rate to be applicable to such portion of the outstanding
balance of the Note upon expiration of such Interest Period and to have given
Lender notice of such selection.
(d) Options Upon Default. Notwithstanding anything in this Section
-------------------- -------
2.6 to the contrary, the Base Rate may not be converted to a LIBOR Tranche and
- ---
no LIBOR Tranche may be continued as such when any Default or Event of Default
has occurred and is continuing, but each such tranche shall be automatically
converted to the Base Rate on the last day of each applicable Interest Period to
which the Default Rate shall apply.
14
<PAGE>
2.7 Repayment of Advances and Interest Thereon. Beginning January 31,
------------------------------------------
1998 and continuing on the last day of each month thereafter through and
including the Maturity Date, Borrower shall, at a minimum, pay accrued interest
on any Advances subject to the Base Rate. Any accrued but unpaid interest
attendant to any LIBOR Tranche shall be due and payable on the last day of the
applicable Interest Period. Beginning June 30, 1998 and on the last day of each
month thereafter through the life of the Loan, Borrower shall also pay a
principal amount equal to the difference between the Loan Balance and the then
existing Effective Borrowing Base. All remaining principal plus all accrued but
unpaid interest shall be due and payable in full on the Maturity Date, if there
has not been an Event of Default which has resulted in all Obligations becoming
immediately due and payable in accordance with Section 9.2 of this Agreement or
-----------
before the Maturity Date if there has been an Event of Default which has
resulted in all Obligations becoming immediately due and payable in accordance
with Section 9.2 of this Agreement or if there has been a mandatory prepayment
-----------
of principal pursuant to Section 2.9(c).
--------------
2.8 Advances and Payments on Note. The Lender is irrevocably authorized
-----------------------------
by the Borrower to account for Advances, payments, prepayments, etc. by any
appropriate method with its customary documentation or other evidence thereof
delivered to the Borrower within a reasonable time after each such Advance,
payment, prepayment, etc. The outstanding principal balance reflected by the
accounting method utilized by Lender shall be deemed rebuttably presumptive
evidence of the principal amount owing on the Note. Interest provided for herein
shall be calculated on unpaid sums actually advanced and outstanding pursuant to
the terms of this Agreement and only for the period from the date or dates of
such Advances until repayment. The liability for payment of principal and
interest evidenced by the Note shall be limited to principal amounts actually
advanced and outstanding pursuant to this Agreement and interest on such amounts
calculated in accordance with this Agreement.
2.9 Borrowing Base Determinations and Monthly Borrowing Base Reductions.
-------------------------------------------------------------------
(a) Until and including June 1, 1998, the Borrowing Base shall be
Twenty-Four Million and No/100 Dollars ($24,000,000.00). The Borrowing Base
shall be recalculated by Lender on a semi-annual basis, or sooner if desired by
Lender, and in accordance with the procedures set forth in paragraph (b) below.
-------------
(b) On June 1, 1998, and on or before each December 1st and June 1st
thereafter, Lender will recalculate the Borrowing Base and Monthly Borrowing
Base Reduction, with the redetermined Borrowing Base and Monthly Borrowing Base
Reduction for the ensuing six month period to become effective as of that
December 1st or June 1st, as the case may be. Unless the Borrowing Base and/or
the Monthly Borrowing Base Reduction has not changed, in which case there shall
be no obligation to notify, Lender will notify Borrower in writing on or before
each such effective date of the amount of the redetermined Borrowing Base and/or
new Monthly Borrowing Base Reduction amount. Each determination of the
Borrowing Base and Monthly Borrowing Base Reduction: (a) shall be made by Lender
in its
15
<PAGE>
sole discretion, to be exercised in good faith, consistent with its general
lending policies then in effect; (b) shall utilize pricing assumptions and
discount rates consistent with those then being used generally by Lender in
evaluating oil and gas reserves; (c) shall be based upon expected future
production revenues from existing Oil and Gas Properties with existing equipment
and operating methods and such other credit factors consistently applied
(including, without limitation, the assets, liabilities, case law, business
properties, prospects, management and ownership of Borrower) as Lender
customarily considers in evaluating similar oil and gas credits; (d) shall take
into account the information contained in the engineering reports referenced in
Section 6.4 submitted since the most recent prior determination of the Borrowing
- -----------
Base; and (e) shall be based upon such other credit factors consistently applied
(including, without limitation, the assets, liabilities, cash flow, business,
properties, prospects, management and ownership of Borrower and its Affiliates)
as Lender customarily considers in evaluating similar credits. Borrower
recognizes that decreases in the Borrowing Base may be caused by such factors as
declines in production volumes, other adverse changes in operating conditions,
price decreases, other adverse market conditions, and increases in interest
rates. It is expressly understood that Lender has no obligation to designate the
Borrowing Base or Monthly Borrowing Base Reduction at any particular amount
except in the exercise of its good faith discretion whether in relation to the
commitment or otherwise, and that the Lender's commitment to advance funds
hereunder is determined by reference to the Borrowing Base from time to time in
effect. Lender shall, within 30 days of its receipt of the information required
by Section 6.4 herein, redetermine the Monthly Borrowing Base Reduction for the
-----------
next succeeding six-month period.
(c) Mandatory Prepayments. If the Loan Balance as of the date of
---------------------
Lender's redetermination of the Borrowing Base exceeds the redetermined
Borrowing Base (such excess amount being referred to in this Section 2.9(c) as
-------------
the "Overage Amount"), within ten (10) Business Days after Borrowers' receipt of
--------------
the notice of the redetermined Borrowing Base and the Overage Amount, Borrower
shall, at Lender's option, take the following actions:
(i) prepay a principal amount of the Note, without penalty or
premium, equal to the Overage Amount; and/or
(ii) mortgage other Oil and Gas Properties or other Collateral
of sufficient value to Lender, in Lender's discretion, to raise the Borrowing
Base above the outstanding principal balance of the Note.
(d) Reduction of Commitment. Upon Lender's redetermination of the
-----------------------
Borrowing Base, if no Overage Amount exists but the Commitment for future
Advances exceeds the redetermined Borrowing Base, the amount of the Commitment
shall be reduced by an amount equal to the difference between the Effective
Borrowing Base and the then outstanding Loan Balance under the Note.
16
<PAGE>
2.10 Voluntary Prepayments. The Borrower shall not prepay any LIBOR
---------------------
Tranche except upon the termination of any Interest Period (and except pursuant
to Lender's requirement of a mandatory prepayment pursuant to Section 2.9(c)).
--------------
The Borrower shall have the right at any time or from time to time to prepay
without premium or penalty, all or any part of the outstanding principal balance
of the Note bearing interest at the Base Rate; provided, however, that no such
-----------------
prepayment shall, until all Obligations are fully paid and satisfied, excuse the
payment as it becomes due of any payment provided for herein.
2.11 Fees.
----
(a) Non-Use. In addition to interest on the Note as provided herein,
-------
to compensate the Lender for maintaining funds available, the Borrower shall pay
to the Lender, in immediately available funds, beginning March 31, 1998 and on
the last Business Day of each June, September, December and March thereafter
during the Commitment Period, an annual fee in the amount of one quarter of one
percent (1/4%) per annum, calculated on the basis of a year of 360 days, but
counting the actual days elapsed (including the first day but excluding the last
day), on the average daily amount of the Available Commitment during the
preceding calendar quarter for which payment is made.
(b) Origination Fee. In addition to interest on the Note as provided
---------------
herein, in order to compensate Lender for Lender originating the loan made by
Lender to Borrower, on or before the Closing Date, Borrower shall pay Lender an
origination fee of $50,000.00.
2.12 Advances to Satisfy Obligations of Borrower. The Lender may, but
-------------------------------------------
shall not be obligated to, make Advances for the benefit of the Borrower and
apply same to the satisfaction of any condition, warranty, representation or
covenant of the Borrower contained in this Agreement or any other Loan Document.
However, if no Event of Default exists or is continuing, Lender shall obtain
Borrower's approval prior to any such Advance. Any funds so advanced and applied
shall be part of the proceeds advanced under and evidenced by the Note and shall
bear interest at the Base Rate.
2.13 Pledge of and Security Interest in Accounts and Right of Offset or
------------------------------------------------------------------
Lien. As security for the payment and/or performance of the Obligations, the
- ----
Borrower hereby transfers, assigns and pledges to the Lender and/or grants to
the Lender a security interest in all funds of the Borrower now or hereafter or
from time to time on deposit with the Lender, with such interest of the Lender
to be retransferred, reassigned and/or released by the Lender, as the case may
be, at the expense of the Borrower upon payment in full and/or complete
performance by the Borrower of all Obligations. The aforementioned lien shall
not apply to funds contained in any account of Borrower held for the benefit of
or in trust for any third party and partnership accounts for entities other than
Borrower and all trust accounts for entities other than Borrower. All remedies
as secured party or assignee of such funds shall be exercisable, subject to
applicable notice and cure periods provided in this Agreement, by the Lender
upon the occurrence of any Event of Default, regardless of whether the exercise
of any
17
<PAGE>
such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof. Furthermore, the Borrower hereby grants to the Lender the
right, exercisable, subject to applicable notice and cure periods provided in
this Agreement, at such time as any Obligation shall mature, whether by
acceleration of maturity or otherwise, of offset or banker's lien against all
funds of the Borrower now or hereafter or from time to time on deposit with the
Lender, regardless of whether the exercise of any such remedy would result in
any penalty or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity thereof.
2.14 General Provisions Relating to Interest. It is the intention of the
---------------------------------------
parties hereto to comply strictly with any applicable usury laws as in effect
from time to time and, in this regard, there shall never be taken, received,
contracted for, collected, charged or received on any sums advanced hereunder
interest in excess of that which would accrue at the Highest Lawful Rate.
If, under any circumstances, the aggregate amounts paid on the Note or
under this Agreement or any other Loan Document include amounts which by law are
deemed interest and which would exceed the amount permitted if the Highest
Lawful Rate were in effect, the Borrower stipulates that such payment and
collection will have been and will be deemed to have been, to the fullest extent
permitted by applicable laws of the State of Oklahoma or the United States of
America, the result of mathematical error on the part of the Borrower and the
Lender; and the Lender shall promptly credit the amount of such excess to the
principal amount of the outstanding Obligations, or if the principal amount of
the Obligations shall have been paid in full, refund the amount of such excess
to the Borrower (to the extent only of such interest payments in excess of that
which would have accrued and been payable on the basis of the Highest Lawful
Rate) upon discovery of such error by the Lender or notice thereof from the
Borrower.
If the maturity of the Note is accelerated by reason of an election of the
Lender resulting from any Event of Default or otherwise, or in the event of any
prepayment, then such consideration that constitutes interest under applicable
laws may never include amounts which are more than the Highest Lawful Rate, and
the amount of such excess, if any, provided for in this Agreement or otherwise
shall be canceled automatically by the Lender as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by the
Lender on the principal amount of the Obligations, or if the principal amount of
the Obligations shall have been paid in full, refunded by the Lender to the
Borrower.
All sums paid, or agreed to be paid, to the Lender for the use, forbearance
and detention of the proceeds of any Advance hereunder shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term hereof until paid in full so that the actual rate of
interest is uniform but does not exceed the Highest Lawful Rate throughout the
full term hereof.
18
<PAGE>
2.15 Letters in Lieu of Transfer Orders. The Lender agrees that none of
----------------------------------
the letters in lieu of transfer or division orders provided by the Borrower
pursuant to Section 4.1(f)(iii) will be sent to the addressees thereof prior to
-------------------
the occurrence of an Event of Default, at which time the Lender may, at its
option and in addition to the exercise of any of its other rights and remedies,
send any or all of such letters, provided however, that upon the occurrence of
an Event of Default other than those specified in Sections 9.1(a), (g) or (h),
---------------------------
the Lender shall not send any or all of such letters or division orders until
the applicable period to cure such Default has lapsed without such Default being
cured.
2.15 Power of Attorney. Borrower hereby designates the Lender as its
-----------------
agent and attorney-in-fact, to act in its name, place and stead (individually
and collectively) for the purpose of completing and delivering any and all of
the letters in lieu of transfer orders delivered by the Borrower to the Lender
pursuant to Section 2.15 or Section 6.7, including, without limitation,
------------ -----------
completing any blanks contained in such letters and attaching exhibits thereto
describing the relevant Collateral. The Borrower hereby ratifies and confirms
all that the Lender shall lawfully do or cause to be done by virtue of this
power of attorney and the rights granted with respect to such power of attorney.
This power of attorney is coupled with the interests of the Lender in the
Collateral, shall commence and be in full force and effect as of the Closing
Date and shall remain in full force and effect and shall be irrevocable until
the obligations, if any, of the Lender hereunder have terminated and until the
full satisfaction of all Obligations. The powers conferred on the Lender by
this appointment may only be exercised by the Lender by execution by any Person
who, at the time of exercise, is an officer of the Lender, and are solely to
protect the interests of the Lender under the Loan Documents and shall not
impose any duty upon the Lender to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives or has expressly
directed that others receive as a result of the exercise of such powers and
shall not be responsible to the Borrower, or any other Person for any act or
failure to act with respect to such powers, except for gross negligence or
willful misconduct.
ARTICLE III
-----------
3 COLLATERAL AND OTHER FORMS OF CREDIT ENHANCEMENT
------------------------------------------------
3.1 Mortgaged Properties. Borrower shall grant and maintain in favor of
--------------------
Lender at all times until the Obligations are paid and satisfied in full, valid
first mortgage liens and first, prior and perfected security interests in and to
all of Borrower's right, title and interest in the Mortgaged Properties. In
order to provide Lender with such valid first mortgage liens and first, prior
and perfected security interests, Borrower shall execute and deliver to Lender
on the Closing Date the Security Instruments. The pledge of additional Oil and
Gas Properties may be required in the event there is a Default or an Event of
Default hereunder, or at Lender's option, as provided pursuant to Section
2.9(c).
19
<PAGE>
3.2 New Properties. At the time any Advance is used to finance the
--------------
acquisition or development of any New Properties by Borrower, Borrower shall, at
Lender's discretion, grant and thereafter shall maintain in favor of Lender at
all times until the Obligations are paid and satisfied in full, valid first
mortgage liens and first, prior and perfected security interests in and to all
of Borrower's right, title and interest in such New Properties. Borrower shall
execute and deliver, or cause to be executed and delivered, such oil and gas
mortgages, deeds of trusts, instruments, agreements, assignments, financing
statements and other documents as may be reasonably necessary in the opinion of
Lender and Lender's counsel to grant Lender valid first mortgage liens and
first, prior and perfected security interests in and to such New Properties.
3.3 MidFirst Collateral. Michael C. Black, individually (to the extent of
-------------------
his interest) and Michael C. Black Revocable Trust (to the extent of its
interest); Richard R. Dunning (to the extent of his interest) and Dunning Family
Limited Partnership (to the extent of its interest); and Larry D. Hartzog (to
the extent of his interest) by collateral documents of even date herewith have
(a) pledged all of their right, title, and interest in and to the equity
securities (common and preferred, and all rights associated therewith) of Cibola
Corporation to MidFirst Bank and (b) agreed to use their best efforts to grant
to MidFirst Bank (to the extent of their interests) a second lien position in a
total of 374,822 escrowed shares of the common stock of TransCanada Pipelines
Limited (collectively, the "MidFirst Collateral"). Said Persons agree also to
grant Lender a security interest in the MidFirst Collateral, subject only to the
lien and interest of MidFirst Bank (as to their Cibola Corporation ownership
rights) and only to the lien and interest of MidFirst Bank and TransCanada
Pipelines Limited (as to their ownership of the escrowed TransCanada Pipelines
Limited common shares.
3.4 Subordination Agreements. As further security for the Obligations,
------------------------
Richard R. Dunning, Larry D. Hartzog, Michael C. Black and Cibola Corporation
shall formally subordinate Borrower's Indebtedness (all debt service
requirements, including principal and interest) to them to the Obligations in a
form acceptable to Lender.
3.5 Guaranty. In order to further secure the Obligations, Cibola
--------
Corporation shall provide its guaranty of Borrower's Obligations, limited to
$5,000,000.00.
3.6 Release of MidFirst Collateral and Cibola Corporation Guaranty. Upon
--------------------------------------------------------------
(a) the release by MidFirst of the MidFirst Collateral and (b) the reduction of
the Loan Balance by Five Million Dollars ($5,000,000.00) from an infusion of
equity capital, Lender shall (x) release its interest in the MidFirst
Collateral, (y) release and return the Cibola Corporation limited guaranty
described in Section 3.5 above, and (z) so long as there is no Event of Default,
permit the payment of current (not accrued interest in excess of 30 days)
interest on the Indebtedness described in Section 3.4 above..
20
<PAGE>
ARTICLE IV
----------
4 CONDITIONS
----------
The obligations of the Lender to enter into this Agreement and to make
Advances are subject to the satisfaction of the following conditions precedent
unless waived in writing by Lender:
4.1 Receipt of Loan Documents and Other Items. The Lender shall have no
-----------------------------------------
obligation under this Agreement unless and until all matters incident to the
consummation of the transactions contemplated herein, including, without
limitation, the review by the Lender or its counsel of the title of Borrower to
the Oil and Gas Properties, shall be satisfactory in the good faith judgment of
the Lender, and the Lender and its counsel shall have received, reviewed and
approved the following documents and other items, appropriately executed when
necessary and, where applicable, acknowledged, all in form and substance
satisfactory in the good faith judgment of the Lender and its counsel and dated,
where applicable, of even date herewith or a date prior thereto (unless
specifically noted below to the contrary) and acceptable in the good faith
judgment of the Lender:
(a) multiple counterparts of this Agreement, as reasonably requested
by the Lender;
(b) assignment of the loan documents and promissory note from
Borrower to Liberty Bank and Trust Company of Oklahoma City, N.A., which such
loan documents are currently held by MidFirst, to Lender;
(c) the Note;
(d) the Guaranty Agreement of Cibola Corporation (limited to
$5,000,000.00);
(e) copies of the Borrower's and Guarantor's Articles of
Incorporation and all amendments thereto accompanied by a certificate issued by
Borrower's and Guarantor's secretary or assistant secretary, to the effect that
each such copy is correct and complete;
(f) copies of the resolutions of Borrower's and Guarantor's board of
directors approving the Loan Documents and authorizing the transactions
contemplated herein and therein, adopted by Borrower's and Guarantor's board of
directors at a meeting or by unanimous consent and that such resolutions
constitute all the consents adopted with respect to such transactions, have not
been amended, modified, or revoked in any respect, and are in full force and
effect as of the date of such certificate;
21
<PAGE>
(g) the following Security Instruments transferring, creating,
evidencing, perfecting and otherwise establishing, as applicable, Liens in favor
of the Lender, in and to the Oil and Gas Properties listed and described in
Exhibit F and the Collateral;
- ---------
(i) Mortgage, Security Agreement, Financing Statement and
Assignment of Production from the Borrower covering certain Oil and Gas
Properties located in any and all states in which the Oil and Gas Properties
lie, and all improvements, personal property and fixtures related thereto;
(ii) Financing Statements from the Borrower, as debtor,
constituent to the document described in clause (i) immediately above;
(iii) Undated letters in lieu of transfer orders, in form and
substance satisfactory to the Lender, from the Borrower to each purchaser of
production and disburser of the proceeds of production from or attributable to
the Oil and Gas Properties, together with additional letters with the addressees
left blank, authorizing and directing the addressees to make future payments
attributable to production from the Oil and Gas Properties directly to the
Lender; and;
(iv) agreements of Michael C. Black, Richard R. Dunning, and
Larry Hartzog and their respective estate planning vehicles pledging their
interest in Cibola Corporation and TransCanada Pipelines Limited to secure
Borrower's Obligations, subject only to the liens and/or interest of MidFirst.
(h) agreements of Richard R. Dunning, Larry D. Hartzog, Michael C.
Black, and Cibola Corporation subordinating Borrower's indebtedness to them to
the Obligations, in a form acceptable to Lender;
(i) Financial Statements of the Borrower dated as of September 30,
1997;
(j) results of searches of the UCC records of the State of Oklahoma
and any and all other jurisdictions in which the Oil and Gas Properties are
located from a source acceptable to the Lender and reflecting no Liens, other
than Permitted Liens, against any of the Collateral as to which perfection of a
Lien is accomplished by the filing of a financing statement;
(k) the $12,000,000.00 loan from MidFirst to Borrower shall have
closed and all conditions to funding thereunder shall have been satisfied.
(l) confirmation, acceptable to the Lender, including, without
limitation, opinions of counsel satisfactory to the Lender, of the Borrower
having marketable title to a material portion of the Oil and Gas Properties,
free and clear of Liens other than Permitted Liens;
22
<PAGE>
(m) an Intercreditor Agreement with MidFirst, in form and substance
satisfactory to Lender.
(n) opinion of Roger Graham, Attorney at Law, substantially in the
form of G;
-
(o) certificates evidencing the insurance maintained by the Borrower
in compliance with applicable provisions of this Agreement; and
(p) such other agreements, documents, items, instruments, opinions,
certificates, waivers, consents and evidence as the Lender may reasonably
request.
4.2 Each Advance Under the Note. In addition to the conditions precedent
---------------------------
stated in Section 4.1 having been fulfilled as of the Closing Date, the Lender
-----------
shall not be obligated to make any Advance unless:
(a) the Borrower shall have delivered to the Lender a Request for
Advance at least the requisite time prior to the requested date for the relevant
Advance; and each statement or certification made in such Request for Advance
shall be true and correct in all material respects on the requested date for
such Advance;
(b) no Event of Default or Default exists or, or by virtue of any
requested Advance, shall exist or will occur;
(c) if requested by the Lender, the Borrower shall have delivered
evidence satisfactory in the good faith judgment of the Lender substantiating
any of the matters contained in this Agreement which are necessary to enable the
Borrower to qualify for such Advance;
(d) no event shall have occurred which, in the reasonable opinion of
the Lender, could have a Material Adverse Effect;
(e) each of the representations and warranties contained in this
Agreement shall be true and correct in all material respects and shall be deemed
to be repeated by the Borrower as if made on the requested date for such
Advance;
(f) the Security Instruments shall be in full force and effect and
provide to the Lender the Liens intended thereby;
(g) to the extent of Borrower's undivided interest therein, the
Borrower shall hold full legal title to the Collateral and be the sole
beneficial owner thereof, except for Permitted Liens and shall provide
confirmation, from the documentation located in its files,
23
<PAGE>
acceptable to Lender, including without limitation, opinions of counsel
satisfactory to Lender or other acceptable evidence of Borrower having
defensible title to the Oil and Gas Properties free and clear of Liens other
than Permitted Liens;
(h) the Lender shall have received reimbursement from the Borrower,
or legal counsel for the Lender shall have received payment from the Borrower,
for (i) all reasonable fees and expenses of counsel to the Lender for which the
Borrower is responsible pursuant to applicable provisions of this Agreement and
for which invoices have been presented as of or prior to the date of the
relevant Advance, and (ii) estimated fees charged by filing officers and other
public officials incurred or to be incurred in connection with the filing and
recordation of any of the Security Instruments, for which invoices have been
presented as of or prior to the date of the requested Advance; and
(i) all material matters incident to the consummation of the
transactions hereby contemplated shall be satisfactory in the good faith
judgment of the Lender.
ARTICLE V
---------
5 REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Lender to enter into this Agreement and to make the Advances,
the Borrower represents and warrants to the Lender (which representations and
warranties shall survive the delivery of the Note) that:
5.1 Due Authorization and Existence. The execution and delivery by
-------------------------------
Borrower of this Agreement and the borrowings hereunder; the execution and
delivery by Borrower of the Note; the repayment of the Note and interest and
fees provided for in the Note and this Agreement; the execution and delivery of
the Security Instruments by Borrower and the performance of all obligations of
Borrower under the Loan Documents are within the power of Borrower and have been
duly authorized by all necessary corporate action of Borrower. The execution and
delivery by Guarantor of the Guaranty Agreement and any subordination of
Borrower's Obligations to it the loan evidenced hereby, and the performance of
its obligations thereunder and under any other Loan Documents are within the
power of Guarantor and have been duly authorized by all necessary corporate
action of Borrower. The Borrower is a corporation legally existing and in good
standing under the laws of the State of Oklahoma and is a corporation duly
qualified and in good standing in all states in which it is doing business,
except where failure to be qualified will not have a Material Adverse Effect.
The Guarantor is a corporation legally existing and in good standing under the
laws of the State of Wyoming and is a corporation duly qualified and in good
standing in all states in which it is doing business, except where failure to be
so qualified will not have a Material Adverse Effect.
24
<PAGE>
5.2 Consents, Conflicts and Creation of Liens. The execution and
-----------------------------------------
delivery by Borrower (and, as the case may be, the Guarantor) of the Loan
Documents and the performance (except upon the occurrence of an Event of
Default) of the obligations of the Borrower (or Guarantor) thereunder do not and
will not (a) require the consent of any Governmental Authority, (b) contravene
or conflict with any Requirement of Law which contravention or conflict would
have a Material Adverse Effect, (c) contravene or conflict with any indenture,
instrument or other agreement to which Borrower (or Guarantor) is a party or by
which any Property of Borrower (or Guarantor) may be presently bound or
encumbered, or (d) result in or require the creation or imposition of any Lien
in, upon or of any Property of Borrower (or Guarantor) under any such indenture,
instrument or other agreement, other than the Loan Documents.
5.3 Valid and Binding Obligations. All of the Loan Documents, when duly
-----------------------------
executed and delivered by Borrower, will be the legal, valid and binding
obligations of the Borrower, enforceable against Borrower by the Lender in
accordance with their respective terms, except as limited by equitable
principals and applicable liquidation, conservatorship, bankruptcy, moratorium,
arrangement, receivership, insolvency, reorganization or similar laws from time
to time affecting the rights of creditors generally.
5.4 Title to Assets and Oil and Gas Properties. Borrower has defensible
------------------------------------------
title to each of its Properties and Oil and Gas Properties, free and clear of
all Liens (except Permitted Liens) and such defects in title that individually
or in the aggregate would have a Material Adverse Effect.
5.5 Scope and Accuracy of Financial Statements. The Financial Statements
------------------------------------------
of the Borrower dated as of September 30, 1997 present fairly the financial
position and results of operations of the Borrower (as presented on a GAAP
basis) as at the relevant point in time or for the period indicated. No event or
circumstance has occurred since September 30, 1997 which could reasonably be
expected to have a Material Adverse Effect.
5.6 Liabilities, Litigation, and Restrictions. Other than as disclosed on
-----------------------------------------
the Financial Statements of the Borrower dated September 30, 1997, the Borrower
has no liabilities, direct or contingent, which may materially and adversely
affect its business, operations or ownership of the Collateral. Except as set
forth under the heading "Litigation" on Exhibit D attached hereto, no Litigation
---------- ---------
of any nature affecting Borrower is pending before any Tribunal or, to the best
knowledge of the Borrower, threatened against or affecting Borrower which might
reasonably be expected to result in any material impairment of its ownership of
any Collateral or to have a Material Adverse Effect. To the best knowledge of
Borrower, after due inquiry, no unusual or unduly burdensome restriction,
restraint or hazard exists by contract, Requirement of Law, or otherwise
relative to the material business or operations of Borrower or the ownership and
operation of a material portion of the Collateral other than such as relate
generally to Persons engaged in business activities similar to those conducted
by Borrower.
25
<PAGE>
5.7 Authorizations and Consents. Except as expressly contemplated by this
---------------------------
Agreement, no authorization, consent, approval, exemption, franchise, permit or
license of, or filing with, any Governmental Authority, Tribunal or any other
Person is required to authorize or is otherwise required in connection with the
valid execution and delivery by the Borrower of the Loan Documents, or any
instrument contemplated hereby or thereby, the repayment by the Borrower of the
Note and the interest and fees provided in the Note and this Agreement, or the
performance (except in the Event of Default) by the Borrower of the Obligations.
5.8 Compliance with Laws. To the best of Borrower's knowledge, the
--------------------
Borrower and its Property, including, without limitation, the Mortgaged
Properties, are in compliance in all material respects with all applicable
Requirements of Law, including, without limitation, Environmental Laws, and
ERISA, except such noncompliance that would not reasonably be expected to have a
Material Adverse Effect.
5.9 Proper Filing of Tax Returns and Payment of Taxes Due. The Borrower
-----------------------------------------------------
has duly and properly filed its United States income tax returns and all other
tax returns which are required to be filed by the Borrower and has paid all
taxes due except such as are being Contested in Good Faith and as to which
adequate provisions and disclosures have been made. The Borrower has no
knowledge of any deficiency or additional assessment in a material amount in
connection with taxes, assessments, or charges not provided for on its books.
5.10 Environmental Laws. To the best knowledge and belief of the Borrower,
------------------
except as would not have a Material Adverse Effect, or as described on Exhibit D
---------
under the heading "Environmental Matters";
---------------------
(a) no Property of Borrower is currently on or has ever been on, or
is adjacent to any Property which is on or has ever been on, any federal or
state list of Superfund Sites;
(b) no Hazardous Substances have been generated, transported and/or
disposed of by Borrower at a site which was, at the time of such generation,
transportation and/or disposal, or has since become, a Superfund Site;
(c) except in accordance with applicable Requirements of Law or the
terms of a valid permit, license, certificate or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by Borrower or from,
affecting or related to any Property of Borrower or adjacent to any Property of
Borrower has occurred that has not been reported and/or corrected, settled or
remediated; and
(d) no Environmental Complaint has been received by the Borrower.
5.11 Compliance with Federal Reserve Regulations. Borrower's execution and
-------------------------------------------
delivery of and the performance of the transactions contemplated by, the Loan
Documents will not violate any regulations promulgated by the Board of Governors
of the Federal Reserve
26
<PAGE>
System, including, without limitation, Regulations G, U or X, which violation
could reasonable be expected to have a Material Adverse Effect.
5.12 Investment Company Act Compliance. The Borrower is not, directly or
---------------------------------
indirectly, controlled by or acting on behalf of any Person which is, an
"investment company" or an "affiliated person" of an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, which control or
action could reasonably be expected to have a Material Adverse Effect.
5.13 Public Utility Holding Company Act Compliance. Borrower is not a
---------------------------------------------
"holding company," or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
5.14 Refunds. Except as described on Exhibit D under the heading,
------- ---------
"Refunds," to Borrower's knowledge no orders of, proceedings pending before, or
-------
other requirements of, the Federal Energy Regulatory Commission or any
Governmental Authority exist which could result in Borrower being required to
refund any material portion of the proceeds received or to be received from the
sale of hydrocarbons constituting part of the Mortgaged Properties.
5.15 Gas Contracts. Except as described on Exhibit D under the heading,
------------- ---------
"Gas Contracts," the Borrower is not obligated in any material respect by virtue
- --------------
of any prepayment made under any contract containing a "take-or-pay" or
"prepayment" provision or under any similar agreement to deliver hydrocarbons
produced from or allocated to any of the Mortgaged Properties at some future
date without receiving full payment therefor at the time of delivery, and (b)
has not produced gas, in any material amount, subject to, and is not, nor are
any of the Mortgaged Properties, subject to balancing rights of third parties or
subject to balancing duties under governmental requirements, except as to such
matters for which Borrower's balancing obligations in the aggregate would not
reasonably be expected to have a Material Adverse Effect.
5.16 No Material Misstatements. To Borrower's knowledge, no information,
-------------------------
exhibit, statement or report furnished to the Lender by or at the direction of
Borrower in connection with this Agreement contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained therein not misleading as of the date made or deemed made.
5.17 Casualties or Taking of Property. Except as disclosed on Exhibit D
-------------------------------- ---------
under the heading "Casualties," since September 30, 1997, neither the business
----------
nor any Property of Borrower has been materially adversely affected as a result
of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike
or other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any Governmental
27
<PAGE>
Authority, riot, activities of armed forces or acts of God, which, as a result
thereof, could reasonably be expected to have a Material Adverse Effect.
5.18 Locations of Business, Offices, and Property. The principal place of
--------------------------------------------
business and chief executive office of the Borrower is located at the address of
the Borrower set forth in Section 10.3 or at such other location as the Borrower
------------
may have, by proper written notice hereunder, advised the Lender, provided that
--------
such other location of the Borrower is within a state in which appropriate
financing statements from the Borrower in favor of the Lender have been filed.
5.19 Security Instruments. The provisions of each Security Instrument are
--------------------
effective to create in favor of the Lender, a legal, valid and enforceable Lien,
except as limited by equitable principles and applicable liquidation,
conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization or similar laws from time to time affecting the rights of
creditors generally, in all right, title and interest of the Borrower in the
Collateral described therein, which Liens, assuming the accomplishment of
recording and filing in accordance with applicable Laws prior to the
intervention of rights of other Persons, shall constitute fully perfected first-
priority Liens on all right, title and interest of the Borrower in the
Collateral described therein, subject to Permitted Liens.
5.20 Subsidiaries. The Borrower has no Subsidiaries as of the Closing
------------
Date.
5.21 Guarantors. Borrower certifies that the Guaranty Agreement is
----------
delivered in consideration of the extension of credit evidenced by this
Agreement, and the Note and that all requisite and necessary actions of the
Guarantor have been taken to ratify the valid delivery of each Guaranty
Agreement and that the Guarantor has read and is familiar with the terms of this
Agreement.
5.22 Assigned Debt. No default currently exists on that certain
-------------
$2,500,000.00 loan from MidFirst to Borrower, which is to be assigned to Lender
hereunder, and Borrower has no offsets, claims or defenses to its liability
thereunder.
ARTICLE VI
----------
6 AFFIRMATIVE COVENANTS
---------------------
Unless agreed in writing by the Lender to the contrary, so long as any
Obligation remains outstanding or unpaid or any Commitment exists, the Borrower
(or Guarantor where applicable) shall:
6.1 Maintenance and Access to Records. Keep adequate records of all its
---------------------------------
transactions so that at any time, and from time to time, its true and complete
financial condition may be readily
28
<PAGE>
determined, and promptly following the reasonable request of the Lender, make
available during Borrower's customary business hours for inspection by the
Lender books and records, engineering reports, and other information pertaining
to the Collateral and, at the expense of the Borrower, allow the Lender to make
copies thereof at the Borrower's premises and take same to Lender's place of
business.
6.2 Quarterly Financial Statements. Deliver to the Lender, (a) on or
------------------------------
before the 45th day after the close of each quarterly period of its fiscal year
a copy of the unaudited Financial Statements of Borrower and Guarantor as at the
close of such quarterly period and from the beginning of such fiscal year to the
end of such period prepared in a manner consistent with GAAP, such Financial
Statement to be certified by a Responsible Officer of the Borrower and Guarantor
as a fair presentation of the condition of the Borrower and Guarantor, subject
to changes resulting from normal year-end adjustments, and (b) concurrent with
(a) above, a Compliance Certificate executed by Borrower's Responsible Officer
stating that such Responsible Officer, after due inquiry, has no knowledge of a
Default or Event of Default and containing a computation of, and demonstrating
compliance with, each financial covenant set forth in Article VI hereof.
----------
6.3 Annual Financial Statements. Deliver to the Lender, (a) on or
---------------------------
before the 105th day after the close of each fiscal year on a GAAP basis of
accounting, a copy of the annual audited Financial Statements of Borrower and
annual unaudited Financial Statements of Guarantor, and (b) concurrent with (a)
above, a Compliance Certificate executed by Borrower's Responsible Officer
stating that such Responsible Officer, after due inquiry, has no knowledge of a
Default or Event of Default and containing a computation of, and demonstrating
compliance with, each financial covenant set forth in Article VI hereof.
----------
6.4 Reserve Reports.
---------------
(a) Deliver to the Lender no later than May 1, 1998 and each May 1
thereafter during the term of this Agreement, engineering reports prepared by an
independent third party engineer approved by Lender (and such other appropriate
information acceptable to Lender) covering or pertaining to Borrower's Oil and
Gas Properties in form and substance acceptable to Lender setting forth (i) the
proven producing and proven non-producing oil and gas reserves (separately
classified as such) attributable to the Oil and Gas Properties as of each
January 1 of each year for which the Reserve Reports are furnished, (ii) the
aggregate present value determined on the basis of stated pricing assumptions,
of the future net income with respect to such Oil and Gas Properties, discounted
at a stated per annum discount rate of proven and producing reserves, and (iii)
projections of the annual rate of production, gross income and net income with
respect to such proven and producing reserves.
(b) The report provided pursuant to this Section 6.4 shall be
-----------
submitted to the Lender together with additional data as the Lender may
reasonably request concerning pricing, quantities of production from the Oil and
Gas Properties, purchasers of production and engineering and geological data.
By November 1 of each year, Borrower shall provide Lender with such other
29
<PAGE>
reserve information as Lender may reasonably request to complete its semi annual
redetermination of the Borrowing Base.
(c) In conjunction with the Reserve Report, Borrower shall furnish
Lender a report on the status of all gas balancing affecting any of the Oil and
Gas Properties.
6.5 Monthly Production Report. Borrower shall provide monthly reports of
-------------------------
its oil and gas production activities for said month summarizing barrel and MCF
volumes, pricing, lease operating expenses and net cash flow within 45 days of
each calendar month.
6.6 Notices of Certain Events. Deliver to the Lender, immediately upon a
-------------------------
Responsible Officer's having knowledge of the occurrence of any of the following
events or circumstances, a written statement with respect thereto, signed by a
Responsible Officer and setting forth the relevant event or circumstance and the
steps being taken by the Borrower with respect to such event or circumstance:
(a) any Default or Event of Default;
(b) any default or event of default under any material contractual
obligation of the Borrower, or any material Litigation, affecting Borrower
before any Governmental Authority or Tribunal;
(c) any Litigation involving Borrower as a defendant or in which any
Property of the Borrower is subject to a claim (i) in which the amount involved
is $250,000.00 (net to the Borrower's interest) or more and which is not covered
by insurance, (ii) in which, together with any other outstanding litigation or
proceeding (whether or not previously disclosed hereunder), the aggregate amount
involved in all such litigation is $250,000.00 (net to Borrower's interest) or
more and which is not covered by insurance, or (iii) in which injunctive or
similar relief is sought which affects a Property having a fair market value
(net to the Borrower's interest therein) of more than $250,000.00 or could
reasonably be expected to result in an expenditure by Borrower of more than
$250,000.00;
(d) the receipt by Borrower of any Environmental Complaint or any
formal request from any Governmental Authority for information (other than
requirements for compliance reports) regarding any Release of Hazardous
Substances by Borrower from, affecting or related to any Property of Borrower or
adjacent to any Property of the Borrower which Environmental Complaint or
request could reasonably be expected to have a Material Adverse Effect;
(e) any actual, proposed or threatened testing or other investigation
by any Governmental Authority concerning the environmental condition of, or
relating to, any Property of the Borrower or adjacent to any Property of
Borrower following any allegation of a violation of any Environmental Law which
testing or investigation could reasonably be expected to have a Material Adverse
Effect;
30
<PAGE>
(f) any Release of Hazardous Substances by Borrower from, affecting
or related to any Property of Borrower or adjacent to any Property of Borrower
except in accordance with applicable Environmental Law or the terms of a valid
permit, license, certificate or approval of the relevant Governmental Authority,
or the violation of any Environmental Law, or the revocation, suspension or
forfeiture of or failure to renew, any permit, license, registration, approval
or authorization, which Release, violation, revocation, suspension, forfeiture
or failure could reasonably be expected to have a Material Adverse Effect;
(g) any other event or condition which could reasonably be expected
to have a Material Adverse Effect; and
(h) any lien, mortgage, security interest, tax lien, pledge,
conditional sale or title retention arrangement, or any other interest in or
encumbrance upon, Property, which is designed to secure the repayment of
Indebtedness, whether arising by agreement, under any Law or otherwise.
6.7 Letters in Lieu of Transfer Orders. Promptly upon the occurrence of
----------------------------------
an Event of Default and the expiration of any applicable period to cure and upon
a reasonable request by the Lender but no more often than once every quarter and
without limitation on the rights of the Lender in accordance with Sections 2.15
-------------
and 2.16, execute such letters in lieu of transfer orders, in addition to the
- --------
letters signed by the Borrower and delivered to the Lender in satisfaction of
the conditions set forth in Section 4.1(f)(iii), as are necessary or appropriate
-------------------
to transfer and deliver to the Lender proceeds from or attributable to any
Mortgaged Property; provided, however, that such letters shall only be delivered
-----------------
to the addressees thereof in accordance with Section 2.15 of this Agreement.
------------
6.8 Division Orders. Promptly upon request by the Lender at any time and
---------------
from time to time following the occurrence of any Event of Default and without
limitation on the rights of the Lender in accordance with Sections 2.15 and
-----------------
2.16, execute such division and/or transfer orders as are necessary or
- ----
appropriate to transfer and deliver to the Lender proceeds from the sale of
hydrocarbon production from or attributable to any Mortgaged Property; provided,
--------
however, that such letters shall only be delivered to the addressees thereof in
- -------
accordance with Section 2.15 of this Agreement.
------------
6.9 Additional Information. Furnish to the Lender, promptly upon the
----------------------
reasonable request of the Lender, such additional financial, engineering,
production or other information concerning the assets, liabilities, operations
and transactions of the Borrower as the Lender may from time to time reasonably
request; and notify the Lender not less than ten (10) Business Days prior to the
occurrence of any condition or event that may change the proper location for the
filing of any financing statement or other public notice or recording for the
purpose of perfecting a Lien in any Collateral, including, without limitation,
any change in name or the location of any principal place of business or chief
executive office of the Borrower; and upon the reasonable request of the
31
<PAGE>
Lender, the Borrower shall execute such additional Security Instruments as may
be necessary or appropriate in connection therewith.
6.10 Compliance with Laws. In all material respects, comply with all
--------------------
applicable Requirements of Law, including, without limitation, (a) the minimum
funding requirements of ERISA so as not to give rise to any material liability
or Reportable Event thereunder, (b) Environmental Laws (i) related to any
natural or environmental resource or media located on, above, within, in the
vicinity of, related to or affected by any Property of the Borrower, (ii)
required for the performance or conduct of the operations of the Borrower,
including, without limitation, all permits, licenses, registrations, approvals
and authorizations, or (iii) applicable to the use, generation, handling,
storage, treatment, transport or disposal of any Hazardous Substances, the
resulting non-compliance of which could have a Material Adverse Effect; and
cause all operators, employees, crew members, agents, contractors,
subcontractors and future lessees (pursuant to appropriate lease provisions) of
the Borrower, while such Persons are acting within the scope of their
relationship with the Borrower, to comply with all such Requirements of Law as
may be necessary or appropriate to enable the Borrower to so comply.
Notwithstanding the reasonable efforts of the Borrower to comply with its
obligations under this Section 6.10, should any non-compliance with any
------------
Requirement of Law cause or could reasonably be expected to cause a Material
Adverse Effect, the Lender shall be notified of such event pursuant to Section
-------
6.6 and the Lender shall be entitled to exercise its rights and remedies
- ---
pursuant to Sections 9.1 and 9.2.
--------------------
6.11 Payment of Assessments and Charges. Pay all taxes, assessments,
----------------------------------
governmental charges, rent and other Indebtedness which, if unpaid, might become
a Lien, other than a Permitted Lien, against the Property of the Borrower,
except any of the foregoing being Contested in Good Faith.
6.12 Hazardous Substances Indemnification. Indemnify and hold the Lender
------------------------------------
harmless from and against any and all claims, losses, damages, liabilities,
fines, penalties, charges, administrative and judicial proceedings and orders,
judgments, remedial actions, requirements and enforcement actions of any kind,
and all costs and expenses incurred in connection therewith (including, without
limitation, reasonable attorneys' fees and expenses), arising directly or
indirectly, in whole or in part, from (a) the presence of any Hazardous
Substances on, under or from any Property of the Borrower, whether prior to or
during the term hereof, (b) any activity carried on or undertaken on or off any
Property of the Borrower, whether prior to or during the term hereof, and
whether by the Borrower, or any predecessor in title, employee, agent,
contractor or subcontractor of the Borrower, or any other Person at any time
occupying or present on such Property, in connection with the handling,
treatment, removal, storage, decontamination, cleanup, transportation or
disposal of any Hazardous Substances at any time located or present on or under
such Property, (c) any residual contamination on or under any Property of the
Borrower, or (d) any contamination of any Property or natural resources of the
Borrower arising in connection with the generation, use, handling, storage,
transportation or disposal of any Hazardous Substances by the Borrower, or any
employee, agent, contractor or subcontractor of the Borrower, while such Persons
are acting within the scope of their relationship with the Borrower,
irrespective of whether
32
<PAGE>
any of such activities were or will be undertaken in accordance with applicable
Requirements of Law, including, without limitation, any of the foregoing arising
from negligence, whether sole or concurrent, on the part of the Lender; with the
foregoing indemnity surviving satisfaction of all Obligations and the
termination of this Agreement, unless all such Obligations have been satisfied
wholly in cash from the Borrower and not by way of realization against any
Collateral or the conveyance of any Property in lieu thereof, provided that such
--------
indemnity shall not extend to any of the foregoing resulting from the Lender's
gross negligence or willful conduct or any act or omission by the Lender with
respect to any Property subsequent to the Lender becoming the owner of such
Property and with respect to which Property such claim, loss, damage, liability,
fine, penalty, charge, proceeding, order, judgment, action or requirement arises
subsequent to the acquisition of title thereto by the Lender.
6.13 Further Assurances. Promptly cure any defects in the execution and
------------------
delivery of any of the Loan Documents and all agreements contemplated thereby,
and execute, acknowledge and deliver such other assurances and instruments as
shall, in the good faith and reasonable opinion of the Lender, be necessary to
fulfill the terms of the Loan Documents.
6.14 Initial Fees and Expenses of Lender and/or Legal Counsel to Lender.
------------------------------------------------------------------
Promptly reimburse the Lender for all reasonable and customary out-of-pocket
expenses of the Lender in connection with the preparation of this Agreement and
all documentation contemplated hereby, the satisfaction of the conditions
precedent set forth herein and the consummation of the transactions contemplated
in this Agreement (including, without limitation, all recording and filing fees
and including legal fees).
6.15 Subsequent Fees and Expenses. The Borrower shall promptly reimburse
----------------------------
the Lender (after the Borrower's receipt of the Lender's request for
reimbursement) for all amounts reasonably expended, advanced or incurred by the
Lender, together with interest thereon as provided in this Section 6.15 (i) to
------------
satisfy any of the Obligations, (ii) to protect or enforce the Lender's rights
under any of the Loan Documents, or (iii) to protect the Collateral or business
of the Borrower; provided, however, if an uncured Event of Default does not
-----------------
exist, the Lender must obtain the Borrower's contemporaneous written consent
prior to making any such expenditure or Advance, or incurring such reimbursable
amount. The amount so reimbursable pursuant to this Section 6.15 shall bear
------------
interest at the per annum interest rate equal to the Base Rate, calculated on a
basis of a calendar year of 360 days, but counting the actual number of days
elapsed, on each such amount from the date of notification that the same was
expended, advanced or incurred by the Lender until the date that it is repaid to
the Lender, with the obligations under this Section 6.15 surviving the non-
------------
assumption of this Agreement in a case commenced under any Insolvency Proceeding
and being binding upon the Borrower and/or a trustee, receiver, custodian or
liquidator of Borrower appointed in any such case.
6.16 Maintenance and Inspection of Tangible Properties. Maintain all of
-------------------------------------------------
its material tangible Properties in good repair and condition, ordinary wear and
tear excepted; make all necessary replacements thereof all as may be reasonably
necessary so that the business carried on in
33
<PAGE>
connection therewith may be properly conducted at all times and operate, if
operated by Borrower, such Properties in a good and workmanlike manner; and
permit any authorized representative or representatives of the Lender to visit
and inspect any tangible Property of the Borrower.
6.17 Maintenance of Insurance and Evidence Thereof. Continue to maintain
---------------------------------------------
or continue to be maintained, insurance with respect to its Properties and
businesses against such liabilities, casualties, risks and contingencies as is
customary for companies of comparable size engaged in the same or similar
business, and, on the Closing Date or upon any renewal of any such insurance and
at other times upon the reasonable request by the Lender, furnish to the Lender
evidence, satisfactory in the good faith judgment of the Lender of the
maintenance of such insurance.
6.18 Payment of Note and Performance of Obligations. Pay the Note
----------------------------------------------
according to the reading, tenor and effect thereof, as modified hereby, and do
and perform every act as required in the Loan Documents and discharge all other
Obligations.
6.19 Operation of Oil and Gas Properties. Develop, maintain and operate,
-----------------------------------
if Borrower is designated as operator thereof, the Oil and Gas Properties in a
prudent and workmanlike manner in accordance with industry standards.
6.20 Depository Accounts. Maintain a depository account with Lender.
-------------------
6.21 Existing Business. Maintain its line of business as engaged in as of
-----------------
the Closing Date unless otherwise consented to by Lender in writing.
6.22 MidFirst Obligation. Pay all Indebtedness from Borrower to MidFirst
-------------------
and comply with all terms, covenants and conditions of that certain loan from
MidFirst to Borrower dated of even date herewith.
6.23 Cash Settlement. Apply the proceeds of any cash settlements for gas
---------------
balancing to the Loan Balance.
6.24 MidFirst Debt. Apply any proceeds resulting from an infusion of
-------------
equity into Borrower in excess of the MidFirst Debt, up to the amount of
$5,000,000.00, against the Loan Balance.
6.25 Equity Offering. Obtain an infusion of equity capital of not less
---------------
than $12,000,000.00 into Borrower on or before June 1, 1998.
6.26 Satisfaction of MidFirst Debt. Borrower and Guarantor agree that upon
-----------------------------
satisfaction of the MidFirst Debt and until the terms of Section 3.6 hereunder
have been satisfied, all terms, covenants and conditions set forth in that
certain Credit Agreement between MidFirst, Borrower and Guarantor shall apply
with equal force herein as if fully set forth herein, and said Credit Agreement
is incorporated herein by reference..
34
<PAGE>
ARTICLE VII
-----------
7 FINANCIAL COVENANTS
-------------------
Unless agreed in writing by the Lender to the contrary, so long as any
Obligation remains outstanding or unpaid or any Commitment exists, the Borrower
shall:
7.1 Current Ratio. Maintain a "Minimum Adjusted Current Ratio" of at
-------------
least 1.00 to 1.00. For the purposes hereof, "Minimum Adjusted Current Ratio"
shall mean Current Assets plus (or minus as the case may be) any unused
availability under the facility divided by Current Liabilities exclusive of the
Loan Balance and the outstanding principal balance of Borrower's Indebtedness
with MidFirst.
7.2 Debt Service Coverage Ratio. Beginning with the earlier of the first
---------------------------
full calendar quarter end following the repayment of the MidFirst Debt or the
calendar quarter ending March 31, 1999, Borrower will maintain a minimum "Debt
Service Coverage Ratio" of not less than 1.20 to 1.00. For purposes of this
covenant, "Debt Service Coverage Ratio" is defined as the quotient of (i) the
quarterly sum of Net Income less dividends, plus depletion, depreciation,
amortization and interest expense and (ii) the quarterly sum of principal
payments due on the Obligations, plus interest expense for the quarter then
ended (less any suspended interest payments on the Subordinated Notes), plus any
other current maturities of long term debt, exclusive of the MidFirst Debt.
7.3 Tangible Net Worth. Maintain as of the end of each calender quarter
------------------
a Tangible Net Worth of, at least, $1,700,000.00.
ARTICLE VIII
------------
8 NEGATIVE COVENANTS
------------------
Unless agreed in writing by the Lender to the contrary, so long as any
Obligation remains outstanding or unpaid or any Commitment exists, the Borrower
shall not:
8.1 Indebtedness. Create, incur, assume or suffer to exist any
------------
Indebtedness that exceed, in the aggregate, the sum of $100,000.00, whether by
way of loan or otherwise; provided however, the foregoing restriction shall not
----------------
apply to (a) the Obligations; r (b) unsecured current accounts payable incurred
in the ordinary course of business; or (c) the MidFirst Debt.
8.2 Contingent Obligations. Create, incur, assume or suffer to exist any
----------------------
Contingent Obligation on or after the Closing Date.
35
<PAGE>
8.3 Liens. Create, incur, assume or suffer to exist any Lien on any of
-----
its Oil and Gas Properties or any other Property of the Borrower, whether now
owned or hereafter acquired without the written consent of Lender; provided
--------
however, the foregoing restrictions shall not apply to Permitted Liens.
- -------
8.4 Sales of Assets. Sell, transfer or otherwise dispose of in any one
---------------
fiscal year, in one or any series of transactions, a Substantial Portion
(hereinafter defined) of its assets, whether now owned or hereafter acquired.
For the purposes of this Agreement, a "Substantial Portion" of assets shall mean
-------------------
any asset or assets whose value, individually or in the aggregate, exceed
$250,000.00. Lender reserves the right to require that any or all proceeds of
any such sales be used to repay principal amounts outstanding under the Note.
8.5 Loans or Advances. Make or agree to make or allow to remain
-----------------
outstanding any loans or Advances to any Person, including Affiliates; provided
---------
however, the foregoing restrictions shall not apply to Advances or extensions of
- -------
credit in the form of accounts receivable incurred in the ordinary course of
business and upon terms common in the industry for such accounts receivable and
indebtedness currently existing and set forth in Borrower's Financial Statement.
8.6 Merger and Consolidation. Borrower will not nor shall it permit any
------------------------
of its Subsidiaries to (i) merge or consolidate with any Person, or permit any
such merger or consolidation with Borrower; (ii) form, acquire, or become a
shareholder, partner or joint venturer in any corporation, partnership, joint
venture or business entity, (iii) discontinue business; (iv) make any material
change in the nature of a manner in which it conducts its business; (v) form any
Plan which is subject to Title IV of ERISA; or (vi) liquidate, wind up, or
dissolve.
8.7 Dividends and Distributions. Declare, pay or make, whether in cash or
---------------------------
Property, or set aside or apply any money or assets to pay or make any
distribution on, or purchase, redeem, retire or otherwise acquire for value, any
shares of stock without the prior written consent of Lender.
8.8 Cancellation of Insurance. Allow any insurance policy required to be
-------------------------
carried hereunder to be terminated or lapse or expire without provision for
adequate renewal or comparable substitution.
8.9 Changes in Structure. Enter into any transaction of consolidation,
--------------------
merger or amalgamation, or liquidate, wind-up or dissolve (or suffer any
liquidation or dissolution) nor shall it discontinue or materially change the
nature and scope of its business.
8.10 Transactions with Affiliates. Directly or indirectly, enter into any
----------------------------
purchase, sale, lease or exchange of Property or any contract for the rendering
of goods or services with any Affiliate or any of them, other than upon fair and
reasonable terms no less favorable than could be obtained in an arm's length
transaction with a Person which was not an Affiliate.
36
<PAGE>
8.11 Organization or Acquisition of Subsidiaries. Organize or acquire any
-------------------------------------------
Subsidiary in addition to those existing as of the Closing Date, if any such
organization or acquisition would have a Material Adverse Effect.
8.12 Change in Management. Allow any material change in the senior
--------------------
management, ownership form or composition, line of business, or asset
composition of Borrower without the prior written consent of the Lender.
8.13 Limitation on Hedging Activities. Engaged in any speculative
--------------------------------
trading activities, which such activities shall include hydrocarbon price swap
agreements, and other hedging transactions.
8.14 Sale/Leaseback Transactions. Make or permit the occurrence of any
---------------------------
sale, transfer or disposition of any Property (now owned by Borrower) followed
by the leasing of such Property or any portion thereof.
8.15 MidFirst Debt. Make or remit any payment of principal on the
-------------
MidFirst Debt, without the prior written consent of Lender, so long as the Loan
Balance hereunder remains unpaid. However, this prohibition shall not apply to a
principal reduction resulting from an anticipated, equity infusion. Further,
except for extensions of the Maturity Date, Borrower shall not alter, amend,
modify or otherwise change the terms of the MidFirst Debt without Lender's prior
written consent.
ARTICLE IX
----------
9 EVENTS OF DEFAULT
-----------------
9.1 Enumeration of Events of Default. Any of the following events shall
--------------------------------
constitute an Event of Default as that term is used herein:
(a) there shall not have been paid within ten (10) days from when due
any installment of principal or interest under this Agreement, the Note or any
fees provided for herein;
(b) an Event of Default as defined in any Loan Document shall have
occurred;
(c) default shall be made by Borrower in the due observance or
performance of any of its obligations, covenants or agreements contained in any
of the Loan Documents and such default could be expected to have a Material
Adverse Effect;
(d) any representation or warranty made by Borrower in any of the
Loan Documents, including, without limitation, in a Request for Advance, proves
to have been untrue in any material respect or any representation, statement
(including Financial Statements), certificate or
37
<PAGE>
data furnished or made to the Lender in connection herewith proves to have been
untrue in any material respect as of the date the facts therein set forth were
stated or certified and such misrepresentation or breach of warranty could
reasonably be expected to have a Material Adverse Effect;
(e) default pursuant to the terms of Borrower's loan with MidFirst or
any loan document discussed therein;
(f) default shall be made by Borrower or any Guarantor (as principal
or guarantor or other surety) in the payment or performance of any bond,
debenture, note or other evidence of indebtedness or under any credit agreement,
loan agreement, indenture, promissory note or similar agreement or instrument
executed in connection with any of the foregoing, and such default shall remain
unremedied in excess of the period of grace, if any, with respect thereto and
such default is not being Contested in Good Faith by the Borrower and would have
a Material Adverse Effect. For the purposes hereof, the occurrence of a
"Default" or "Event of Default" under that certain Credit Agreement between
Borrower as MidFirst and in the Promissory Note and any other "Loan Document"
executed in conjunction therewith shall constitute a Default hereunder and be
considered to create a Material Adverse Effect;
(g) Borrower shall be unable to satisfy any condition or cure any
circumstance specified in Article IV, unless the failure to so satisfy would not
----------
have a Material Adverse Effect, the satisfaction or curing of which is precedent
to the right of the Borrower to receive an Advance hereunder, and such inability
shall continue for a period in excess of thirty (30) days;
(h) Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or all or a substantial part of its
assets, (ii) file a voluntary petition commencing an Insolvency Proceeding
concerning Borrower or any Guarantor, (iii) make a general assignment for the
benefit of creditors, (iv) be unable, or admit in writing its inability, to pay
its debts generally as they become due, (v) file an answer admitting the
material allegations of a petition filed against it in any Insolvency
Proceeding, or (vi) become insolvent.
(i) an order, judgment or decree shall be entered against Borrower by
any court of competent jurisdiction or by any other duly authorized authority,
on the petition of a creditor or otherwise, granting relief in any Insolvency
Proceeding or approving a petition seeking reorganization or an arrangement of
its debts or appointing a receiver, trustee, conservator, custodian or
liquidator of it or all or any substantial part of its assets and such order,
judgment or decree shall not be dismissed or stayed within sixty (60) days after
the issuance and entry thereof;
(j) the levy against any significant portion of the Property of
Borrower, or any execution, garnishment, attachment, sequestration or other writ
or similar proceeding which is not permanently dismissed or discharged within
sixty (60) days after the levy and which could reasonably be expected to have a
Material Adverse Effect;
38
<PAGE>
(k) the entry of a judgment, order or decree (and the execution of a
settlement) which, together with other such outstanding judgments, orders or
decrees (and settlements) against the Borrower or its Subsidiaries (after
allowance for insurance coverage) exceeds $250,000.00 (net to Borrower's
interest), and (x) within thirty (30) days after entry thereof such judgment,
order or decree shall not have been dismissed or execution thereof stayed
pending appeal or, within thirty (30) days after the expiration of any such
stay, such judgment shall not have been dismissed, or (y) any enforcement
proceeding shall have been commenced by any creditor upon such judgment.
(l) any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower under the
Racketeering Influence and Corrupt Organizations Statute (18 U.S.C. (S) 1961 et
--
seq.), the result of which could be the forfeiture or transfer of a substantial
- ---
portion of Borrower's assets subject to a Lien in favor of the Lender without
(i) satisfaction or provision for satisfaction of such Lien, or (ii) such
forfeiture or transfer of such Property being expressly made subject to such
Lien, or (iii) the Borrower paying to the Lender the amount of the resultant
decrease in the Effective Borrowing Base, as a result thereof;
(m) Borrower shall have (i) concealed, removed or diverted, or
permitted to be concealed, removed or diverted, any part of its Property, with
intent to hinder, delay or defraud its creditors or any of them; (ii) made or
suffered a transfer of any of its Property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar Law; (iii) made any transfer of its
Property to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid with the intent to hinder, delay or
defraud its creditors or any of them; or (iv) shall have suffered or permitted,
while insolvent, any creditor to obtain a Lien upon any of its Property through
legal proceedings or distraint which is not vacated within thirty (30) days from
the date thereof;
(n) any Security Instrument shall for any reason not, or cease to,
create valid and perfected first-priority Liens against the Collateral
purportedly covered thereby and such occurrence would have a Material Adverse
Effect;
(o) the good faith determination by the Lender that a Material
Adverse Effect has occurred or will occur or that the value of the Collateral
has, or will be, materially decreased;
(p) the failure of Borrower to maintain all licenses, permits,
orders, authorizations and approvals of any Governmental Authority which are
required in the conduct of Borrower's business;
(q) the cancellation or alteration of any material license of
Borrower; or
(r) any Material Adverse Change in any Guarantor's financial
condition.
39
<PAGE>
9.2 Remedies.
--------
(a) Upon the occurrence of an Event of Default specified in Sections
--------
9.1(a), (d), (g), or (h) immediately and without notice, (i) all Obligations
- ------------------------
shall automatically become immediately due and payable, without presentment,
demand, protest, notice of protest, default or dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity or other notice of any
kind, except as may be provided to the contrary elsewhere herein, all of which
are hereby expressly waived by the Borrower, and (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lender in
writing, and in such event, the Lender is hereby authorized at any time and from
time to time, without notice to the Borrower (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits of the
Borrower (general or special, time or demand, provisional or final) held by the
Lender, except to the extent any such deposits contain funds of persons other
than Borrower, the Guarantor, or Borrower's subsidiaries and any and all other
indebtedness at any time owing by the Lender to or for the credit or account of
the Borrower against any and all of the Obligations.
(b) Upon the occurrence of any Event of Default other than those
specified in Sections 9.1(a), (d), (g), or (h), Borrower shall have thirty (30)
---------------------------------
days after receiving written notification of the Event of Default to cure such
Default but, during such cure period, the Lender will not, as a result of such
Default, accelerate the Note or exercise any of its rights pursuant to the Loan
Documents, and notwithstanding Section 9.1, such Default will not constitute an
-----------
Event of Default, unless such Default is not remedied to the reasonable
satisfaction of Lender within thirty (30) days after Borrower's receipt of such
written notification. In the event Borrower shall fail to effectuate such a
cure, Lender may declare all Obligations immediately due and payable, without
presentment, demand, protest, notice of protest, default or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity or other
notice of any kind, except as may be provided to the contrary elsewhere herein,
all of which are hereby expressly waived by the Borrower, and the Commitment
shall immediately cease and terminate unless and until reinstated by the Lender
in writing, and in such event, the Lender is hereby authorized at any time and
from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set-off and apply any and all deposits
containing funds of the Borrower (general or special, time or demand,
provisional or final) held by the Lender, and any and all other indebtedness at
any time owing by the Lender to or for the credit or account of the Borrower
against any and all of the Obligations although such Obligations may be
unmatured.
(c) Subject to the provisions of this Agreement, upon the occurrence
of any Event of Default the Lender may, in addition to the foregoing, exercise
any or all of its rights and remedies provided by law or pursuant to the Loan
Documents.
40
<PAGE>
ARTICLE X
---------
10 MISCELLANEOUS
-------------
10.1 Transfers and Participations. The Lender may, at any time, sell,
----------------------------
transfer, assign or grant participations in the Obligations or any portion
thereof; and the Lender may forward to each Transferee and each prospective
Transferee all documents and information relating to such obligations, whether
furnished by the Borrower or otherwise obtained, as the Lender determines
necessary or desirable. The Borrower agrees that each Transferee, regardless of
the nature of any transfer to it, may exercise all rights (including, without
limitation, rights of set-off) with respect to the Obligations held by it as
fully as if such Transferee were the direct holder thereof, subject to any
agreements between such Transferee and the transferor to such Transferee. The
Lender agrees that each such Transferee shall assume all of the obligations of
the Lender pursuant to the Loan Documents.
10.2 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations and warranties of the Borrower and all covenants and agreements
herein made shall survive the execution and delivery of the Note and the
Security Instruments and shall remain in force and effect so long as any
Obligation is outstanding or any Commitment exists.
10.3 Notices and Other Communications. Except as to verbal notices
--------------------------------
expressly authorized herein, which verbal notices shall be confirmed in writing,
all notices, requests and communications hereunder shall be in writing
(including by telegraph or telecopy). Unless otherwise expressly provided
herein, any such notice, request, demand or other communication shall be deemed
to have been duly given or made when delivered by hand, or, in the case of
delivery by mail, deposited in the mail, certified mail, return receipt
requested, postage prepaid, or, in the case of telegraphic notice, when
delivered to the telegraph company, or, in the case of telecopy notice, when
receipt thereof is acknowledged orally, addressed as follows:
(a) if to the Lender, to:
BANK ONE, OKLAHOMA, N.A.
100 N. Broadway
Oklahoma City, Oklahoma 73102
Attention: John K. Slay, Jr., Sr. Vice President
Facsimile Number: 405/231-6661
41
<PAGE>
(b) if to the Borrower, to:
INDIAN OIL COMPANY
9400 North Broadway, Suite 800
Oklahoma City, Oklahoma 73114
Attention: Roger D. Graham
Facsimile Number: 405/475-7777
Any party may, by proper written notice hereunder to the other, change the
individuals or addresses to which such notices to it shall thereafter be sent.
10.4 Parties in Interest. Subject to applicable restrictions contained
-------------------
herein, all covenants and agreements herein contained by or on behalf of the
Borrower or the Lender shall be binding upon and inure to the benefit of the
Borrower or the Lender, as the case may be, and their respective heirs, legal
representatives, successors and assigns.
10.5 Rights of Third Parties. All provisions herein are imposed solely and
-----------------------
exclusively for the benefit of the Lender and the Borrower. No other Person
shall have any right, benefit, priority or interest hereunder or as a result
hereof or have standing to require satisfaction of provisions hereof in
accordance with their terms, and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.
10.6 Articles and Sections. This Agreement, for convenience only, has been
---------------------
divided into Articles and Sections and it is understood that the rights and
other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.
10.7 Number and Gender. Whenever the context requires, reference herein
-----------------
made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Definitions of
terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative.
10.8 Renewals and Extensions. All provisions of this Agreement relating to
-----------------------
the Note shall apply with equal force and effect to each promissory note
hereafter executed or issued which in whole or in part represents a renewal or
extension of any part of the Indebtedness of the Borrower under this Agreement,
the Note, or any other Loan Document.
42
<PAGE>
10.9 No Waiver: Rights Cumulative. No course of dealing on the part of
----------------------------
the Lender, its officers or employees, nor any failure or delay by the Lender
with respect to exercising any of its rights under any Loan Document shall
operate as a waiver thereof. The rights of the Lender under the Loan Documents
shall be cumulative and the exercise or partial exercise of any such right shall
not preclude the exercise of any other right. No Advance hereunder shall
constitute a waiver of any of the covenants, warranties or conditions of the
Borrower contained herein. In the event the Borrower is unable to satisfy any
such covenant, warranty or condition, no such Advance shall have the effect of
precluding the Lender from thereafter declaring such inability to be an Event of
Default if same constitutes an Event of Default under the terms of this
Agreement as hereinabove provided.
10.10 Incorporation of Exhibits. The Exhibits attached to this Agreement
-------------------------
are incorporated herein and shall be considered a part of this Agreement for all
purposes.
10.11 Survival Upon Unenforceability. In the event any one or more of the
------------------------------
provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations 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 any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.
10.12 Amendments or Modifications. Neither this Agreement nor any
---------------------------
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
10.13 Controlling Provision Upon Conflict. In the event of a conflict
-----------------------------------
between the provisions of this Agreement and those of any other Loan Document,
the provisions of this Agreement shall control.
10.14 Time, Place and Method of Payments. All payments required pursuant
----------------------------------
to this Agreement or the Note shall be made in lawful money of the United States
of America and in immediately available funds; shall be deemed received by the
Lender on the next Business Day following receipt if such receipt is after 2:00
p.m. Central Standard or Daylight Savings Time, as the case may be, on any
Business Day; and shall be made at the Principal Office of the Lender. Except as
provided to the contrary herein, if the due date of any payment hereunder or
under the Note would otherwise fall on a day which is not a Business Day, such
date shall be extended to the next succeeding Business Day and interest shall be
payable for any principal so extended for the period of such extension.
10.15 Time of Essence. Time is of the essence of this Agreement and of
---------------
each provision hereof.
43
<PAGE>
10.16 Disposition of Collateral. Notwithstanding any term or provision,
-------------------------
express or implied, in any of the Security Instruments, the realization,
liquidation, foreclosure or any other disposition on or of any or all of the
Collateral shall be in the order and manner and determined in the sole
discretion of the Lender; provided however, that in no event shall the Lender
----------------
violate applicable Law or exercise rights and remedies other than those provided
in such Security Instruments or otherwise existing at law or in equity.
10.17 GOVERNING LAW. THIS AGREEMENT, THE NOTE, THE GUARANTY AGREEMENT AND
-------------
THE OTHER LOAN DOCUMENTS (EXCEPT AS OTHERWISE EXPRESSLY PROVIDED THEREIN) SHALL
BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA.
10.18 Jurisdiction and Venue. All actions or proceedings with respect to,
----------------------
arising directly or indirectly in connection with, out of, related to or from
this Agreement or any other Loan Document may be litigated, at the sole
discretion and election of the Lender, in courts having situs in Tulsa, Tulsa
County, Oklahoma. The Borrower hereby submits to the jurisdiction of any local,
state or federal court located in Oklahoma City, Oklahoma County, Oklahoma and
hereby waives any rights it may have to transfer or change the jurisdiction or
venue of any litigation brought against it by the Lender in accordance with this
section.
10.19 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto with respect to the parties hereof and shall supersede
any prior agreement between the parties hereto, whether written or oral,
relating to the subject hereof. Furthermore, in this regard, this written
Agreement and the other Loan Documents represent, collectively, 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.
[SIGNATURES ON FOLLOWING PAGE]
44
<PAGE>
IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the
date first above written.
BORROWER:
INDIAN OIL COMPANY,
an Oklahoma corporation
_____________________________________________
By: Roger D. Graham
Title: President
LENDER:
BANK ONE, OKLAHOMA, N.A.
_____________________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
45
<PAGE>
JOINDER OF GUARANTOR
--------------------
The undersigned Guarantor hereby certifies that the Guaranty Agreement has
been delivered in consideration of the extension of credit to the Borrower
evidenced by this Agreement and warrants and represents that it is familiar with
and has read this Agreement and is bound by all applicable provisions contained
therein.
GUARANTOR:
CIBOLA CORPORATION
_____________________________________________
By: Michael C. Black
Title: President
46
<PAGE>
EXHIBIT 10.5(b)
FIRST AMENDMENT TO CREDIT AGREEMENT BY AND
BETWEEN INDIAN OIL COMPANY
AND BANK ONE, OKLAHOMA, N.A.
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made
effective the 10th day of August, 1998 by and between INDIAN OIL COMPANY, an
Oklahoma corporation (the "Borrower") and BANK ONE, OKLAHOMA, N.A. (the
"Lender").
W I T N E S S E T H:
WHEREAS, on December 22, 1997, Borrower and Lender entered into that
certain Credit Agreement (the "Original Agreement") whereby Lender provided
Borrower with a reducing, revolving line of credit in an amount, subject to a
Borrowing Base, which shall not exceed $50,000,000.00 as evidenced by the Note.
WHEREAS, the obligations described in the Agreement are secured by, among
other things not specifically set forth herein, certain Oil and Gas Properties;
and
WHEREAS, all capitalized terms not otherwise defined herein shall have
those meanings assigned to such terms in the Agreement;
WHEREAS, Borrower and Lender desire to amend the Agreement for the first
time in order to: (i) change the Debt Service Coverage ratio calculation; (ii)
waive the occurrence of certain events of default; and (iii) certain other
changes more particularly set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree to amend the agreement as follows:
A. CHANGES TO THE AGREEMENT
1. Section 6.25 of the Agreement, Equity Infusion, is hereby amended
---------------
and restated in its entirety as follows:
6.25. Equity Infusion. Obtain an infusion of equity capital of not
---------------
less than $12,000,000.00 into Borrower on or before October 1, 1998. In
the event MidFirst extends the January 15, 1999 maturity date of the
MidFirst Debt until, at least, July 15, 1999, the deadline for Borrower to
obtain the infusion of equity capital shall be extended to December 1,
1998.
<PAGE>
2. Section 7.2 of the Agreement, Debt Service Coverage Ratio, is
---------------------------
hereby amended and restated in its entirety as follows:
7.2 Debt Service Coverage Ratio. Beginning with calendar quarter
---------------------------
ending December 31, 1998, Borrower will maintain a minimum "Debt
Service Coverage Ratio" of not less than 1.20 to 1.00. For the
purposes of this covenant, the "Debt Service Coverage Ratio" is
defined as the quotient of (i) the quarterly sum of Net Income
less dividends, plus depletion, depreciation, amortization and
interest expense divided by (ii) the sum of the greater of (a)
the quarterly sum of Monthly Borrowing Base Reductions required
hereunder or (b) the quarterly principal reductions required
assuming a level amortization of the outstanding Loan Balance as
of the quarter end over the Half Life of the Borrower's Oil and
Gas Properties, plus interest expense for the quarter then ended
(less any suspended interest payments on the Subordinated Notes),
plus any other current maturities of long term debt (exclusive of
the MidFirst Debt). For the purposes of this covenant, "Half Life
of the Borrower's Oil and Gas Properties" shall be defined as the
duration, in months, as projected by the Lender, in its sole
discretion, acting reasonably, during which one-half of the
undiscounted future income, net of lease operating expenses,
production taxes, and capital expenditures will be realized from
the Borrower's Oil and Gas Properties. The Lender's calculation
of the Half Life of the Borrower's Oil and Gas Properties shall
be determined and communicated to the Borrower in conjunction
with the periodic determinations of the Borrowing Base and the
Monthly Borrowing Base Reduction set forth in Section 2.9.
3. Section 8.13 of the Agreement, Limitation on Hedging Activities,
--------------------------------
is hereby amended and restated in its entirety as follows:
Borrower shall not engage in any speculative trading activities;
Borrower may engage in energy price swaps done with prior written consent
of Lender and/or hedging transactions done with prior written consent of
Lender (in each case which consent shall not be unreasonably withheld).
B. NOTICES AND WAIVERS.
Borrower is hereby notified of the following occurrences and the Lender
hereby provides the following waivers.
1. Borrowing Base. Pursuant to Section 2.9 of the Agreement,
--------------
Borrower and Lender hereby affirm the Borrowing Base at $24,000,000.00 and the
Monthly Borrowing Base Reduction at $0 until December 1, 1998. Furthermore, the
Lender has calculated the
2
<PAGE>
Half Life of Borrower's Oil and Gas Properties (defined below) to be 67 months
until the next determination of the Borrowing Base.
2. Annual Financial Statement. Lender hereby provides Borrower with
--------------------------
a one time waiver of the default created by Borrower's failure to comply with
Section 6.3 of the Agreement by not providing it audited, annual financial
statements by the 105th day following the close of its fiscal year. Borrower
hereby agrees to provide the financial statements required by Section 6.3 for
year ending December 31, 1997 on or before August 31, 1998. Borrower and Lender
hereby agree that any material adverse change in the audited financial
statements from the unaudited financial statements previously provided shall
constitute an additional Event of Default under the Agreement as hereby amended.
3. Equity Offering. Lender hereby provides Borrower with a one time
---------------
waiver of the default created by Borrower's failure to comply with Section 6.25
of the Agreement by not obtaining a $12,000,000.00 infusion of equity by June
1, 1998.
4. Tangible Net Worth. Lender hereby provides Borrower with a one-
------------------
time waiver of the default created by Borrower's failure to comply with Section
7.3 of the Agreement by not maintaining a Tangible Net Worth of, at least,
$1,700,000.00 for the quarter ending March 31, 1998.
C. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender that:
1. Borrower is a corporation, duly organized, legally existing, and
in good standing under the laws of the State of Oklahoma, and is duly qualified
as a foreign corporation and in good standing in all other states wherein the
nature of its business or its assets make such qualification necessary.
2. Borrower's execution and delivery of this Amendment and
performance of its obligations hereunder: (a) are and will be within its
corporate powers; (b) are duly authorized by its board of directors; (c) are not
and will not be in contravention of any law, statute, rule or regulation, the
terms of its articles or certificates of incorporation and bylaws, nor of any
preferred stock provision, indenture, agreement or undertaking to which
Corporation or any of its properties are bound; (d) do not require any consent
or approval (including governmental) which has not been given; and (e) will not
result in the imposition of Liens, charges or encumbrances on any of its
properties or assets, except those in favor of Lender hereunder.
3
<PAGE>
3. This Amendment, when duly executed and delivered, will constitute
the legal, valid and binding obligations of each Borrower, enforceable in
accordance with its terms.
4. All financial statements, balance sheets, income statements and
other financial data which have been or are hereafter furnished to Lender by
each Borrower to induce Lender to make the loans hereunder due, and as to
subsequent financial statements will, fairly represent each Borrower's financial
condition as of the dates for which the same are furnished. All such financial
statements, reports, papers and other data furnished to Lender are and will be,
when furnished: prepared in accordance with generally accepted accounting
principles consistently applied; accurate and correct in all material respects;
and complete insofar as completeness may be necessary to give Lender a true and
accurate knowledge of the subject matter. Since the date of the last such
financial statements, no material adverse change has occurred in the operations
or condition, financial or otherwise and other financial data provided to
Lender; of either Borrower, nor, to the best of their knowledge, has either
Borrower incurred, any material liabilities or made any material investment or
guarantees, direct or contingent, in any single case or in the aggregate, which
has not been disclosed to Lender.
5. The Borrower is the sole and lawful owner of the Collateral,
pledged, mortgaged or assigned by it, and Borrower has, and as to after acquired
property or New Properties will have, good right to cause the Collateral to be
hypothecated to Lender as security for the Obligations.
6. All of Borrower's other representations and warranties set forth
in Sections 5.1 through 5.22 of the Agreement are true and correct on and as of
the date hereof with the same effect as though made and repeated by Borrower as
of the date hereof.
D. CONDITIONS
Lender's obligations under the Agreement, as hereby amended, is subject to
the following conditions:
1. Lender and Borrower shall have executed and delivered this
Amendment.
2. Borrower's representations and warranties set forth in Section
C hereof shall be true and correct on and as of the date hereof, and the date of
any subsequent advance with the same effect as though such representation and
warranty had been on and as of such date.
4
<PAGE>
3. Borrower shall have satisfied all conditions set forth in Section
4.1 of the Agreement.
4. As of the date hereof, and the date of any subsequent Advance, no
Event of Default nor any event which, with the giving of notice or lapse of
time, would constitute an Event of Default shall have occurred and be
continuing.
E. OTHER COVENANTS AND MISCELLANEOUS TERMS
1. Except as expressly amended and supplemented hereby, the
Agreement shall remain unchanged and in full force and effect, and the same is
hereby ratified and extended.
2. The Obligations, including but not limited to the indebtedness
evidenced by the Note executed in conjunction with the Agreement, shall continue
to be secured by the Collateral, without interruption or impairment of any kind.
3. The Borrowers hereby agrees to pay all reasonable attorney fees
and legal expenses incurred by Lender in preparation, execution and
implementation of this Amendment, the Replacement Note, and any mortgages, deeds
of trust, security agreements, pledge agreements or any amendments thereto.
4. This Amendment shall be construed in accordance with and governed
by the laws of the State of Oklahoma, and shall be binding on and inure to the
benefit of the Borrower and Lender, and their respective successors and assigns.
All obligations of the Borrower under the Agreement and all rights of Lender and
any other holder of the Notes, whether expressed herein or in any Note, shall be
in addition to and not in limitation of those provided by applicable law.
Borrower irrevocably agrees that, subject to Lender's sole election, all suits
or proceedings arising from or related to the Agreement, as amended, or the
Notes may be litigated in courts (whether State or Federal) sitting in Oklahoma
City, Oklahoma, and the Borrower hereby irrevocably waives any objection to such
jurisdiction and venue.
5. This Amendment may be executed in as many counterparts as are
deemed necessary or convenient, and it shall not be necessary for the signature
of more than any one party to appear on any single counterpart. Each
counterpart shall be deemed an original, but all shall be construed together as
one and the same instrument. The failure of any party to sign shall not affect
or limit the liability of any party executing any such counterpart.
5
<PAGE>
BORROWER: INDIAN OIL COMPANY,
an Oklahoma corporation
__________________________________________
By: Roger D. Graham
Title: President
LENDER: BANK ONE, OKLAHOMA, N.A.
__________________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
6
<PAGE>
EXHIBIT 10.5(c)
SECOND AMENDMENT TO CREDIT AGREEMENT BY AND
BETWEEN INDIAN OIL COMPANY
AND BANK ONE, OKLAHOMA, N.A.
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made
effective the 26th day of February, 1999 by and between INDIAN OIL COMPANY, an
Oklahoma corporation. (the "Borrower") and BANK ONE, OKLAHOMA, N.A. (the
"Lender").
W I T N E S S E T H:
WHEREAS, on December 22, 1997, Borrower and Lender entered into that
certain Credit Agreement (the "Original Agreement") whereby Lender provided
Borrower with a reducing, revolving line of credit in an amount, subject to a
Borrowing Base, which shall not exceed $50,000,000.00 as evidenced by the Note.
WHEREAS, on August 10, 1998 Borrower and Lender amended the Original
Agreement for the first time (the "First Amendment") in order to: (i) change the
Debt Service Coverage ratio calculation; (ii) waive the occurrence of certain
events of default; and (iii) certain other changes more particularly set forth
therein (the Original Agreement as amended by the First Amendment is referred to
herein as the "Agreement").
WHEREAS, the obligations described in the Agreement are secured by, among
other things not specifically set forth herein, certain Oil and Gas Properties;
and
WHEREAS, all capitalized terms not otherwise defined herein shall have
those meanings assigned to such terms in the Agreement;
WHEREAS, Borrower and Lender now desire to amend the Original Agreement for
the second time in order to (i) reduce the Borrower's Borrowing Base
availability from $24,000,000.00 to $20,000,000.00; (ii) extend the deadline for
Borrower to have completed a $12,000,000.00 equity offering until March 1, 1999;
(iii) extend the deadline for Borrower to provide an audited financial
statement for the fiscal year ending December 31, 1997 until April 10, 1999; and
(iv) waive the occurrence of certain events of default (the Original Agreement
as amended by the First and Second Amendments is referred to herein as the
"Agreement").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree to amend the agreement as follows:
<PAGE>
A. CHANGES TO THE AGREEMENT
1. Section 6.25 of the Agreement, Equity Infusion, is hereby amended
---------------
and restated in its entirety in order to extend the date to provide an equity
infusion as follows:
6.25. Equity Infusion. Obtain an infusion of equity capital of not
---------------
less than $12,000,000.00 into Borrower on or before March 1, 1999.
B. NOTICES AND WAIVERS.
Borrower is hereby notified of the following occurrences and the Lender
hereby provides the following waivers.
1. Borrowing Base. Pursuant to Section 2.9 of the Agreement,
--------------
Borrower and Lender hereby affirm the Borrowing Base at $20,000,000.00 and the
Monthly Borrowing Base Reduction at $0 until March 1, 1999. Furthermore, the
Lender has calculated the Half Life of Borrower's Oil and Gas Properties
(defined below) to be 84 months until the next determination of the Borrowing
Base.
2. Annual Financial Statement. Lender hereby provides Borrower with
--------------------------
an additional waiver of the default created by Borrower's failure to comply with
Section 6.3 of the Agreement by not providing Lender with its audited, annual
financial statements by the 105th day following the close of its fiscal year.
Borrower hereby agrees to provide the financial statements required by Section
6.3 for year ending December 31, 1997 on or before April 10, 1999. Borrower and
Lender hereby agree that any material adverse change in the audited financial
statements from the unaudited financial statements previously provided shall
constitute an additional Event of Default under the Agreement as hereby amended.
3. Equity Offering. Lender hereby provides Borrower with an
---------------
additional waiver of the default created by Borrower's failure to comply with
Section 6.25 of the Agreement by not obtaining a $12,000,000.00 infusion of
equity by the previously extended date of December 1, 1998.
4. Tangible Net Worth. Lender hereby provides Borrower with a one-
------------------
time waiver of the default created by Borrower's failure to comply with Section
7.3 of the Agreement by not maintaining a Tangible Net Worth of, at least,
$1,700,000.00 for the quarter ending September 30, 1998 for the quarters ending
June 30, 1998 and September 30, 1998.
C. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender that:
2
<PAGE>
1. Borrower is a corporation, duly organized, legally existing, and
in good standing under the laws of the State of Oklahoma, and is duly qualified
as a foreign corporation and in good standing in all other states wherein the
nature of its business or its assets make such qualification necessary.
2. Borrower's execution and delivery of this Amendment and
performance of its obligations hereunder: (a) are and will be within its
corporate powers; (b) are duly authorized by its board of directors; (c) are not
and will not be in contravention of any law, statute, rule or regulation, the
terms of its articles or certificates of incorporation and bylaws, nor of any
preferred stock provision, indenture, agreement or undertaking to which
Corporation or any of its properties are bound; (d) do not require any consent
or approval (including governmental) which has not been given; and (e) will not
result in the imposition of Liens, charges or encumbrances on any of its
properties or assets, except those in favor of Lender hereunder.
3. This Amendment, when duly executed and delivered, will constitute
the legal, valid and binding obligations of each Borrower, enforceable in
accordance with its terms.
4. All financial statements, balance sheets, income statements and
other financial data which have been or are hereafter furnished to Lender by
each Borrower to induce Lender to make the loans hereunder due, and as to
subsequent financial statements will, fairly represent each Borrower's financial
condition as of the dates for which the same are furnished. All such financial
statements, reports, papers and other data furnished to Lender are and will be,
when furnished: prepared in accordance with generally accepted accounting
principles consistently applied; accurate and correct in all material respects;
and complete insofar as completeness may be necessary to give Lender a true and
accurate knowledge of the subject matter. Since the date of the last such
financial statements, no material adverse change has occurred in the operations
or condition, financial or otherwise and other financial data provided to
Lender; of either Borrower, nor, to the best of their knowledge, has either
Borrower incurred, any material liabilities or made any material investment or
guarantees, direct or contingent, in any single case or in the aggregate, which
has not been disclosed to Lender.
5. The Borrower is the sole and lawful owner of the Collateral,
pledged, mortgaged or assigned by it, and Borrower has, and as to after acquired
property or New Properties will have, good right to cause the Collateral to be
hypothecated to Lender as security for the Obligations.
6. All of Borrower's other representations and warranties set forth
in Sections 5.1 through 5.22 of the Agreement are true and correct on and as of
the date hereof with the same effect as though made and repeated by Borrower as
of the date hereof.
3
<PAGE>
D. CONDITIONS
Lender's obligations under the Agreement, as hereby amended, is subject to
the following conditions:
1. Lender and Borrower shall have executed and delivered this
Amendment.
2. Borrower's representations and warranties set forth in Section
C hereof shall be true and correct on and as of the date hereof, and the date of
any subsequent advance with the same effect as though such representation and
warranty had been on and as of such date.
3. Borrower shall have satisfied all conditions set forth in Section
4.1 of the Agreement.
4. As of the date hereof, and the date of any subsequent Advance, no
Event of Default nor any event which, with the giving of notice or lapse of
time, would constitute an Event of Default shall have occurred and be
continuing.
E. OTHER COVENANTS AND MISCELLANEOUS TERMS
1. Except as expressly amended and supplemented hereby, the
Agreement shall remain unchanged and in full force and effect, and the same is
hereby ratified and extended.
2. The Obligations, including but not limited to the indebtedness
evidenced by the Note executed in conjunction with the Agreement, shall continue
to be secured by the Collateral, without interruption or impairment of any kind.
3. Borrower shall make, execute or endorse, and acknowledge and
deliver or file or cause the same to be done, all such vouchers, invoices,
notices, certifications and additional agreements, undertakings, conveyances,
deeds of trusts, mortgages, transfers, assignments, financing statements or
other assurances, and take any and all such other action, as Lender may, from
time to time, deem reasonably necessary or proper in connection with any of the
Loan Documents and the obligations of Borrower assuring and confirming unto
Lender all or any part of the security for any such obligation. In connection
herewith, Lender may require Borrower to execute additional mortgages or deeds
of trust pursuant to the terms of the Agreement.
4. The Borrowers hereby agrees to pay all reasonable attorney fees
and legal expenses incurred by Lender in preparation, execution and
implementation of this
4
<PAGE>
Amendment and any mortgages, deeds of trust, security agreements, pledge
agreements or any amendments thereto.
5. This Amendment shall be construed in accordance with and governed
by the laws of the State of Oklahoma, and shall be binding on and inure to the
benefit of the Borrower and Lender, and their respective successors and assigns.
All obligations of the Borrower under the Agreement and all rights of Lender and
any other holder of the Notes, whether expressed herein or in any Note, shall be
in addition to and not in limitation of those provided by applicable law.
Borrower irrevocably agrees that, subject to Lender's sole election, all suits
or proceedings arising from or related to the Agreement, as amended, or the
Notes may be litigated in courts (whether State or Federal) sitting in Oklahoma
City, Oklahoma, and the Borrower hereby irrevocably waives any objection to such
jurisdiction and venue.
6. This Amendment may be executed in as many counterparts as are
deemed necessary or convenient, and it shall not be necessary for the signature
of more than any one party to appear on any single counterpart. Each
counterpart shall be deemed an original, but all shall be construed together as
one and the same instrument. The failure of any party to sign shall not affect
or limit the liability of any party executing any such counterpart.
BORROWER: INDIAN OIL COMPANY,
an Oklahoma corporation
__________________________________________
By: Richard R. Dunning
Title: Chief Executive Officer
LENDER: BANK ONE, OKLAHOMA, N.A.
__________________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
5
<PAGE>
Exhibit 10.5(d)
THIRD AMENDMENT TO CREDIT AGREEMENT BY AND
BETWEEN INDIAN OIL COMPANY
AND BANK ONE, OKLAHOMA, N.A.
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made
effective the 31st day of March, 1999 by and between INDIAN OIL COMPANY, an
Oklahoma corporation. (the "Borrower") and BANK ONE, OKLAHOMA, N.A. (the
"Lender").
W I T N E S S E T H:
WHEREAS, on December 22, 1997, Borrower and Lender entered into that
certain Credit Agreement (the "Original Agreement") whereby Lender provided
Borrower with a reducing, revolving line of credit in an amount, subject to a
Borrowing Base, which shall not exceed $50,000,000.00 as evidenced by the Note.
WHEREAS, on August 10, 1998 Borrower and Lender amended the Original
Agreement for the first time (the "First Amendment") in order to: (i) change the
Debt Service Coverage ratio calculation; (ii) waive the occurrence of certain
events of default; and (iii) certain other changes more particularly set forth
therein.
WHEREAS, on February 26, 1999, Borrower and Lender amended the Original
Agreement for the second time (the "Second Amendment") in order to (i) reduce
the Borrower's Borrowing Base availability from $24,000,000.00 to
$20,000,000.00; (ii) extend the deadline for Borrower to have completed a
$12,000,000.00 equity offering until March 1, 1999; (iii) extend the deadline
for Borrower to provide an audited financial statement for the fiscal year
ending December 31, 1997 until April 10, 1999; and (iv) waive the occurrence of
certain events of default (the Original Agreement as amended by the First and
Second Amendments is referred to herein as the "Agreement").
WHEREAS, the obligations described in the Agreement are secured by, among
other things not specifically set forth herein, certain Oil and Gas Properties;
and
WHEREAS, all capitalized terms not otherwise defined herein shall have
those meanings assigned to such terms in the Agreement;
WHEREAS, Borrower and Lender now desire to amend the Agreement for the
third time in order to (i) reset the Borrowing Base, (ii) reset the Monthly
Borrowing Base Reduction figure, (iii) restate the Debt Service Coverage ratio,
and (iv) document such other amendments and waivers as set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are
<PAGE>
hereby acknowledged, the Borrower and the Lender hereby agree to amend the
agreement as follows:
A. CHANGES TO THE AGREEMENT. The Agreement is hereby amended as follows:
1. Lender's second lien position on 100% of the stock of Cibola
Corporation and the 374,822 shares of TransCanada Pipelines stock is hereby
released, and Lender shall execute and file any such documentation of record
evidencing same.
2. The limited Guaranty provided by Cibola Corporation and required
pursuant to Section 3.5 of the Agreement, Guaranty, is hereby released and
--------
returned to Cibola Corporation.
3. The definition of "Applicable Percentage" at Section 1.2 of the
Agreement, Additional Defined Terms, is hereby amended and restated in its
------------------------
entirety as follows:
"Applicable Percentage" shall mean for any day, the margin of interest
---------------------
over the LIBOR Rate that is applicable dependent upon the Interest Option
selected by Borrower. The Applicable Percentage is subject to upwards
adjustment based upon the Advance Ratio as follows (rounded to the nearest
percentage point):
Advance Ratio Applicable Percentage
------------- ---------------------
Greater than or equal to 51% 2.750%
Greater than or equal to 31%, but less than 51% 2.625%
Less than 31% 2.500%
The Applicable Percentage shall be adjusted only upon each Request for
Advance and upon each Rollover Notice. Neither the Advance Ratio nor
Applicable Percentage shall be recalculated during an Interest Period.
4. The definition of "Tangible Net Worth" at Section 1.2 of the
Agreement, Additional Defined Terms, is hereby amended and restated in its
------------------------
entirety as follows:
"Tangible Net Worth" shall mean, on any date as of which the amount
------------------
thereof is to be determined, the sum of the following for Borrower
calculated in accordance with GAAP: (i) the amount of stated capital (less
cost of treasury shares), plus (ii) the amount of surplus and retained
----
earnings (or in the case of a surplus or retained earnings deficit, minus
-----
the amount of such deficit), plus (iii) all debt owed to shareholders
----
and/or Affiliates subordinated to the Obligations.
2
<PAGE>
5. Section 2.9 of the Agreement, Borrowing Base Determinations and
---------------------------------
Monthly Borrowing Base Reductions, is hereby amended to replace all references
- ---------------------------------
therein to the term "June 1st" with the term "March 1st" and all references
therein to the term "December 1st" with the term "September 1st" in order to
change the dates for borrowing base redeterminations and redeterminations of
Monthly Borrowing Base Reductions.
6. Section 3.6 of the Agreement, Release of MidFirst Collateral and
----------------------------------
Cibola Corporation Guaranty, is hereby deleted from the Agreement in its
- ---------------------------
entirety in light of Sections 1 and 2 above.
7. Section 6.4 of the Agreement, Reserve Reports, is hereby amended
---------------
to replace the second reference to the term "May 1" occurring in the first line
of said Section 6.4 with the term "August 1" and all references in said Section
6.4 to the term "November 1" with the term "February 1".
8. Section 6.25 of the Agreement, Equity Infusion, is hereby deleted
---------------
and the phrase "Intentionally Deleted" is inserted in its place as follows:
6.25. INTENTIONALLY DELETED.
9. Section 7.2 of the Agreement, Debt Service Coverage Ratio , is
---------------------------
hereby amended and restated in its entirety as follows:
7.2 Debt Service Coverage Ratio. For the quarterly
---------------------------
reporting periods ending December 31, 1998 and March 31, 1999,
the ratio determined by the quotient of (i) the sum of Borrower's
Net Income, as defined by GAAP, less dividends, plus depletion,
depreciation, amortization and interest expense (less any accrued
and unpaid interest on subordinated debt) for the quarter then
ended DIVIDED BY (ii) the Borrower's interest expense (less any
----------
accrued and unpaid interest on subordinated debt ) for the
quarter then ended, plus any other current maturities of long
term debt (exclusive of the Bank One debt or MidFirst Debt or the
"Contingent Production Payment" payable to Coral Reserves, Inc.,
Coral Reserves Energy Corp., and/or Coral Reserves Group, Ltd.
and/or any Affiliate thereof) shall not be less than 1.20 to
1.00.
Beginning with the quarterly reporting period ending June
30, 1999 and each quarter thereafter, Borrower shall maintain a
Debt Service Coverage Ratio, calculated on a quarterly basis, of
not less than 1:1. For the purposes of this calculation, the Debt
Service Coverage Ratio is defined as the quotient of (i) the sum
of Borrower's Net Income, as defined by GAAP, less dividends,
plus depletion, depreciation, amortization and interest expense
(less any accrued and unpaid interest on subordinated debt) for
the quarter then ended DIVIDED BY (i) the sum of the greater of
----------
(a) the quarterly sum of the Monthly Borrowing Base Reductions
required at the last redetermination of the Borrowing Base or
3
<PAGE>
(b) the quarterly principal reductions required assuming a level
amortization of the outstanding loan balance on the Obligations
as of the quarter end over the Half Life of Borrower's Oil and
Gas Properties, plus interest expense (less any accrued and
unpaid interest on subordinated debt ) for the quarter then
ended, plus any other current maturities of long term debt. For
the purposes of this covenant, "Half Life of the Borrower's Oil
and Gas Properties" shall be defined as the duration, in months,
as projected by Lender, in its sole discretion, acting
reasonably, during which one-half of the undiscounted future net
income, net of lease operating expenses, production taxes, and
capital expenditures will be realized from the Borrower's Oil and
Gas Properties. The Lender's calculation of the Half Life of the
Borrower's Oil and Gas Properties shall be determined and
communicated to Borrower with each redetermination of the
Borrowing Base and Monthly Borrowing Base Reduction.
10. Section 7.3 of the Agreement, Tangible Net Worth , is hereby
------------------
amended and restated in its entirety as follows:
7.3 Tangible Net Worth. Beginning with the quarter ending
------------------
December 31, 1998, maintain as of the end of the each quarterly
reporting period, a minimum Tangible Net Worth of no less than
$3,500,000.00 plus 75% of all Net Income (excluding any Net
Losses) subsequent to December 31,1998.
11. An additional provision shall be added to ARTICLE VIII of the
------------
Agreement, NEGATIVE COVENANTS, and shall be entitled " 8.16 Investments" which
------------------
shall state as follows:
8.16 Investments. Make any loan or advance to any person or
-----------
entity or purchase or otherwise acquire any capital stock,
assets, obligations, or other securities of, make any capital
contribution to, or otherwise invest in, or acquire any interest
in, any person or entity. Provided, however, this Section 8.16
shall not apply to Borrower's purchase or acquisition of Oil and
Gas Properties or direct obligations of the United States or any
agency thereof, certificates of deposit issued by any commercial
bank or any mutual fund consisting of obligations of the United
States or any agency thereof.
12. Section 9.1 of the Agreement, Enumeration of Events of Default,
--------------------------------
is hereby amended at paragraph "(f)" to add an additional sentence to the end of
said paragraph which shall state as follows:
For the purposes hereof, the occurrence of a default
pursuant to that certain Agreement and Plan of Merger by and
between Coral Reserves, Inc., Coral Reserves Energy Corp., Coral
Reserves Group, Ltd. and Borrower (the "Merger Agreement") or any
document executed in conjunction therewith shall
4
<PAGE>
constitute a Default hereunder and be considered to create a
Material Adverse Effect.
13. Section 9.1 of the Agreement, Enumeration of Events of Default,
--------------------------------
is hereby amended to include a new "Event of Default", as paragraph (s), in
order to make Borrower's shareholders' and/or Affiliates' failure to contribute
all of their subordinated debt as equity to Borrower an Event of Default. The
provision shall state as follows:
(s) Borrower shall not have received as an equity contribution,
all of the subordinated notes payable to its shareholders and/or Affiliates
by close of business on September 1, 2000 .
B. NOTICES.
Borrower is hereby notified of the following occurrences: Borrowing Base.
--------------
Pursuant to Section 2.9 and Section 7.2 of the Agreement, Borrower and Lender
hereby affirm the Borrowing Base at $20,000,000.00 until September 1, 1999 and
the Monthly Borrowing Base Reduction shall be reset at $244,000.00 beginning
April 1, 1999 and the Half Life of the Borrower's Oil and Gas Properties shall
be redetermined at eighty-two (82) months until the next redetermination on
September 1, 1999.
Lender hereby waives the default created by Borrower not completing a
twelve million dollar equity offering by March 1, 1999.
C. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender that:
1. Borrower is a corporation, duly organized, legally existing, and
in good standing under the laws of the State of Oklahoma, and is duly qualified
as a foreign corporation and in good standing in all other states wherein the
nature of its business or its assets make such qualification necessary.
2. Borrower's execution and delivery of this Amendment and
performance of its obligations hereunder: (a) are and will be within its
corporate powers; (b) are duly authorized by its board of directors; (c) are not
and will not be in contravention of any law, statute, rule or regulation, the
terms of its articles or certificates of incorporation and bylaws, nor of any
preferred stock provision, indenture, agreement or undertaking to which
Corporation or any of its properties are bound; (d) do not require any consent
or approval (including governmental) which has not been given; and (e) will not
result in the imposition of Liens, charges or encumbrances on any of its
properties or assets, except those in favor of Lender hereunder.
5
<PAGE>
3. This Amendment, when duly executed and delivered, will constitute
the legal, valid and binding obligations of each Borrower, enforceable in
accordance with its terms.
4. All financial statements, balance sheets, income statements and
other financial data which have been or are hereafter furnished to Lender by
each Borrower to induce Lender to make the loans hereunder due, and as to
subsequent financial statements will, fairly represent each Borrower's financial
condition as of the dates for which the same are furnished. All such financial
statements, reports, papers and other data furnished to Lender are and will be,
when furnished: prepared in accordance with generally accepted accounting
principles consistently applied; accurate and correct in all material respects;
and complete insofar as completeness may be necessary to give Lender a true and
accurate knowledge of the subject matter. Since the date of the last such
financial statements, no material adverse change has occurred in the operations
or condition, financial or otherwise and other financial data provided to
Lender; of either Borrower, nor, to the best of their knowledge, has either
Borrower incurred, any material liabilities or made any material investment or
guarantees, direct or contingent, in any single case or in the aggregate, which
has not been disclosed to Lender.
5. The Borrower is the sole and lawful owner of the Collateral,
pledged, mortgaged or assigned by it, and Borrower has, and as to after acquired
property or New Properties will have, good right to cause the Collateral to be
hypothecated to Lender as security for the Obligations.
6. All of Borrower's other representations and warranties set forth
in Sections 5.1 through 5.22 of the Agreement are true and correct on and as of
the date hereof with the same effect as though made and repeated by Borrower as
of the date hereof.
D. CONDITIONS
Lender's obligations under the Agreement, as hereby amended, is subject to
the following conditions:
1. Lender and Borrower shall have executed and delivered this
Amendment.
2. Coral Reserves, Inc., Coral Reserves Energy Corp., Coral Reserves
Natural Gas Income Fund 1996 Limited Partnership, Coral Reserves 1996
Institutional Limited Partnership and/or Coral Reserves Group, Ltd (individually
and collectively, "Coral") shall have invested $6,000,000.00 in Borrower in
exchange for, among other things, an unsecured "Contingent Production Payment
("CPP") .
3. Indian shall have made a $6,000,000.00 principal reduction on the
MidFirst Debt.
6
<PAGE>
4. MidFirst shall have renewed the MidFirst Debt on terms requiring
a single payment of principal and interest on or after March 1, 2000.
5. MidFirst shall have released its mortgage on Borrower's Oil and
Gas Properties.
6. Borrower, MidFirst and Coral shall have executed an intercreditor
agreement, in form and substance acceptable to Lender.
7. Borrower's representations and warranties set forth in Section
C hereof shall be true and correct on and as of the date hereof, and the date of
any subsequent advance with the same effect as though such representation and
warranty had been on and as of such date.
8. Borrower shall have satisfied all conditions set forth in Section
4.1 of the Agreement.
9. As of the date hereof, and the date of any subsequent Advance, no
Event of Default nor any event which, with the giving of notice or lapse of
time, would constitute an Event of Default shall have occurred and be
continuing.
10. Lender shall have received the Amendment/Restructure Fee referred
to and required pursuant to Section E(1) below.
E. OTHER COVENANTS AND MISCELLANEOUS TERMS
1. In addition to interest on the Note and in order to compensate
Lender for various consents, waivers and amendments to restructure the credit
facility and in consideration for the release of certain collateral discussed
above, Borrower shall pay Lender an Amendment/Restructure Fee in the amount of
$75,000.00.
2. Except as expressly amended and supplemented hereby, the
Agreement shall remain unchanged and in full force and effect, and the same is
hereby ratified and extended.
3. The Obligations, including but not limited to the indebtedness
evidenced by the Note executed in conjunction with the Agreement, shall continue
to be secured by the Collateral, without interruption or impairment of any kind.
4. Borrower shall make, execute or endorse, and acknowledge and
deliver or file or cause the same to be done, all such vouchers, invoices,
notices, certifications and additional agreements, undertakings, conveyances,
deeds of trusts, mortgages, transfers, assignments, financing statements or
other assurances, and take any and all such other action, as Lender may, from
time to time, deem reasonably necessary or proper in connection with
7
<PAGE>
any of the Loan Documents and the obligations of Borrower assuring and
confirming unto Lender all or any part of the security for any such
obligation. In connection herewith, Lender may require Borrower to
execute additional mortgages or deeds of trust pursuant to the terms
of the Agreement.
5. The Borrowers hereby agrees to pay all reasonable attorney fees
and legal expenses incurred by Lender in preparation, execution and
implementation of this Amendment and any mortgages, deeds of trust, security
agreements, pledge agreements or any amendments thereto.
6. This Amendment shall be construed in accordance with and governed
by the laws of the State of Oklahoma, and shall be binding on and inure to the
benefit of the Borrower and Lender, and their respective successors and assigns.
All obligations of the Borrower under the Agreement and all rights of Lender and
any other holder of the Notes, whether expressed herein or in any Note, shall be
in addition to and not in limitation of those provided by applicable law.
Borrower irrevocably agrees that, subject to Lender's sole election, all suits
or proceedings arising from or related to the Agreement, as amended, or the
Notes may be litigated in courts (whether State or Federal) sitting in Oklahoma
City, Oklahoma, and the Borrower hereby irrevocably waives any objection to such
jurisdiction and venue.
7. This Amendment may be executed in as many counterparts as are
deemed necessary or convenient, and it shall not be necessary for the signature
of more than any one party to appear on any single counterpart. Each
counterpart shall be deemed an original, but all shall be construed together as
one and the same instrument. The failure of any party to sign shall not affect
or limit the liability of any party executing any such counterpart.
BORROWER: INDIAN OIL COMPANY,
an Oklahoma corporation
__________________________________________
By: Richard R. Dunning
Title: Chief Executive Officer
LENDER: BANK ONE, OKLAHOMA, N.A.
__________________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
8
<PAGE>
EXHIBIT 10.5 (e)
FOURTH AMENDMENT TO CREDIT AGREEMENT BY AND
BETWEEN INDIAN OIL COMPANY
AND BANK ONE, OKLAHOMA, N.A.
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made
effective the 1st day of November, 1999 by and between INDIAN OIL COMPANY, an
Oklahoma corporation. (the "Borrower") and BANK ONE, OKLAHOMA, N.A. (the
"Lender").
W I T N E S S E T H:
WHEREAS, on December 22, 1997, Borrower and Lender entered into that
certain Credit Agreement (the "Original Agreement") whereby Lender provided
Borrower with a reducing, revolving line of credit in an amount, subject to a
Borrowing Base, which shall not exceed $50,000,000.00 as evidenced by the Note.
WHEREAS, on August 10, 1998 Borrower and Lender amended the Original
Agreement for the first time (the "First Amendment") in order to: (i) change the
Debt Service Coverage ratio calculation; (ii) waive the occurrence of certain
events of default; and (iii) certain other changes more particularly set forth
therein.
WHEREAS, on February 26, 1999, Borrower and Lender amended the Original
Agreement for the second time (the "Second Amendment") in order to (i) reduce
the Borrower's Borrowing Base availability from $24,000,000.00 to
$20,000,000.00; (ii) extend the deadline for Borrower to have completed a
$12,000,000.00 equity offering until March 1, 1999; (iii) extend the deadline
for Borrower to provide an audited financial statement for the fiscal year
ending December 31, 1997 until April 10, 1999; and (iv) waive the occurrence of
certain events of default.
WHEREAS, on March 31, 1999, Borrower and Lender amended the Agreement for
the third time (the "Third Amendment") in order to: (i) reset the Borrowing
Base, (ii) reset the Monthly Borrowing Base Reduction, (iii) restate the Debt
Service Coverage Ratio, and (iv) document such other amendments and waivers as
set forth therein (the Original Agreement as amended by the First, Second, and
Third Amendments is referred to herein as the "Agreement")
WHEREAS, the obligations described in the Agreement are secured by, among
other things not specifically set forth herein, certain Oil and Gas Properties;
and
WHEREAS, all capitalized terms not otherwise defined herein shall have
those meanings assigned to such terms in the Agreement;
<PAGE>
WHEREAS, Borrower and Lender now desire to amend the Agreement for the
fourth time in order to (i) permit additional subordinated debt, as described
herein, (ii) to provide for Unscheduled Redeterminations (defined herein),
(iii) to include commodity rate management language and (iv) to document such
other amendments, extensions and waivers as set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree to amend the agreement as follows:
A. CHANGES TO THE AGREEMENT. The Agreement is hereby amended as follows:
1. The definition of "Affiliate" at Section 1.2 of the Agreement,
---------
Additional Defined Terms, is hereby amended to specifically include "INDCO,
- ------------------------
L.C.C." by inserting the following sentence at the end of said definition:
The term "Affiliates" is also understood to include, but is not limited to,
----------
INDCO, L.L.C.
2. The definition of "Obligations" at Section 1.2 of the Agreement,
Additional Defined Terms, is hereby amended and restated in its entirety as
- ------------------------
follows:
"Obligations" shall mean, without duplication, (a) all
-----------
Indebtedness evidenced by the Note, (b) the obligation of the
Borrower for the payment of any fees required herein, (c) any and
all obligations, contingent or otherwise, whether now existing or
hereafter arising, of Borrower to Lender arising under or in
connection with Rate Management Transactions, and (d) all other
obligations and liabilities of the Borrower to the Lender, now
existing or hereafter incurred, under, arising out of or in
connection with any Loan Document, and with respect to all of the
foregoing to the extent that any of the same includes or refers
to the payment of amounts deemed or constituting interest, only
so much thereof as shall have accrued, been earned and remains
unpaid at each relevant time of determination.
3. The definition of "Tangible Net Worth" at Section 1.2 of the
Agreement, Additional Defined Terms, is hereby amended and restated in its
------------------------
entirety as follows:
"Tangible Net Worth" shall mean, on any date as of which the
------------------
amount thereof is to be determined, the sum of the following for
Borrower calculated in accordance with GAAP: (i) the amount of
stated capital (less cost of treasury shares), plus (ii) the
----
amount of surplus and retained earnings (or in the case of a
2
<PAGE>
surplus or retained earnings deficit, minus the amount of such
-----
deficit), plus (iii) all debt owed to shareholders and/or
----
Affiliates subordinated to the Obligations, minus (iv) all debt
-----
owed to Borrower by shareholders and/or Affiliates.
4. A new definition shall be added to Section 1.2 of the Agreement,
Additional Defined Terms, for the term "Rate Management Transaction" which shall
- -------------------------
be inserted in Section 1.2 in its alphabetical location and which shall state as
follows:
"Rate Management Transaction" shall mean any transaction
---------------------------
(including an agreement with respect thereto) now existing or
hereafter entered into between Borrower and Lender which is a
rate swap, basis swap, forward transaction, commodity swap,
commodity option, equity or equity index swap, equity or equity
index option, bond option, interest rate option, foreign exchange
transaction, cap transaction, floor transaction, collar
transaction, forward transaction, currency swap transaction,
cross-currency rate swap transaction, currency option or any
other similar transaction (including any option with respect to
any of these transactions) or any combination thereof, whether
linked to one or more interest rates, foreign currencies,
commodity prices, equity prices or other financial measures.
5. A new definition shall be added to Section 1.2 of the Agreement,
Additional Defined Terms, for the term "Unscheduled Redetermination" which shall
- -------------------------
be inserted in Section 1.2 in its alphabetical location and which shall state as
follows:
"Unscheduled Redetermination" shall mean a redetermination
---------------------------
of the Maximum Borrowing Base made at any time other than on the
dates set for the regular semi-annual redetermination of the
Maximum Borrowing Base which is made (A) at the reasonable
request of a Borrower, (B) at any time it appears to the Lender,
in the exercise of its reasonable discretion, that either (i)
there has been a material decrease in the value of the Oil and
Gas Properties, or (ii) an event has occurred which is reasonably
expected to have a Material Adverse Effect.
6. Paragraph (b) of Section 2.9 of the Agreement, Borrowing Base
--------------
Determinations and Monthly Borrowing Base Reductions, is hereby amended and
- ----------------------------------------------------
restated in its entirety as follows:
(b) Subsequent Borrowing Base Determinations shall be made
by the Lender at least semi-annually on March 1 and September 1
(each a "Determination Date") of each year beginning September 1,
1999 or at any other time as an Unscheduled Borrowing Base
Determination. In connection with, and as of, each Borrowing Base
Determination, the Lender shall also determine the Monthly
Borrowing Base Reduction and Half Life of the Borrower's Oil and
Gas
3
<PAGE>
Properties. Borrower shall provide Lender with engineering
information pursuant to the terms of Section 6.4 below. Lender
shall, by notice to the Borrower by March 1 and September 1 of
each year, or within a reasonable time thereafter (herein called
the "Determination Date"), notify the Borrower of the designation
by the Lender of the new Borrowing Base, Monthly Borrowing Base
Reduction and Half Life of the Borrower's Oil and Gas Properties
for the period beginning on such Determination Date and
continuing until, but not including, the next Determination Date.
If an Unscheduled Borrowing Base Determination is made by the
Lender, the Lender shall notify the Borrower within a reasonable
time after receipt of all requested information of the new
Borrowing Base, Monthly Borrowing Base Reduction, and Half Life
of the Borrower's Oil and Gas Properties and such new Borrowing
Base, Monthly Borrowing Base Reduction, and Half Life of the
Borrower's Oil and Gas Properties shall continue until the next
Borrowing Base Determination. If the Borrower does not furnish
all such information, reports and data by any date specified in
this Section 2.9.2 or Section 6.4, the Lender may nonetheless
designate the Borrowing Base, Monthly Borrowing Base Reduction,
and Half Life of the Borrower's Oil and Gas Properties at any
amounts which the Lender in its discretion determines and may
redesignate the Borrowing Base, Monthly Borrowing Base Reduction,
and Half Life of the Borrower's Oil and Gas Properties from time
to time thereafter until the Lender receives all such
information, reports and data, whereupon the Lender shall
designate a new Borrowing Base, Monthly Borrowing Base Reduction,
and Half Life of the Borrower's Oil and Gas Properties as
described above. At each Borrowing Base Determination Lender
shall determine the amount of the Borrowing Base, Monthly
Borrowing Base Reduction, and Half Life of the Borrower's Oil and
Gas Properties based upon the Lender's evaluation of the
Collateral which Lender in its discretion (using such
methodology, assumptions and discounts rates as Lender
customarily uses in assigning collateral value to oil and gas
properties, oil and gas gathering systems, gas processing and
plant operations) assigns to such Oil and Gas Properties and
other Collateral of the Borrower at the time in question and
based upon such other credit factors consistently applied
(including, without limitation, the assets, liabilities, cash
flow, business, properties, prospects, management and ownership
of the Borrower and its Affiliates) as Lender customarily
considers in evaluating similar oil and gas loans. If at any time
any of the Oil and Gas Properties are sold, the Borrowing Base
then in effect shall automatically be reduced by a sum equal to
the amount of prepayment required to be made pursuant to Section
8.4 hereof. It is expressly understood that the Lender has no
obligation to designate the Borrowing Base, Monthly Borrowing
Base Reduction or Half Life of the Borrower's Oil and Gas
Properties at any particular amounts, except in the exercise of
its discretion, whether in relation to the Commitment or
otherwise. Provided, however, that the Lender shall not have the
obligation to designate a
4
<PAGE>
Borrowing Base in an amount in excess of the Commitment or its
legal or internal lending limits.
7. Article III of the Agreement, COLLATERAL AND OTHER FORMS OF
-----------------------------
CREDIT ENHANCEMENT, is hereby amended to include a new section at Section 3.7
- ------------------
entitled, INDCO, L.L.C. Collateral, which shall state as follows:
------------------------
3.7 INDCO, L.L.C. Collateral. As further security for the
------------------------
Obligations, Borrower shall pledge to Lender its $960,000.00 note
from INDCO, L.L.C. and upon request by Lender, INDCO, L.L.C.
shall pledge and/or grant Lender a security interest in and to
all assets transferred to INDCO, L.L.C. by Borrower, and any
consideration received by INDCO, L.L.C. for the sale or transfer
of the aforementioned assets.
8. Section 6.5 of the Agreement, Reserve Reports, is hereby amended
---------------
and restated in its entirety to allow for Unscheduled Redeterminations as
follows:
6.4 Reserve Reports.
---------------
(a) Deliver to the Lender no later than February 1, 2000,
and each February 1 thereafter during the term of this Agreement
and, upon request, in conjunction with any Unscheduled
Redetermination, engineering reports prepared by an independent
third party engineer approved by Lender (and/or such other
appropriate information acceptable to Lender) covering or
pertaining to Borrower's Oil and Gas Properties in form and
substance acceptable to Lender setting forth (i) the proven
producing and proven non-producing oil and gas reserves
(separately classified as such) attributable to the Oil and Gas
Properties as of each January 1 of each year for which the
Reserve Reports are furnished, (ii) the aggregate present value
determined on the basis of stated pricing assumptions, of the
future net income with respect to such Oil and Gas Properties,
discounted at a stated per annum discount rate of proven and
producing reserves, and (iii) projections of the annual rate of
production, gross income and net income with respect to such
proven and producing reserves.
(b) The report provided pursuant to this Section 6.4 shall
-----------
be submitted to the Lender together with additional data as the
Lender may reasonably request concerning pricing, quantities of
production from the Oil and Gas Properties, purchasers of
production and engineering and geological data. By August 1 of
each year and, upon request, in conjunction with Unscheduled
Redeterminations, Borrower shall provide Lender with such other
reserve information as Lender may reasonably request to complete
its semi annual redetermination of the Borrowing Base, Monthly
Borrowing Base Reduction, and Half Life of the Borrower's Oil and
Gas Properties.
5
<PAGE>
(c) In conjunction with the Reserve Report, Borrower shall furnish
Lender a report on the status of all gas balancing affecting any of the Oil
and Gas Properties.
9. Section 8.1 of the Agreement, Indebtedness, is hereby amended and
------------
restated in its entirety in order to permit certain of Borrower's obligations to
INDCO, L.L.C. as a permitted indebtedness as follows:
8.1 Indebtedness. Create, incur, assume or suffer to exist
------------
any Indebtedness that exceed, in the aggregate, the sum of
$100,000.00, whether by way of loan or otherwise; provided
--------
however, the foregoing restriction shall not apply to (a) the
-------
Obligations; (b) unsecured current accounts payable incurred in
he ordinary course of business; (c) the MidFirst Debt; or (d)
that certain $500,000.00 note payable to INDCO, L.L.C., which
such note shall be expressly subordinate to the Obligations.
10. Section 8.13 of the Agreement, Limitation of Hedging Activities,
--------------------------------
is hereby amended and restated in its entirety, in order to provide for Rate
Management Transactions as follows:
8.13 Limitation of Hedging Activities. The Borrower will
--------------------------------
not enter into any transaction providing (i) for the hedging,
forward sale, swap or any derivation thereof of crude oil or
natural gas or other commodities; or (ii) for a swap, collar,
floor, cap, option, corridor or other contract which is intended
to reduce or eliminate risk of fluctuation of interest rates, as
such terms are referred in the capital markets, except the
foregoing prohibitions shall not apply to: (a) transactions
consented to in writing by the Lender which are on terms
acceptable to the Lender; or (b) Pre-Approved Contracts. The term
"Pre-Approved Contracts" as used herein shall mean (i) any
physical delivery contract or agreement with an oil and gas
purchaser under which the Borrower agrees to sell its oil and gas
at an agreed upon price for an agreed upon period of time and for
volume amounts which do not exceed the monthly production
forecast for all of the Borrower's proved developed producing
reserves; and/or (ii) any financial contract or agreement entered
into between the Borrower and an affiliate of the Lender or such
other counterparty as is acceptable to Lender and which is
consistent with the following: (a) the sales price is at or above
the Bank's oil and gas pricing then in effect; (b) the volume
amounts do not exceed 75% of the Borrower's monthly production
forecast for all of the Borrower's proved developed producing
reserves; (c) the term does not extend beyond an twelve month
period. Upon entering into any such contract allowed hereunder,
Borrower agrees to notify Bank so as to allow for an adjustment
to the Maximum Borrowing Base if and when deemed appropriate by
the Bank in its sole discretion.
6
<PAGE>
11. The Event of Default set forth at Section 9.1 of the Agreement,
Enumeration of Events of Default, at paragraph (c) is hereby amended and
- ---------------------------------
restated in its entirety in order to include Rate Management Transactions as
follows:
(c) default shall be made by Borrower in the due observance
or performance of any of its obligations, covenants or agreements
(for payment or otherwise) contained in any of the Loan Documents
or pursuant to any Rate Management Transaction and such default
could be expected to have a Material Adverse Effect;
B. NOTICES. Borrower is hereby notified of the following occurrences:
1. Borrowing Base Determinations. Pursuant to Section 2.9 and
-----------------------------
Section 7.2 of the Agreement, Borrower and Lender hereby affirm the Borrowing
Base at $18,292,000.00 until December 1, 1999 at which time the Monthly
Borrowing Base Reduction shall resume at $244,000.00. Borrower and Bank
acknowledge that the aforementioned sentence effectively provides a waiver of
the $244,000.00 Monthly Borrowing Base reduction otherwise scheduled for
November 1, 1999. Borrower and Bank further acknowledge that the regularly
scheduled Borrowing Base Determination dates are March 1 and September 1. The
Borrowing Base Determination Dates set forth in Section 2.9 of the Agreement
notwithstanding, the September 1, 1999 Borrowing Base Determination Date is
hereby extended until December 15, 1999.
2. Debt Service Coverage Ratio. For the quarterly reporting period
---------------------------
ending September 30, 1999 and only for the quarterly reporting period ending
September 30, 1999, the denominator of the Debt Service Coverage Ratio shall be
$488,000.00 (which such amount equates to the Monthly Borrowing Base Reduction
for two months - not three- in order to offset the $250,000.00 payment to Reid
Investments incurred during the month of September, 1999) plus interest expense
----
(less any accrued and unpaid interest on subordinated debt ) for the quarter
then ended, plus any other current maturities of long term debt. The
----
calculation of the Debt Service Coverage Ratio as set forth in the Agreement
shall continue and be reinstated for all quarters subsequent to September 30,
1999.
3. Tangible Net Worth. Lender hereby waives the default created by
------------------
Borrower's failure to maintain the level of Tangible Net Worth required pursuant
to Section 7.3 of the Agreement, Tangible Net Worth, for the quarterly reporting
------------------
periods ending March 31, 1999 and June 30, 1999. This waiver is on a one-time
basis and is specifically not intended to waive any future violations of Section
7.3 of the Agreement or any other terms, covenants or conditions of the
Agreement.
C. REPRESENTATIONS AND WARRANTIES
7
<PAGE>
Borrower hereby represents and warrants to Lender that:
1. Borrower is a corporation, duly organized, legally existing, and
in good standing under the laws of the State of Oklahoma, and is duly qualified
as a foreign corporation and in good standing in all other states wherein the
nature of its business or its assets make such qualification necessary.
2. Borrower's execution and delivery of this Amendment and
performance of its obligations hereunder: (a) are and will be within its
corporate powers; (b) are duly authorized by its board of directors; (c) are not
and will not be in contravention of any law, statute, rule or regulation, the
terms of its articles or certificates of incorporation and bylaws, nor of any
preferred stock provision, indenture, agreement or undertaking to which
Corporation or any of its properties are bound; (d) do not require any consent
or approval (including governmental) which has not been given; and (e) will not
result in the imposition of Liens, charges or encumbrances on any of its
properties or assets, except those in favor of Lender hereunder.
3. This Amendment, when duly executed and delivered, will constitute
the legal, valid and binding obligations of each Borrower, enforceable in
accordance with its terms.
4. All financial statements, balance sheets, income statements and
other financial data which have been or are hereafter furnished to Lender by
each Borrower to induce Lender to make the loans hereunder due, and as to
subsequent financial statements will, fairly represent each Borrower's financial
condition as of the dates for which the same are furnished. All such financial
statements, reports, papers and other data furnished to Lender are and will be,
when furnished: prepared in accordance with generally accepted accounting
principles consistently applied; accurate and correct in all material respects;
and complete insofar as completeness may be necessary to give Lender a true and
accurate knowledge of the subject matter. Since the date of the last such
financial statements, no material adverse change has occurred in the operations
or condition, financial or otherwise and other financial data provided to
Lender; of either Borrower, nor, to the best of their knowledge, has either
Borrower incurred, any material liabilities or made any material investment or
guarantees, direct or contingent, in any single case or in the aggregate, which
has not been disclosed to Lender.
5. The Borrower is the sole and lawful owner of the Collateral,
pledged, mortgaged or assigned by it, and Borrower has, and as to after acquired
property or New Properties will have, good right to cause the Collateral to be
hypothecated to Lender as security for the Obligations.
8
<PAGE>
6. All of Borrower's other representations and warranties set forth
in Sections 5.1 through 5.22 of the Agreement are true and correct on and as of
the date hereof with the same effect as though made and repeated by Borrower as
of the date hereof.
D. CONDITIONS
Lender's obligations under the Agreement, as hereby amended, is subject to
the following conditions:
1. Lender and Borrower shall have executed and delivered this
Amendment.
2. Lender shall have executed and delivered such endorsements and
assignments necessary, in the discretion of Bank, to pledge the $960,000.00
promissory note from INDCO, L.L.C. to Borrower.
3. INDCO, L.L.C. and Borrower shall have executed and delivered to
Lender for its execution an agreement, satisfactory to Lender, subordinating
INDCO, L.L.C.'s $500,000.00 promissory note from the Borrower (principal and
interest) to the Obligations.
4. Borrower's representations and warranties set forth in Section
C hereof shall be true and correct on and as of the date hereof, and the date of
any subsequent advance with the same effect as though such representation and
warranty had been on and as of such date.
5. Borrower shall have satisfied all conditions set forth in Section
4.1 of the Agreement.
6. Except for the default created by Borrower's failure to provide
Bank with a copy of its audited financial statements for year ending December
31, 1998, as of the date hereof, and the date of any subsequent Advance, no
Event of Default nor any event which, with the giving of notice or lapse of
time, would constitute an Event of Default shall have occurred and be
continuing.
E. OTHER COVENANTS AND MISCELLANEOUS TERMS
1. Except as expressly amended and supplemented hereby, the
Agreement shall remain unchanged and in full force and effect, and the same is
hereby ratified and extended.
9
<PAGE>
2. The Obligations, including but not limited to the indebtedness
evidenced by the Note executed in conjunction with the Agreement, shall continue
to be secured by the Collateral, without interruption or impairment of any kind.
3. Borrower shall make, execute or endorse, and acknowledge and
deliver or file or cause the same to be done, all such vouchers, invoices,
notices, certifications and additional agreements, undertakings, conveyances,
deeds of trusts, mortgages, transfers, assignments, financing statements or
other assurances, and take any and all such other action, as Lender may, from
time to time, deem reasonably necessary or proper in connection with any of the
Loan Documents and the obligations of Borrower assuring and confirming unto
Lender all or any part of the security for any such obligation. In connection
herewith, Lender may require Borrower to execute additional mortgages or deeds
of trust pursuant to the terms of the Agreement.
4. The Borrower hereby agrees to pay all reasonable attorney fees
and legal expenses incurred by Lender in preparation, execution and
implementation of this Amendment and any mortgages, deeds of trust, security
agreements, pledge agreements or any amendments thereto.
5. This Amendment shall be construed in accordance with and governed
by the laws of the State of Oklahoma, and shall be binding on and inure to the
benefit of the Borrower and Lender, and their respective successors and assigns.
All obligations of the Borrower under the Agreement and all rights of Lender and
any other holder of the Notes, whether expressed herein or in any Note, shall be
in addition to and not in limitation of those provided by applicable law.
Borrower irrevocably agrees that, subject to Lender's sole election, all suits
or proceedings arising from or related to the Agreement, as amended, or the
Notes may be litigated in courts (whether State or Federal) sitting in Oklahoma
City, Oklahoma, and the Borrower hereby irrevocably waives any objection to such
jurisdiction and venue.
6. This Amendment may be executed in as many counterparts as are
deemed necessary or convenient, and it shall not be necessary for the signature
of more than any one party to appear on any single counterpart. Each
counterpart shall be deemed an original, but all shall be construed together as
one and the same instrument. The failure of any party to sign shall not affect
or limit the liability of any party executing any such counterpart.
BORROWER: INDIAN OIL COMPANY,
an Oklahoma corporation
__________________________________________
By: Richard R. Dunning
Title: Chief Executive Officer
10
<PAGE>
LENDER: BANK ONE, OKLAHOMA, N.A.
__________________________________________
By: John K. Slay, Jr.
Title: Vice President
11
<PAGE>
INDCO, L.L.C. JOINDER
INDCO, L.L.C., for good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, certify that it is familiar with,
has read, and is bound by applicable provisions concerning it contained therein.
Further, INDCO, L.L.C. hereby acknowledges and ratifies its agreements set forth
that certain letter agreement with Bank One, Oklahoma, N.A. and Indian Oil
Company dated as of September 20, 1999.
INDCO, L.L.C.,
____________________________________
By: Richard R. Dunning
Title: Manager
12
<PAGE>
EXHIBIT 10.5 (f)
INTERCREDITOR AGREEMENT
This Intercreditor Agreement is dated as of this 31st day of March, 1999 by
and among BANK ONE, OKLAHOMA, N.A. and its successors and assigns ("Bank One"),
MIDFIRST BANK, a federally chartered savings association and its successors and
assigns ("MidFirst"), and INDIAN OIL COMPANY, an Oklahoma corporation (the
"Borrower").
RECITALS:
---------
WHEREAS, On December 17, 1997, Borrower and MidFirst entered that certain
Loan Agreement (the "MidFirst Loan Agreement") and that certain promissory note
in the principal amount of $12,000,000.00 (the "MidFirst Note") and such other
documents executed in conjunction with the MidFirst Loan Agreement (the
"MidFirst Loan Documents").
WHEREAS, on December 17, 1997, Borrower and Bank One entered into that
certain Credit Agreement (the "Bank One Loan Agreement") and that certain
revolving promissory note in the principal amount of $50,000,000.00 (the "Bank
One Note") and such other documents executed in conjunction with the Bank One
Loan Agreement (the "Bank One Loan Documents").
WHEREAS, all indebtedness evidenced by the Bank One Loan Agreement, the
Bank One Note and the Bank One Loan Documents is referred to herein as the "Bank
One Debt."
WHEREAS, all indebtedness evidenced by the MidFirst Loan Agreement, the
MidFirst Note and the MidFirst Loan Documents is referred to herein as the
"MidFirst Debt."
WHEREAS, MidFirst and Bank One entered into and executed that certain
Intercreditor Agreement on December 17, 1997 (the "1997 Intercreditor
Agreement") in conjunction with the execution of both the Bank One Loan
Agreement and the MidFirst Loan Agreement, wherein MidFirst and Bank One agreed
to certain procedures to follow concerning collateral shared by both lenders.
WHEREAS, both the Bank One Loan Agreement and the MidFirst Loan Agreement
have been amended from time to time after the date of the original execution
thereof.
WHEREAS, contemporaneously herewith, Borrower has agreed to make a six
million dollar ($6,000,000.00) payment to reduce its total outstanding
indebtedness;
WHEREAS, Bank One, MidFirst, and Indian desire that the entire
$6,000,000.00 be applied against the MidFirst Debt in consideration for, among
other things, the execution of this Intercreditor Agreement.
1
<PAGE>
WHEREAS, it is the intent hereof and the parties hereto agree that this
Intercreditor Agreement shall replace and be substituted for, in its entirety,
the 1997 Intercreditor Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and such other good and valuable consideration the sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:
I. REPRESENTATIONS AND WARRANTIES. MidFirst and Borrower represent and
------------------------------
warrant to Bank One that:
(a) MidFirst Loan. As of the date hereof, the total indebtedness
-------------
owing by Borrower to MidFirst is $12,000,000.00 of which such amount shall be
contemporaneously reduced to $6,000,000.00.
(b) Default. There is no default in the indebtedness from Borrower to
-------
MidFirst or under any other agreements between Borrower and third parties.
II. JUNIOR PRIORITY OF MIDFIRST DEBT. In order to induce Bank One to
--------------------------------
extend a loan to Borrower, it is agreed as follows:
(a) Junior Priority. MidFirst agrees that the outstanding principal
----------------
indebtedness of the MidFirst Debt together with all interest obligations and the
payment therefor shall be and hereby are inferior and junior to the Bank One
Debt, unless otherwise agreed to in writing by Bank One, and MidFirst shall be
entitled to no payments of either principal or interest of any nature whatsoever
until the full cash payment of any and all indebtedness (including all interest
after the date of filing of a petition by or against Borrower under any
bankruptcy act) now due to Bank One from Borrower pursuant to the Bank One Loan
Agreement, as same may be amended from time to time hereafter. Provided,
however, notwithstanding the above, MidFirst may accept monthly payments of
interest only on the MidFirst Debt so long as Borrower is not in default on the
Bank One Loan Agreement. Upon the occurrence of an Event of Default under the
Bank One Loan Agreement, payments of interest on the MidFirst Debt by Borrower
shall be suspended and not made until such Event of Default has been cured to
Bank One's satisfaction; provided MidFirst shall have the right to collect the
principal and interest of the MidFirst Debt from its guarantors or the
liquidation of its collateral as provided in Section II(b) hereof.
(b) No Action by MidFirst. MidFirst will not, without Bank One's
---------------------
prior written consent, collect or enforce the MidFirst Debt or any part thereof
out of the assets of Borrower or otherwise exercise its remedies against
Borrower under the MidFirst Loan Documents, except as provided below, until the
Bank One Debt has been paid in full. MidFirst shall be entitled to exercise its
remedies against the collateral securing the MidFirst
2
<PAGE>
Debt and against any guarantors of the MidFirst Debt at any time. MidFirst shall
have the right to initiate collection activities and seek a judgment against
Borrower upon the initiation by Bank One of litigation to enforce Borrower's
obligations to Bank One, but not before. Bank One hereby agrees that upon its
transmission of any notification to Borrower of the occurrence of any event of
default thereby triggering any applicable cure period, it will forward MidFirst
a copy of this notice. Bank One also agrees to promptly forward MidFirst notice
of any litigation filed by it against Borrower. In no event shall MidFirst file
a judgment lien against the assets of Borrower prior to the filing by Bank One
of such a judgment lien. It is the intent hereof that MidFirst shall have the
right to obtain repayment of the MidFirst Debt pursuant to the MidFirst Loan
Documents from guarantors of the MidFirst Debt and from and against any
collateral securing the MidFirst Debt at any time, and, it is the intent hereof
that MidFirst shall have the right to obtain repayment of the MidFirst Debt
pursuant to the MidFirst Loan Documents against Borrower after repayment of the
Bank One Debt.
(c) Amendment of MidFirst Loan. So long as the Bank One Debt shall
--------------------------
remain outstanding, MidFirst shall not make or permit any amendment to the
MidFirst Loan Documents without the prior written consent of Bank One which
would (i) extend the maturity date past September 1,2000, (ii) encumber the
collateral securing the Bank One Debt or any other assets owned by the Borrower
or (iii) increase the MidFirst Debt.
(d) Payments Held in Trust. In the event that any payment of
----------------------
principal or interest or other payment or distribution of assets of Borrower
shall be received by any holder of the MidFirst Debt, notwithstanding the
foregoing, in violation of the provisions hereof, and before payment in full of
the Bank One Debt, such payment or distribution shall be held by such holder of
the MidFirst Debt in trust for the holder of the Bank One Debt by such holder of
the MidFirst Debt to the extent necessary to make payment of any unpaid Bank One
Debt.
(e) Permissive Payments. Borrower agrees with Bank One that after the
-------------------
execution hereof, it will make no payments of principal or interest to MidFirst
on the MidFirst Loan; provided, however, Bank One agrees that Borrower shall be
allowed to make monthly payments of interest only to MidFirst on the MidFirst
Loan, as long as such payment does not cause the Borrower to violate Section 7.2
of the Bank One Loan Agreement (the "Debt Service Coverage Ratio") and so long
as no "Event of Default" has occurred or is continuing under the Bank One Loan
Agreement. In the event that making the monthly interest payment due to MidFirst
would cause the Borrower to violate the Debt Service Coverage Ratio, and as a
result anything less than the full interest payment is made, Bank One agrees
that such payments may be made up at such point in time and to the extent that
no violation of the Debt Service Coverage Ratio would result.
(f) Amendment of Bank One Loan. So long as the MidFirst Debt shall
--------------------------
remain outstanding, Bank One shall not make or permit any amendment to the Bank
One Loan Documents without the prior written consent of MidFirst which would (i)
extend the maturity date past September 1, 2000, (ii) encumber the collateral
securing the MidFirst Debt or (iii) increase the Bank One commitment amount
beyond $20,000,000.00.
3
<PAGE>
(g) Discontinuance of Bank One Debt. If, at any time hereafter, Bank
-------------------------------
One shall, in its own judgment determine to discontinue the extension of credit
to Borrower, Bank One may do so. This Agreement shall continue in full force
and effect until Borrower shall have satisfied all obligations and Bank One
shall have been paid in full on all indebtedness, of any nature whatsoever that
may be due on the Bank One Loan Agreement or any amendments thereto to Bank One
from Borrower.
III MISCELLANEOUS
-------------
(a) Insolvency. In the event of any liquidation, dissolution or
----------
winding up of the Borrower, or any execution sale, receivership, insolvency,
bankruptcy, liquidation, readjustment, reorganization or other similar
proceeding relative to the Borrower or its property, all principal, interest and
other amounts owing on the Bank One Debt shall first be paid in full in cash
before any payment is made upon the MidFirst Debt; and in any such event, and in
the event of any payment in violation of this Intercreditor Agreement, any
payment or distribution of any kind or character, whether in cash, property or
securities which shall be made upon or in respect of the MidFirst Debt shall be
paid over to Bank One for application in payment thereof unless and until the
Bank One Debt shall have been paid or satisfied in full in cash.
(b) Proof and Vote of Claims. MidFirst hereby appoints, which
------------------------
appointment is irrevocable and coupled with an interest, Bank One, its
successors and assigns, as MidFirst's true and lawful attorney, with full power
of substitution, in the name of MidFirst, Bank One or otherwise. Such
appointment shall be for the sole use and benefit of Bank One, to the extent
permitted by law, to prove and vote all claims relating to the MidFirst Debt,
and to receive and collect all distributions and payments to which MidFirst
would be otherwise entitled on any liquidation of Borrower or in any proceeding
affecting Borrower or its property under any bankruptcy or insolvency laws or
any laws or proceedings relating to the relief of the Borrower, readjustment,
composition or extension of indebtedness or reorganization.
(c) Release of Oil and Gas Collateral. MidFirst will forthwith
---------------------------------
release its second mortgage on Borrower's oil and gas properties.
(d) Release of MidFirst Collateral. Bank One will forthwith release
------------------------------
its liens against the MidFirst Collateral.
(e) Administrative Proceedings. Except as permitted in Section
--------------------------
II(b), MidFirst agrees that it will not commence, prosecute or participate in
any administrative, legal, or equitable action against Borrower or in any
administrative, legal or equitable action that might adversely affect Borrower
or its interest, without Bank One's prior written consent.
(f) No Interference. MidFirst agrees that it will not take any action
---------------
that will impede, interfere with or restrict or restrain the exercise by Bank
One of its rights and
4
<PAGE>
remedies under the Bank One Loan Documents and, upon the commencement of any
bankruptcy of the Borrower, will take such actions as may be reasonably
necessary or appropriate to effectuate the subordination provided hereby. In
furtherance thereof, MidFirst hereby agrees not to oppose any motion filed or
supported by Bank One for relief from the automatic stay, for adequate
protection in respect of the Bank One Debt, and/or for the Borrower's use of
cash collateral or post-petition borrowing from Bank One.
(g) Collection Actions. If MidFirst, in violation of this Agreement,
------------------
shall commence, prosecute or participate in any suit, action or proceeding
against Borrower, Borrower may interpose as a defense or plea the making of this
Agreement and Bank One may intervene and interpose such defense or plea in Bank
One's name or in the name of Borrower. If MidFirst shall attempt to enforce any
security agreements, real estate mortgages or any lien instrument or other
encumbrances in violation of this Agreement, Bank One or Borrower may by virtue
of this Agreement restrain the enforcement thereof in Bank One's name or in the
name of Borrower. If MidFirst obtains any assets of the Borrower as a result of
any administrative, legal, or equitable action, or otherwise, MidFirst agrees to
forthwith pay, deliver, and assign to Bank One any such assets for application
upon the amount now or hereafter owing to Bank One by Borrower.
(h) MidFirst Rights. Nothing contained in this Subordination
---------------
Agreement is intended to or shall impair, as between Borrower and the holder of
the MidFirst Debt, the obligation of Borrower, which is absolute and
unconditional, to pay to the holder of the MidFirst Debt the principal of and
interest on such indebtedness.
(i) Limitation Assignments. MidFirst shall not sell, assign or
----------------------
transfer any of the MidFirst Debt, unless the buyer, assignee or transferee
thereof shall agree in writing to become bound by the provisions of this
Agreement and the holders of the Bank One Debt shall have been furnished with
the original copies of such agreement.
(j) Borrower Agreement. Borrower agrees, for the benefit of the
------------------
holder of the Bank One Debt, that, in the event that any note evidencing the
MidFirst Debt is declared due and payable before its expressed maturity,
Borrower will give prompt notice in writing of such happening to the holder of
the Bank One Debt. Borrower further agrees and covenants not to make any
distribution or payment to MidFirst in violation of the terms hereof.
(k) Governing Law. This Agreement and the obligations which it
-------------
secures and all rights and liabilities of the parties shall be governed as to
validity, interpretation, enforcement and effect by the laws of the State of
Oklahoma.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of this 31st day of March, 1999.
BORROWER:
5
<PAGE>
INDIAN OIL COMPANY
_____________________________________
By: Richard R. Dunning
Title: Chief Executive Officer
MIDFIRST:
MIDFIRST BANK:
______________________________________
By: Alan H. Kraft
Title: Sr. Vice President
BANK ONE:
BANK ONE, OKLAHOMA, N.A.
______________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
6
<PAGE>
EXHIBIT 10.5(g)
INTERCREDITOR AGREEMENT
This Intercreditor Agreement is dated as of this 31st day of March, 1999 by
and among BANK ONE, OKLAHOMA, N.A. and its successors and assigns ("Bank One"),
CORAL RESERVES, INC., an Oklahoma corporation ("Coral Reserves"), CORAL RESERVES
ENERGY CORP., an Oklahoma corporation ("Coral Energy"), CORAL RESERVES GROUP,
LTD., an Oklahoma corporation ("Coral Ltd.") (collectively, Coral Reserves,
Coral Energy, Coral Ltd. and/or CORAL RESERVES ENERGY INCOME FUND 1996 LIMITED
PARTNERSHIP and CORAL RESERVES 1996 INSTITUTIONAL LIMITED PARTNERSHIP thereof
are referred to herein as the "Coral Group"), and INDIAN OIL COMPANY, an
Oklahoma corporation (the "Borrower").
RECITALS:
---------
WHEREAS, on December 17, 1997, Borrower and Bank One entered into that
certain Credit Agreement (the "Bank One Loan Agreement") which such Bank One
Loan Agreement has been amended from time to time thereafter and revolving
promissory note in the principal amount of $50,000,000.00 (the "Bank One Note")
and such other documents executed in conjunction with the Bank One Loan
Agreement (the "Bank One Loan Documents").
WHEREAS, on February 15, 1999, the Coral Group and Borrower entered into
that certain Agreement and Plan of Merger ("Merger Agreement");
WHEREAS, pursuant to the Merger Agreement, the Coral Group invested or
shall invest $6,000,000.00 in Borrower in exchange for, among other things, an
unsecured "Contingent Production Payment" ("CPP").
WHEREAS, Borrower prepaid $6,000,000.00 against the MidFirst Debt.
WHEREAS, in return for the $6,000,000.00 payment from the Coral Group
referenced above, Borrower promised to make a production payment to the Coral
Group from proceeds received from Borrower's interests in oil and gas properties
in the amount of $56,250.00 per month (the "Contingent Production Payment");
WHEREAS, the Merger Agreement contemplates and sets forth the priority in
which Borrower's debts shall be repaid. This Intercreditor Agreement further
describes that procedure;
WHEREAS, all indebtedness evidenced by the Bank One Loan Agreement, the
Bank One Note and the Bank One Loan Documents is referred to herein as the "Bank
One Debt."
1
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises herein contained
and such other good and valuable consideration the sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:
I. REPRESENTATIONS AND WARRANTIES. The Coral Group and Borrower
------------------------------
represent and warrant to Bank One that:
(a) The Contingent Production Payment. As of the date hereof, the
---------------------------------
total indebtedness owing by Borrower to The Coral Group is evidenced by the
Contingent Production Payment.
(b) Default. There is no default in the indebtedness from Borrower to
-------
The Coral Group or under any other agreements between Borrower and third
parties.
II. JUNIOR PRIORITY OF CONTINGENT PRODUCTION PAYMENT. In order to induce
------------------------------------------------
Bank One to extend a loan to Borrower, it is agreed as follows:
(a) Junior Priority. The Coral Group agrees that the Contingent
----------------
Production Payment shall be and hereby are inferior and junior to the Bank One
Debt, unless otherwise agreed to in writing by Bank One, and the Coral Group
shall be entitled to no payments pursuant to the Contingent Production Payment
until the full cash payment of any and all indebtedness (including all interest
after the date of filing of a petition by or against Borrower under any
bankruptcy act) of any nature whatsoever now due to Bank One from Borrower
pursuant to the Bank One Loan, as same may be amended from time to time
hereafter. Provided, however, notwithstanding the above, the Coral Group shall
be entitled to the monthly Contingent Production Payment so long as Borrower is
not in default of the Bank One Loan Agreement. Upon the occurrence of an Event
of Default under the Bank One Loan Agreement, the Contingent Production Payment
shall be suspended and not made until such Event of Default has been cured to
Bank One's satisfaction.
(b) No Action by the Coral Group. The Coral Group will not, without
----------------------------
Bank One's prior written consent, accelerate, assert, collect, enforce or
release the Contingent Production Payment or any part thereof and/or otherwise
exercise its remedies pursuant to the Contingent Production Payment and the
Merger Agreement until the Bank One Debt has been paid in full.
(c) No Amendment. The Coral Group shall not amend or permit amendment
------------
of the terms of any instrument or agreement evidencing the Contingent Production
Payment without the prior written consent of Bank One.
2
<PAGE>
(d) Payments Held in Trust. In the event that any payment of
----------------------
principal or interest or other payment or distribution of assets of Borrower
shall be received by any holder of the Contingent Production Payment,
notwithstanding the foregoing, in violation of the provisions hereof, and before
payment in full of the Bank One Debt, such payment or distribution shall be held
by such holder of the Contingent Production Payment in trust for the holder of
the Bank One Debt by such holder of the Contingent Production Payment to the
extent necessary to make payment of any unpaid Bank One Debt.
(e) Permissive Payments. Borrower agrees with Bank One that after the
-------------------
execution hereof, it will make no payments to the Coral Group on the Contingent
Production Payment; provided, however, Bank One agrees that Borrower shall be
allowed to make monthly payments to the Coral Group on the Contingent Production
Payment, as long as such payment does not cause the Borrower to violate Section
7.2 of the Bank One Loan Agreement (the "Debt Service Coverage Ratio") and so
long as no "Event of Default" has occurred or is continuing under the Bank One
Loan Agreement. In the event that making the monthly Contingent Production
Payment due to the Coral Group would cause the Borrower to violate the Debt
Service Coverage Ratio, and as a result anything less than the full Contingent
Production Payment is made, Bank One agrees that such payments may be made up at
such point in time and to the extent that no violation of the Debt Service
Coverage Ratio would result.
(f) Bank One Modifications. With respect to the Bank One Debt, the
----------------------
Coral Group agrees that Bank One may grant extensions of the time of payment or
performance, make compromises, including releases of collateral and settlements
with Borrower, or otherwise modify the Bank One Debt without affecting the
agreements of the Coral Group or Borrower hereunder.
(g) Discontinuance of Bank One Debt. If, at any time hereafter, Bank
-------------------------------
One shall, in its own judgment determine to discontinue the extension of credit
to Borrower, Bank One may do so. This Agreement shall continue in full force
and effect until Borrower shall have satisfied all obligations and Bank One
shall have been paid in full on all indebtedness, of any nature whatsoever that
may be due on the Bank One Loan Agreement or any amendments thereto to Bank One
from Borrower.
III MISCELLANEOUS
-------------
(a) Insolvency. In the event of any liquidation, dissolution or
----------
winding up of the Borrower, or any execution sale, receivership, insolvency,
bankruptcy, liquidation, readjustment, reorganization or other similar
proceeding relative to the Borrower or its property, all principal, interest and
other amounts owing on the Bank One Debt shall first be paid in full in cash
before any payment is made upon the Contingent Production Payment; and in any
such event, and in the event of any payment in violation of this Intercreditor
Agreement,
3
<PAGE>
any payment or distribution of any kind or character, whether in cash, property
or securities which shall be made upon or in respect of the Contingent
Production Payment shall be paid over to Bank One for application in payment
thereof unless and until the Bank One Debt shall have been paid or satisfied in
full in cash.
(b) Proof and Vote of Claims. The Coral Group hereby appoints, which
------------------------
appointment is irrevocable and coupled with an interest, Bank One, its
successors and assigns, as The Coral Group's true and lawful attorney, with full
power of substitution, in the name of the Coral Group, Bank One or otherwise.
Such appointment shall be for the sole use and benefit of Bank One, to the
extent permitted by law, to prove and vote all claims relating to the Contingent
Production Payment, and to receive and collect all distributions and payments to
which the Coral Group would be otherwise entitled on any liquidation of Borrower
or in any proceeding affecting Borrower or its property under any bankruptcy or
insolvency laws or any laws or proceedings relating to the relief of the
Borrower, readjustment, composition or extension of indebtedness or
reorganization.
(c) Administrative Proceedings. The Coral Group agrees that it will
--------------------------
not commence, prosecute or participate in any administrative, legal, or
equitable action against Borrower or in any administrative, legal or equitable
action arising out of Borrower's failure to make the Contingent Production
Payment that might adversely affect Borrower or its interest, without Bank One's
prior written consent.
(d) No Interference. The Coral Group agrees that it will not take any
---------------
action that will impede, interfere with or restrict or restrain the exercise by
Bank One of its rights and remedies under the Bank One Loan Documents and, upon
the commencement of any bankruptcy of the Borrower, will take such actions as
may be reasonably necessary or appropriate to effectuate the subordination
provided hereby. In furtherance thereof, the Coral Group hereby agrees not to
oppose any motion filed or supported by Bank One for relief from the automatic
stay, for adequate protection in respect of the Bank One Debt, and/or for the
Borrower's use of cash collateral or post-petition borrowing from Bank One.
(e) Collection Actions. If the Coral Group, in violation of this
------------------
Agreement, shall commence, prosecute or participate in any suit, action or
proceeding against Borrower, Borrower may interpose as a defense or plea the
making of this Agreement and Bank One may intervene and interpose such defense
or plea in Bank One's name or in the name of Borrower. If the Coral Group shall
attempt to enforce any security agreements, real estate mortgages or any lien
instrument or other encumbrances, Bank One or Borrower may by virtue of this
Agreement restrain the enforcement thereof in Bank One's name or in the name of
Borrower. If the Coral Group obtains any assets of the Borrower as a result of
any administrative, legal, or equitable action, or otherwise, the Coral Group
agrees to forthwith pay, deliver, and assign to Bank One any such assets for
application upon the amount now or hereafter owing to Bank One by Borrower.
4
<PAGE>
(f) The Coral Group Rights. Nothing contained in this Agreement is
----------------------
intended to or shall impair, as between Borrower and the holder of the
Contingent Production Payment, the obligation of Borrower, which is absolute and
unconditional, to pay to the holder of the Contingent Production Payment such
indebtedness.
(g) Limitation Assignments. The Coral Group shall not sell, assign or
----------------------
transfer any of the Contingent Production Payment, unless the buyer, assignee or
transferee thereof shall agree in writing to become bound by the provisions of
this Agreement and the holders of the Bank One Debt shall have been furnished
with the original copies of such agreement.
(h) Borrower Agreement. Borrower agrees, for the benefit of the
------------------
holder of the Bank One Debt, that, in the event the or any Contingent Production
Payment is declared due and payable before its expressed maturity, Borrower will
give prompt notice in writing of such happening to the holder of the Bank One
Debt. Borrower further agrees and covenants not to make any distribution or
payment to the Coral Group in violation of the terms hereof.
(i) Governing Law. This Agreement and the obligations which it
-------------
secures and all rights and liabilities of the parties shall be governed as to
validity, interpretation, enforcement and effect by the laws of the State of
Oklahoma.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of this ____ day of March, 1999.
BORROWER:
INDIAN OIL COMPANY
__________________________________________
By: Roger D. Graham
Title: President
CORAL GROUP:
CORAL RESERVES, INC.:
__________________________________________
By: Leo E. Woodard
Title: President
5
<PAGE>
CORAL RESERVES ENERGY CORP.,
__________________________________________
By: Leo E. Woodard
Title: President
CORAL RESERVES GROUP, LTD.,
__________________________________________
By: Leo E. Woodard
Title: President
CORAL RESERVES 1996 INSTITUTIONAL
LIMITED PARTNERSHIP, an Oklahoma limited
partnership
By: Coral Reserves, Inc., general partner
By: ________________________
Leo E. Woodard, President
CORAL RESERVES ENERGY INCOME
FUND 1996 LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By: Coral Reserves Energy Corp.,
General Partner
By: _________________________
Leo E. Woodard, President
BANK ONE:
BANK ONE, OKLAHOMA, N.A.
__________________________________________
By: John K. Slay, Jr.
Title: Sr. Vice President
6
<PAGE>
EXHIBIT 10.5(h)
FIFTH AMENDMENT TO CREDIT AGREEMENT BY AND
BETWEEN INDIAN OIL COMPANY
AND BANK ONE, OKLAHOMA, N.A.
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made
effective as of the 1/st/ day of January, 2000 by and between INDIAN OIL
COMPANY, an Oklahoma corporation (the "Borrower") and BANK ONE, OKLAHOMA, N.A.
(the "Lender").
W I T N E S S E T H:
WHEREAS, on December 22, 1997, Borrower and Lender entered into that
certain Credit Agreement (the "Original Agreement") whereby Lender provided
Borrower with a reducing, revolving line of credit in an amount, subject to a
Borrowing Base, which shall not exceed $50,000,000.00 as evidenced by the Note.
WHEREAS, on August 10, 1998 Borrower and Lender amended the Original
Agreement for the first time (the "First Amendment") in order to: (i) change the
Debt Service Coverage ratio calculation; (ii) waive the occurrence of certain
events of default; and (iii) certain other changes more particularly set forth
therein;
WHEREAS, on February 26, 1999, Borrower and Lender amended the Original
Agreement for the second time (the "Second Amendment") in order to (i) reduce
the Borrower's Borrowing Base availability from $24,000,000.00 to
$20,000,000.00; (ii) extend the deadline for Borrower to have completed a
$12,000,000.00 equity offering until March 1, 1999; (iii) extend the deadline
for Borrower to provide an audited financial statement for the fiscal year
ending December 31, 1997 until April 10, 1999; and (iv) waive the occurrence of
certain events of default;
WHEREAS, on March 31, 1999, Borrower and Lender amended the Agreement for
the third time (the "Third Amendment") in order to: (i) reset the Borrowing
Base, (ii) reset the Monthly Borrowing Base Reduction, (iii) restate the Debt
Service Coverage Ratio, and (iv) document such other amendments and waivers as
set forth therein;
WHEREAS, on November 1/st/, 1999, Borrower and Lender amended the Agreement
for the fourth time (the "Fourth Amendment") in order to: (i) permit additional
subordinated debt, as described herein, (ii) to provide for Unscheduled
Redeterminations (defined herein), (iii) to include commodity rate management
language and (iv) to document such other amendments, extensions and waivers as
set forth therein (the Original Agreement as amended by the First, Second,
Third, and Fourth Amendments is referred to herein as the "Agreement");
WHEREAS, the obligations described in the Agreement are secured by, among
other things not specifically set forth herein, certain Oil and Gas Properties;
and
<PAGE>
WHEREAS, all capitalized terms not otherwise defined herein shall have
those meanings assigned to such terms in the Agreement;
WHEREAS, Borrower and Lender now desire to amend the Agreement for the
fifth time in order to: (i) renew and extend the Note, (ii) reset the Borrowing
Base and the Monthly Borrowing Base Reduction, (iii) restate the Debt Service
Coverage Ratio and (iv) document such other amendments, extensions and waivers
as set forth herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree to amend the agreement as follows:
A. CHANGES TO THE AGREEMENT. The Agreement is hereby amended as follows:
1. The definition of "Maturity Date" set forth at Section 1.2 of the
-------------
Agreement, Additional Defined Terms, is hereby amended and restated in its
------------------------
entirety to renew and extend the line of credit by deleting the reference
therein to "January 15, 2000" and replacing it with "January 15, 2001".
2. Section 2.9(b) of the Agreement, Borrowing Base Determinations
-----------------------------
and Monthly Borrowing Base Reductions, is hereby amended and restated in its
- -------------------------------------
entirety to change the dates as follows:
2.9 Borrowing Base Determinations and Monthly Borrowing Base
--------------------------------------------------------
Reductions.
----------
(b) Subsequent Borrowing Base Determinations shall be made by the
Lender at least semi-annually on July 1 and January 1 (each a
"Determination Date") of each year beginning July 1, 2000 or at any other
time as an Unscheduled Borrowing Base Determination. In connection with,
and as of, each Borrowing Base Determination, the Lender shall also
determine the Monthly Borrowing Base Reduction and Half Life of the
Borrower's Oil and Gas Properties. Borrower shall provide Lender with
engineering information pursuant to the terms of Section 6.4 below. Lender
shall, by notice to the Borrower by each Determination Date each year, or
within a reasonable time thereafter, notify the Borrower of the designation
by the Lender of the new Borrowing Base, Monthly Borrowing Base Reduction
and Half Life of the Borrower's Oil and Gas Properties for the period
beginning on such Determination Date and continuing until, but not
including, the next Determination Date. If an Unscheduled Borrowing Base
Determination is made by the Lender, the Lender shall notify the Borrower
within a reasonable time after receipt of all requested information of the
new Borrowing Base, Monthly Borrowing Base Reduction, and Half Life of the
Borrower's Oil and Gas Properties and such new Borrowing Base, Monthly
2
<PAGE>
Borrowing Base Reduction, and Half Life of the Borrower's Oil and Gas
Properties shall continue until the next Borrowing Base Determination. If
the Borrower does not furnish all such information, reports and data by any
date specified in this Section 2.9.2 or Section 6.4, the Lender may
nonetheless designate the Borrowing Base, Monthly Borrowing Base
Reduction, and Half Life of the Borrower's Oil and Gas Properties at any
amounts which the Lender in its discretion determines and may redesignate
the Borrowing Base, Monthly Borrowing Base Reduction, and Half Life of the
Borrower's Oil and Gas Properties from time to time thereafter until the
Lender receives all such information, reports and data, whereupon the
Lender shall designate a new Borrowing Base, Monthly Borrowing Base
Reduction, and Half Life of the Borrower's Oil and Gas Properties as
described above. At each Borrowing Base Determination Lender shall
determine the amount of the Borrowing Base, Monthly Borrowing Base
Reduction, and Half Life of the Borrower's Oil and Gas Properties based
upon the Lender's evaluation of the Collateral which Lender in its
discretion (using such methodology, assumptions and discounts rates as
Lender customarily uses in assigning collateral value to oil and gas
properties, oil and gas gathering systems, gas processing and plant
operations) assigns to such Oil and Gas Properties and other Collateral of
the Borrower at the time in question and based upon such other credit
factors consistently applied (including, without limitation, the assets,
liabilities, cash flow, business, properties, prospects, management and
ownership of the Borrower and its Affiliates) as Lender customarily
considers in evaluating similar oil and gas loans. If at any time any of
the Oil and Gas Properties are sold, the Borrowing Base then in effect
shall automatically be reduced by a sum equal to the amount of prepayment
required to be made pursuant to Section 8.4 hereof. It is expressly
understood that the Lender has no obligation to designate the Borrowing
Base, Monthly Borrowing Base Reduction or Half Life of the Borrower's Oil
and Gas Properties at any particular amounts, except in the exercise of its
discretion, whether in relation to the Commitment or otherwise. Provided,
however, that the Lender shall not have the obligation to designate a
Borrowing Base in an amount in excess of the Commitment or its legal or
internal lending limits.
3. Section 6.4 of the Agreement, Reserve Reports, is hereby amended
---------------
and restated in its entirety to change the dates as follows:
3
<PAGE>
6.4 Reserve Reports.
---------------
(a) Deliver to the Lender no later than June 1, 2000, and each June 1
thereafter during the term of this Agreement and, upon request, in
conjunction with any Unscheduled Redetermination, engineering reports
prepared by an independent third party engineer approved by Lender (and/or
such other appropriate information acceptable to Lender) covering or
pertaining to Borrower's Oil and Gas Properties in form and substance
acceptable to Lender setting forth (i) the proven producing and proven non-
producing oil and gas reserves (separately classified as such) attributable
to the Oil and Gas Properties as of each January 1 of each year for which
the Reserve Reports are furnished, (ii) the aggregate present value
determined on the basis of stated pricing assumptions, of the future net
income with respect to such Oil and Gas Properties, discounted at a stated
per annum discount rate of proven and producing reserves, and (iii)
projections of the annual rate of production, gross income and net income
with respect to such proven and producing reserves.
(b) The report provided pursuant to this Section 6.4 shall be
-----------
submitted to the Lender together with additional data as the Lender may
reasonably request concerning pricing, quantities of production from the
Oil and Gas Properties, purchasers of production and engineering and
geological data. By December 1 of each year and, upon request, in
conjunction with Unscheduled Redeterminations, Borrower shall provide
Lender with such other reserve information as Lender may reasonably request
to complete its semi annual redetermination of the Borrowing Base, Monthly
Borrowing Base Reduction, and Half Life of the Borrower's Oil and Gas
Properties.
(c) In conjunction with the Reserve Report, Borrower shall furnish
Lender a report on the status of all gas balancing affecting any of the Oil
and Gas Properties.
4. Section 7.2 of the Agreement, Debt Service Coverage Ratio , is
---------------------------
hereby amended and restated in its entirety as follows:
7.2 Debt Service Coverage Ratio. Beginning with the quarterly
---------------------------
reporting period ending December 31, 1999 and each quarter thereafter,
Borrower shall maintain a Debt Service Coverage Ratio, calculated on a
quarterly basis, of not less than 1:1. For the purposes of this
calculation, the Debt Service Coverage Ratio is defined as the quotient of
(i) the sum of Borrower's Pretax Net Income (as defined by GAAP) less cash
taxes, less dividends, plus depletion, depreciation, amortization and
interest expense for the quarter then ended DIVIDED BY (i) the sum of the
----------
greater of (a) the quarterly sum of the Monthly Borrowing Base Reductions
required at the last redetermination of the Borrowing Base or (b) the
4
<PAGE>
quarterly principal reductions required assuming a level amortization of
the Loan Balance as of the quarter end over the Half Life of Borrower's Oil
and Gas Properties, plus interest expense, including any accrued and unpaid
interest on the MidFirst Debt (less any accrued and unpaid interest on
other subordinated debt ) for the quarter then ended, plus any other
current maturities of long term debt (to include the "Contingent Production
Payment" payable to Coral Reserves, Inc., Coral Reserves Energy Corp.,
and/or Coral Reserves Group, Ltd., and/or any Affiliate thereof). For the
purposes of this covenant, "Half Life of the Borrower's Oil and Gas
Properties" shall be defined as the duration, in months, as projected by
Lender, in its sole discretion, acting reasonably, during which one-half of
the undiscounted future net income, net of lease operating expenses,
production taxes, and capital expenditures will be realized from the
Borrower's Oil and Gas Properties. The Lender's calculation of the Half
Life of the Borrower's Oil and Gas Properties shall be determined and
communicated to Borrower with each redetermination of the Borrowing Base
and Monthly Borrowing Base Reduction.
5. Borrower's requirement to maintain a certain Tangible Net Worth
is hereby eliminated beginning with calendar quarter ending December 31, 1999;
therefore, Section 7.3 of the Agreement, Tangible Net Worth is hereby deleted
------------------
and the phrase "Intentionally Deleted" is inserted in its place as follows:
7.3. INTENTIONALLY DELETED.
B. NOTICES. Pursuant to Section 2.9 and Section 7.2 of the Agreement,
the Borrower is hereby notified that effective as of January 1, 2000, the
Borrowing Base has been redetermined at $17,804,000.00, which such amount shall
be further subject to a Monthly Borrowing Base Reduction of $215,000.00
beginning February 1, 2000. Also effective January 1, 2000, the Half Life of
the Borrower's Oil and Gas Properties has been redetermined at eighty-three (83)
months. The Borrowing Base, Monthly Borrowing Base Reduction and Half Life of
the Borrower's Oil and Gas Properties referenced herein shall remain in effect
until the earlier of (i) July 1, 2000 (the next scheduled Determination Date) or
(ii) an Unscheduled Redetermination.
C. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender that:
1. Borrower is a corporation, duly organized, legally existing, and
in good standing under the laws of the State of Oklahoma, and is duly qualified
as a foreign corporation and in good standing in all other states wherein the
nature of its business or its assets make such qualification necessary.
5
<PAGE>
2. Borrower's execution and delivery of this Amendment and
performance of its obligations hereunder: (a) are and will be within its
corporate powers; (b) are duly authorized by its board of directors; (c) are not
and will not be in contravention of any law, statute, rule or regulation, the
terms of its articles or certificates of incorporation and bylaws, nor of any
preferred stock provision, indenture, agreement or undertaking to which
Corporation or any of its properties are bound; (d) do not require any consent
or approval (including governmental) which has not been given; and (e) will not
result in the imposition of Liens, charges or encumbrances on any of its
properties or assets, except those in favor of Lender hereunder.
3. This Amendment, when duly executed and delivered, will constitute
the legal, valid and binding obligations of each Borrower, enforceable in
accordance with its terms.
4. All financial statements, balance sheets, income statements and
other financial data which have been or are hereafter furnished to Lender by
each Borrower to induce Lender to make the loans hereunder due, and as to
subsequent financial statements will, fairly represent each Borrower's financial
condition as of the dates for which the same are furnished. All such financial
statements, reports, papers and other data furnished to Lender are and will be,
when furnished: prepared in accordance with generally accepted accounting
principles consistently applied; accurate and correct in all material respects;
and complete insofar as completeness may be necessary to give Lender a true and
accurate knowledge of the subject matter. Since the date of the last such
financial statements, no material adverse change has occurred in the operations
or condition, financial or otherwise and other financial data provided to
Lender; of either Borrower, nor, to the best of their knowledge, has either
Borrower incurred, any material liabilities or made any material investment or
guarantees, direct or contingent, in any single case or in the aggregate, which
has not been disclosed to Lender.
5. The Borrower is the sole and lawful owner of the Collateral,
pledged, mortgaged or assigned by it, and Borrower has, and as to after acquired
property or New Properties will have, good right to cause the Collateral to be
hypothecated to Lender as security for the Obligations.
6. All of Borrower's other representations and warranties set forth
in Sections 5.1 through 5.22 of the Agreement are true and correct on and as of
the date hereof with the same effect as though made and repeated by Borrower as
of the date hereof.
D. CONDITIONS
Lender's obligations under the Agreement, as hereby amended, is subject to
the following conditions:
1. Lender and Borrower shall have executed and delivered this
Amendment.
6
<PAGE>
2. Borrower shall have executed and delivered to Lender an amended
and restated promissory note.
3. Lender shall have received an estoppel certificate from Coral or
other evidence acceptable to Lender that the Agreement and Plan of Merger is
still in effect and that there are currently no defaults or events of default
pertaining thereto.
4. MidFirst shall have renewed and extended the MidFirst Debt to a
March 1, 2001 maturity.
5. Lender shall have received evidence acceptable to Lender that
both MidFirst and Coral consent and/or approve of the renewals, modifications,
amendments set forth herein.
6. Borrower's representations and warranties set forth in Section C
hereof shall be true and correct on and as of the date hereof, and the date of
any subsequent advance with the same effect as though such representation and
warranty had been on and as of such date.
7. Borrower shall have satisfied all conditions set forth in Section
4.1 of the Agreement.
8. No Event of Default nor any event which, with the giving of
notice or lapse of time, would constitute an Event of Default shall have
occurred and be continuing which has not been waived by Lender.
E. OTHER COVENANTS AND MISCELLANEOUS TERMS
1. Except as expressly amended and supplemented hereby, the
Agreement shall remain unchanged and in full force and effect, and the same is
hereby ratified and extended.
2. Borrower shall provide Lender with a final unqualified audit of
its Financial Statement for the fiscal year ending December 31, 1998 by
February 29, 2000. Borrower's failure to so provide this unqualified audit
shall constitute an Event of Default under the Agreement.
3. In consideration for extending the Commitment, Borrower agrees to
pay to Lender a Commitment Fee in the amount of $44,510.00, which equates to one
quarter of one percent (.25%) of the new Borrowing Base. The payment of such
fee shall be made by Borrower no later than July 1, 2000. Borrower's failure to
make this payment shall constitute an Event of Default under the Agreement.
7
<PAGE>
3. The Obligations, including but not limited to the indebtedness
evidenced by the Note executed in conjunction with the Agreement, shall continue
to be secured by the Collateral, without interruption or impairment of any kind.
4. Borrower shall make, execute or endorse, and acknowledge and
deliver or file or cause the same to be done, all such vouchers, invoices,
notices, certifications and additional agreements, undertakings, conveyances,
deeds of trusts, mortgages, transfers, assignments, financing statements or
other assurances, and take any and all such other action, as Lender may, from
time to time, deem reasonably necessary or proper in connection with any of the
Loan Documents and the obligations of Borrower assuring and confirming unto
Lender all or any part of the security for any such obligation. In connection
herewith, Lender may require Borrower to execute additional mortgages or deeds
of trust pursuant to the terms of the Agreement.
5. The Borrower hereby agrees to pay all reasonable attorney fees
and legal expenses incurred by Lender in preparation, execution and
implementation of this Amendment and any mortgages, deeds of trust, security
agreements, pledge agreements or any amendments thereto.
6. This Amendment shall be construed in accordance with and governed
by the laws of the State of Oklahoma, and shall be binding on and inure to the
benefit of the Borrower and Lender, and their respective successors and assigns.
All obligations of the Borrower under the Agreement and all rights of Lender and
any other holder of the Notes, whether expressed herein or in any Note, shall be
in addition to and not in limitation of those provided by applicable law.
Borrower irrevocably agrees that, subject to Lender's sole election, all suits
or proceedings arising from or related to the Agreement, as amended, or the
Notes may be litigated in courts (whether State or Federal) sitting in Oklahoma
City, Oklahoma, and the Borrower hereby irrevocably waives any objection to such
jurisdiction and venue.
7. This Amendment may be executed in as many counterparts as are
deemed necessary or convenient, and it shall not be necessary for the signature
of more than any one party to appear on any single counterpart. Each
counterpart shall be deemed an original, but all shall be construed together as
one and the same instrument. The failure of any party to sign shall not affect
or limit the liability of any party executing any such counterpart.
BORROWER: INDIAN OIL COMPANY,
an Oklahoma corporation
__________________________________________
By: Richard R. Dunning
Title: Chief Executive Officer
8
<PAGE>
LENDER: BANK ONE, OKLAHOMA, N.A.
________________________________
By: John K. Slay, Jr.
Title: Vice President
9
<PAGE>
Exhibit 10.6(a)
CREDIT AGREEMENT
$6,000,000 TERM LOAN
AMONG
INDIAN OIL COMPANY
AS BORROWER
CIBOLA CORPORATION
AS GUARANTOR
AND
MIDFIRST BANK
AS LENDER
March 31, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Heading Page
- ------- ------- ----
<S> <C>
SECTION 1. DEFINITIONS ........................................................... 1
1.1 Certain Defined Terms............................................. 1
1.2 Accounting Terms and Determinations............................... 8
1.3 Other Definitional Provisions..................................... 8
1.4 Calculations and Determinations................................... 9
SECTION 2. AMOUNT AND TERMS OF LOANS; NOTES........................................ 9
2.1 Loan.............................................................. 9
2.2 Interest; Payments of Principal and Interest....................... 9
2.3 Fee............................................................... 9
2.4 Optional Prepayments.............................................. 9
2.5 Manner and Time of Payments....................................... 9
2.6 Capital Adequacy.................................................. 10
2.7 Maximum Lawful Interest Rate...................................... 10
SECTION 3 CONDITIONS PRECEDENT.................................................... 11
3.1 Deliveries........................................................ 11
3.2 Commitment Fee.................................................... 13
3.3 Other Loan........................................................ 13
3.4 Representations and Warranties.................................... 13
3.5 No Default........................................................ 13
3.6 Performance....................................................... 13
SECTION 4 BORROWER'S AND GUARANTOR'S REPRESENTATIONS AND WARRANTIES............... 13
4.1 Organization, Powers and Qualification............................ 13
4.2 Subsidiaries...................................................... 13
4.3 Authorization of Borrowing; Binding Obligation.................... 14
4.4 No Conflict....................................................... 14
4.5 Governmental Consents............................................. 14
4.6 Financial Statements.............................................. 14
4.7 Title to Properties; Liens........................................ 15
4.8 Litigation........................................................ 15
4.9 Adverse Facts..................................................... 15
4.10 Payment of Taxes.................................................. 15
4.11 Governmental Regulation........................................... 15
4.12 Environmental Regulations......................................... 16
4.13 Use of Proceeds; Margin Stock..................................... 16
4.14 ERISA............................................................. 16
4.15 Licenses; Reports; Etc............................................ 16
4.16 Casualties........................................................ 16
4.17 Solvency.......................................................... 16
4.18 Disclosure........................................................ 17
4.19 No Default........................................................ 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 5 AFFIRMATIVE COVENANTS................................................... 17
5.1 Payment and Performance........................................... 17
5.2 Financial Statements and Other Reports............................ 17
5.3 Corporate Existence, Capital Stock, Etc........................... 18
5.4 Payment of Trade Debt, Taxes, Etc................................. 19
5.5 Maintenance of Properties; Insurance.............................. 19
5.6 Inspection........................................................ 19
5.7 Compliance With Laws, Etc......................................... 19
5.8 Other Loan........................................................ 20
5.9 Brokerage Account Value........................................... 20
5.10 Deposits to Brokerage Accounts.................................... 20
SECTION 6 NEGATIVE COVENANTS...................................................... 20
6.1 Limitation on Debt................................................ 20
6.2 Limitation on Liens............................................... 21
6.3 Dividends......................................................... 21
6.4 Limitation on Investments......................................... 21
6.5 Limitation on Debt of Others...................................... 21
6.6 Affiliate Transactions............................................ 21
6.7 Limitation on Sale of Properties.................................. 21
6.8 Fiscal Year and Accounting Method................................. 21
6.9 Liquidation, Mergers and Consolidations........................... 21
6.10 Other Loan Documents.............................................. 22
SECTION 7 EVENTS OF DEFAULT; REMEDIES............................................. 22
7.1 Events of Default................................................. 22
7.2 Remedies Upon Event of Default.................................... 24
7.3 Application of Proceeds........................................... 25
SECTION 8 MISCELLANEOUS........................................................... 25
8.1 Amendments........................................................ 25
8.2 Expenses.......................................................... 25
8.3 Indemnity......................................................... 26
8.4 Entire Agreement.................................................. 27
8.5 Independence of Covenants......................................... 27
8.6 Set-Off........................................................... 27
8.7 Notices........................................................... 28
8.8 Survival of Warranties and Agreements............................. 28
8.9 Failure or Indulgence Not Waiver; Remedies Cumulative............. 28
8.10 Severability...................................................... 28
8.11 Headings.......................................................... 28
8.12 Applicable Law.................................................... 28
8.13 Submission to Jurisdiction; Venue; Waiver of Jury Trial........... 29
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
8.14 Successors and Assigns; Transferees of Note....................... 29
8.15 Counterparts; Effectiveness....................................... 29
8.16 Restatement of Existing Credit Agreement.......................... 29
</TABLE>
SIGNATURE PAGES
EXHIBITS
1.1(a) Guaranty
1.1(b) Individual Pledge Agreement
1.1(c) Pledgor Guaranty
1.1(d) Account Pledge Agreement
1.1(e) Form of Control Agreement
2.1 Form of Note
5.2(a) Form of Compliance Certificate
SCHEDULES
4.2 Subsidiaries
4.8 Litigation
-iii-
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT is dated as of March 31, 1999, and entered into
by and among INDIAN OIL COMPANY, an Oklahoma corporation ("Borrower"), CIBOLA
CORPORATION, a Wyoming corporation ("Guarantor") and MIDFIRST BANK ("Lender")
with respect to the following facts:
A. Borrower and Guarantor have requested that Lender make financing
available to Borrower for the purpose of refinancing a portion of the cost of
acquiring a package of oil and gas properties from Sonat Exploration Company
having a total purchase price of $31,707,067.
B. Each of Borrower and Guarantor expects to derive benefit,
directly or indirectly, from such financing.
C. Lender is currently extending credit to Borrower pursuant to the
Existing Credit Agreement (as defined in Section 8.16) and is prepared to
-------------
extend the credit requested on the terms and conditions of this Agreement.
D. The parties desire to amend and restate in its entirety the
Existing Credit Agreement.
Accordingly, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1 Certain Defined Terms. The following terms used in this
---------------------
Agreement shall have the following meanings:
"Account Pledge Agreement" means that certain Pledge and Security
------------------------
Agreement previously executed by Guarantor and the other Persons named therein
(the "Account Pledgor") in favor of Lender granting to Lender a security
interest in the brokerage accounts, investment property and other property
described therein (the "Brokerage Accounts"), a copy of which is attached hereto
as Exhibit 1.1(d).
--------------
"Affiliate" means, with respect to any Person, any other Person
---------
directly or indirectly controlling (including all directors and officers of such
Person), controlled by, or under direct or indirect common control with, that
Person, and any other Person in which such Person's direct or indirect equity
interest is 5% or more of the total outstanding equity interests of such Person.
"Agreement" means this Credit Agreement dated as of the date first
---------
above written, as it may be amended from time to time.
"Authorized Officer" means, with respect to any act to be performed or
------------------
duty to be discharged by or on behalf of any
<PAGE>
Person who is not an individual, any officer, agent or representative thereof
who is at the time in question authorized to perform such act or discharge such
duty on behalf of such Person.
"Base Rate" means the per annum rate of interest identified as the
---------
prime rate in the "Money Rates" section of The Wall Street Journal. If more
than one prime rate is published in the "Money Rates" section of The Wall Street
Journal, the Base Rate shall be the highest rate. If such prime rate changes
after the date hereof, the Base Rate shall be automatically increased or
decreased, as the case may be, without notice to Borrower from time to time as
of the effective date of each change in such prime rate. If The Wall Street
Journal ceases publishing a prime rate or materially changes the criteria
therefor, as reasonably determined by Lender, "Base Rate" shall mean the rate of
interest from time to time publicly announced by Chase Manhattan Bank, or its
successor, as its prime rate.
"Business Day" means a day on which commercial banks are open for
------------
business with the public in Oklahoma City, Oklahoma.
"Capital Lease", as applied to any Person, means any lease of any
-------------
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.
"Capitalized Lease Obligation" means any rental obligation which,
----------------------------
under GAAP, would be required to be capitalized on the books of Borrower and its
Subsidiaries, taken at the amount thereof accounted for as indebtedness (net of
interest expense) in accordance with such principles.
"Cash Flow" means an amount equal to (i) Net Income plus (ii)
---------
Depreciation and interest expense deducted in determining Net Income minus (iii)
Dividends, each for the applicable period.
"Closing Date" means March __, 1999, or such other date as mutually
------------
agreed to by the parties.
"Contractual Obligation", as applied to any Person, means any
----------------------
provision of any securities issued by that Person or of any material indenture,
mortgage, deed of trust, contract, lease, undertaking, agreement or other
instrument to which that Person is a party or by which it or any of its
properties is bound or to which it or any of its properties is subject.
"Control Agreements" means those certain Account Control Agreements to
------------------
be executed by the Account Pledgor and the Brokers named therein ("Brokers") in
connection with perfecting
-2-
<PAGE>
the security interests created by the Account Pledge Agreement in the form of
Exhibit 1.1(e).
- --------------
"Controlled Group" means (i) the controlled group of corporations as
----------------
defined in Section 1563 of the Internal Revenue Code, or (ii) the group of
trades or businesses under common control as defined in Section 414(c) of the
Internal Revenue Code, of which Borrowers are a part or may become a part.
"Coral Agreement" means the Agreement and Plan of Merger dated
---------------
February 15, 1999, as amended, among Coral Reserves, Inc., Coral Reserves Energy
Corp., Coral Reserves Group, Ltd. and Borrower.
"Current Assets" means current assets of Borrower and its
--------------
Subsidiaries, on a combined basis, determined in accordance with GAAP.
"Current Liabilities" means current liabilities of Borrower and its
-------------------
Subsidiaries, on a combined basis, determined in accordance with GAAP.
"Current Maturities" means the current portion payable by Borrower and
------------------
its Subsidiaries, on a combined basis, of (i) principal payments on all Funded
Debt, and (ii) the principal portion of lease payments on all Capital Leases.
"Debt" of any Person means at any date, (a) all indebtedness for
----
borrowed money (whether by loan or the issuance and sale of debt securities) or
for the deferred purchase price of property or services (excluding accounts
payable in the ordinary course of business outstanding less than 60 days from
the date of invoice and payments or benefits in the nature of compensation for
services of employees), (b) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property,
(c) all Capitalized Lease Obligations, (d) all guaranties or other contingent
liabilities of any kind (including letter of credit repayment obligations) and
(e) all indebtedness, to the extent it would constitute a liability on a
consolidated balance sheet of the Person prepared in accordance with GAAP.
"Default" means any of the events specified in Section 7.1, regardless
------- -----------
of whether there shall have occurred any passage of time or giving of notice or
both that would be necessary in order to constitute such event an Event of
Default.
"Depreciation" means depreciation, depletion and amortization expenses
------------
and other non-cash charges as determined in accordance with GAAP.
-3-
<PAGE>
"Dividends", in respect of any corporation, means (i) cash
---------
distributions or any other distributions on, or in respect of, any class of
capital stock of a corporation, and (ii) any and all funds, cash or other
payments made in respect of the redemption, repurchase or acquisition of such
stock, unless such stock shall be redeemed or acquired through the exchange of
such stock with stock of the same class.
"Environmental Laws" means federal, state or local laws, rules or
------------------
regulations, and any judicial, arbitral or administrative interpretations
thereof, including any judicial, arbitral or administrative order, judgment,
permit, approval, decision or determination pertaining to health, safety or the
environment in effect at the time in question, including the Clean Air Act, the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
------
the Federal Water Pollution Control Act, the Occupational Safety and Health Act,
as amended, the Resource Conservation and Recovery Act, the Safe Drinking Water
Act, as amended, the Toxic Substances Control Act, the Superfund Amendment and
Reauthorization Act of 1986, the Hazardous Materials Transportation Act,
comparable state and local laws, and other environmental conservation and
protection laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, together with all regulations issued pursuant thereto.
"Event of Default" means the conditions and events specified in
----------------
Section 7.1.
- -----------
"Financial Statements" means each of Borrower's and Guarantor's
--------------------
balance sheet, income statement and stockholders' equity statement and statement
of cash flows.
"Financing Statements" means those certain financing statements
--------------------
executed by Borrower, Guarantor and Pledgors, as debtors, in favor of Lender, as
secured party.
"Funded Debt" means any loan or other obligation of Borrower and its
-----------
Subsidiaries (including indebtedness and obligations of others, with respect to
which Borrower or any Subsidiary has become liable by way of a guaranty)
maturing within a period in excess of one year from the date of determination,
excluding Capitalized Lease Obligations, operating leases, Debt arising out of
this Agreement.
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
-4-
<PAGE>
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstance as of the date of
determination.
"Guaranty" means the Guaranty Agreement executed by the Guarantor, a
--------
copy of which is attached hereto as Exhibit 1.1(a).
--------------
"Hazards" means any hazardous substances, solid wastes, asbestos,
-------
petroleum products or other substances known or suspected to pose a threat to
health or the environment.
"Individual Pledge Agreement" means that certain Pledge and Security
---------------------------
Agreement executed by Richard R. Dunning, Larry D. Hartzog, Michael C. Black and
the other Persons named therein ("Pledgors") in favor of Lender granting to
Lender a security interest in the stock, option to purchase and other property
as therein described, a copy of which is attached hereto as Exhibit 1.1(b).
--------------
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
---------------------
amended to the date hereof and from time to time hereafter.
"Investment" means, as applied to any Person, any direct or indirect
----------
purchase or other acquisition by such Person of stock or other securities of any
other Person, or any direct or indirect loan, advance or capital contribution by
such Person to any other Person, and any other item which would be classified as
an "investment" on a balance sheet of such Person prepared in accordance with
GAAP.
"Late Payment Rate" means three percent (3.0%) per annum plus the Base
-----------------
Rate then in effect.
"Licenses" means all licenses, permits, orders, authorizations and
--------
approvals of any federal, state or local regulatory authority and all contracts,
authorizations, licenses and approvals of any third parties which are necessary
or useful in the conduct of the business of Borrower and Guarantor, as now
conducted or as may be conducted in the future.
"Lien" means any lien, mortgage, pledge, security interest, charge or
----
encumbrance of any kind (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any agreement to give any
security interest).
"Loan Documents" means this Agreement, the Note, the Guaranty, the
--------------
Individual Pledge Agreement, the Pledgor Guaranty, the Account Pledge Agreement,
the Control Agreements, the Financing Statements, and all other agreements,
certificates,
-5-
<PAGE>
legal opinions and other documents, instruments and writings heretofore or
hereafter delivered in connection herewith or therewith (exclusive of commitment
letters, term sheets, and similar documents used in the negotiation hereof).
"Loan" has the meaning specified in Section 2.1.
---- -----------
"Margin Stock" has the meaning assigned to that term in Regulation U
------------
of the Board of Governors of the Federal Reserve System as in effect from time
to time.
"Material Adverse Effect" means, relative to any occurrence of
-----------------------
whatever nature (including any adverse determination in any litigation,
arbitration or governmental investigation or proceeding) and after taking into
account actual insurance coverage and effective indemnification with respect to
such occurrence, (a) a material adverse effect on the financial condition,
business or operations of Borrower or Guarantor or (b) any material impairment
upon the collective ability of Borrower or Guarantor to perform its payment or
other obligations hereunder or under the Note and other Loan Documents or the
right of Lender to enforce any of such obligations or any of its remedies under
the Loan Documents.
"Maturity Date" means March 1, 2000.
-------------
"Net Income" means net profit or loss after taxes of Borrower and its
----------
Subsidiaries, on a combined basis, determined in accordance with GAAP, minus any
gain from the non-cash write-ups of assets or any other extraordinary gains (to
the extent that such items are included in the determination of net income).
"Net Worth" means, with respect to Borrower and its Subsidiaries, on a
---------
combined basis, the sum of stockholders' or partners' equity, as shown on a
balance sheet, and "Tangible Net Worth" means Net Worth minus the sum of (i) any
------------------
surplus resulting from any write-up of assets, (ii) goodwill, (iii) treasury
stock, (iv) patents, trademarks, service marks, trade names, and copyrights,
plus (v) other intangible assets.
"Note" has the meaning specified in Section 2.1.
---- -----------
"Obligations" means all obligations of every nature of Guarantor or
-----------
Borrower from time to time owed to Lender under the Loan Documents.
"Other Loan" means the loan to Borrower from Bank One, Oklahoma, N.A.
----------
in the principal amount of $20,000,000, with an initial availability of
$20,000,000, to be secured by the oil and gas properties of Borrower (the
"Mortgaged Properties").
-6-
<PAGE>
"Other Loan Documents" means the Loan Agreement, Promissory Note,
--------------------
Mortgages and all other documents executed by Borrower, Guarantor and any other
Person in connection with the Other Loan.
"PBGC" means the Pension Benefit Guaranty Corporation, and any
----
successor to all or any of its functions under ERISA.
"Permitted Liens" means: (i) pledges or deposits made to secure
---------------
payment of worker's compensation insurance (or to participate in any fund in
connection with worker's compensation insurance), unemployment insurance,
pensions or social security programs, (ii) Liens imposed by mandatory provisions
of law such as for materialmen's, mechanics', warehousemen's and other like
Liens arising in the ordinary course of business, securing Debt whose payment is
not yet due, (iii) Liens for taxes, assessments and governmental charges or
levies imposed upon a Person or upon such Person's income or profits or
property, if the same are not yet due and payable or if the same are being
contested in good faith and as to which adequate cash reserves have been
provided, (iv) encumbrances consisting of zoning restrictions, easements, or
other restrictions on the use of real property, provided that such items do not
impair the use of such property for the purposes intended, and none of which is
violated by existing or proposed structures or land use, (v) Liens created
pursuant to this Agreement or any other Loan Document in favor of Lender, or
(vi) Liens on the oil and gas properties of Borrower which are permitted by the
Other Loan Documents.
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, limited liability companies, joint stock
companies, joint ventures, associations, companies, trusts, estates, banks,
trust companies, land trusts, business trusts or other organizations, whether or
not legal entities, and governments and agencies and political subdivisions
thereof.
"Plan" means an employee benefit plan or other plan maintained by
----
either Borrower for employees of such Borrower and covered by Title IV of ERISA,
or subject to the minimum funding standards under Section 412 of the Internal
Revenue Code.
"Pledgor Guaranty" means the Guaranty executed by the Pledgors, a copy
----------------
of which is attached hereto as Exhibit 1.1(c).
--------------
"Production Payment" means that certain production payment granted by
------------------
Borrower to Coral Reserves, Inc. and Coral Reserves Energy Corp. dated February
15, 1999.
"Regulation D" means Regulation D of the Board of Governors of the
------------
Federal Reserve System as in effect from time to
-7-
<PAGE>
time.
"Regulation U" means Regulation U of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.
"Regulation X" means Regulation X of the Board of Governors of the
------------
Federal Reserve System, as in effect from time to time.
"Reportable Event" has the meaning specified in Title IV of ERISA.
----------------
"Short Term Debt" means any loan or other obligation for borrowed
---------------
money of Borrower (including indebtedness and obligations of others with respect
to which Borrower or its Subsidiary has become liable by way of a Guaranty)
maturing within one year of the date of determination (including without
limitation outstanding balances under revolving credit facilities and committed
lines of credit, current maturities of Funded Debt and current maturities of
Capitalized Lease Obligations).
"Subsidiary" means, as to any Person, (a) any corporation a sufficient
----------
quantity of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person, directly or
indirectly through Subsidiaries, and (b) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, has a greater than 10% equity interest at the time.
"Tangible Assets" means the tangible assets of Borrower and its
---------------
Subsidiaries, on a combined basis, determined in accordance with GAAP.
"Total Liabilities" means at any time all obligations of Borrower and
-----------------
its Subsidiaries, determined on a combined basis, which in accordance with GAAP
should be classified as liabilities on a combined balance sheet prepared in
accordance with GAAP, and which in any event shall include (without
duplication): (i) all debt, obligations and liabilities guaranteed (directly or
indirectly), and all debt, obligations and liabilities secured by any Lien upon
any property owned by Borrower or any Subsidiary, even though it has not assumed
or become liable for the payment of the same; and (ii) Capital Leases.
1.2 Accounting Terms and Determinations. Unless otherwise specified
-----------------------------------
herein, all accounting terms used herein shall
-8-
<PAGE>
be interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP as in effect from time to time, applied on a basis
consistent with the most recent audited consolidated financial statements of
Borrower delivered to Lender.
1.3 Other Definitional Provisions. References to "Sections" and
-----------------------------
"subsections" shall be to Sections and subsections, respectively, of this
Agreement unless otherwise specifically provided. Any of the terms defined in
subsection 1.1 may, unless the context otherwise requires, be used in the
singular or the plural depending on the reference.
1.4 Calculations and Determinations. All calculations under the Loan
-------------------------------
Documents of interest and fees shall be on the basis of actual days elapsed
(including the first day but excluding the last) and a year of 360 days. Each
determination by Lender of amounts to be paid under Section 2.7 or any other
-----------
matters which are to be determined hereunder by Lender (such as any Base Rate or
Business Day) shall, in the absence of error, be conclusive and binding.
SECTION 2. AMOUNT AND TERMS OF LOANS; NOTES
2.1 Loan. Subject to the terms and conditions hereof, Lender agrees
----
to make a term loan to Borrower in the amount of $6,000,000 (the "Loan"). The
obligation of Borrower to repay the Loan shall be evidenced by a promissory note
(herein called the "Note") made by Borrower payable to the order of Lender in
the form of Exhibit 2.1.
-----------
2.2 Interest; Payments of Principal and Interest. The Loan
--------------------------------------------
(exclusive of any past due principal or interest) shall bear interest on each
day at the Base Rate in effect on such day. All past due principal and interest
on the Loan shall bear interest on each day outstanding at the Late Payment Rate
in effect on such day, and such interest shall be due and payable immediately as
it accrues. Accrued interest on the Loan shall be payable on March 31, 1999 and
thereafter monthly on the last day of each month until the Maturity Date, at
which time all remaining accrued but unpaid interest and all principal shall be
due and payable.
2.3 Fee. In consideration of Lender's commitment to make the Loan,
---
Borrower will pay to Lender a commitment fee in the amount of $15,000 on the
Closing Date.
2.4 Optional Prepayments. Borrower may, upon concurrent notice to
--------------------
Lender, from time to time and without premium or penalty, prepay the Loan, in
whole or in part, so long as all partial prepayments of principal concurrently
paid on the Loan are
-9-
<PAGE>
in increments of $100,000. Any prepayment of the Loan shall be applied first to
the payment of accrued and unpaid interest and then to the outstanding principal
of the Loan. Any prepayments on the Loan shall not be readvanced.
2.5 Manner and Time of Payments. Borrower will make each payment
---------------------------
which it owes under the Loan Documents to Lender without defense, set off or
counterclaim not later than 11:00 a.m. Oklahoma City time, on the date such
payment becomes due and payable, in lawful money of the United States of America
and in immediately available funds. If any money of Borrower is on deposit with
Lender on the date such payment is due, Borrower hereby instructs Lender, and
Lender hereby agrees, as long as no Default or Event of Default has occurred and
is continuing, to apply such money, to the extent of the amount owed, to the
payment which is due, and to advise Borrower via fax of the amount so applied.
Any payment received by Lender after such time will be deemed to have been made
on the next following Business Day. Should any such payment become due and
payable on a day other than a Business Day, the maturity of such payment shall
be extended to the next succeeding Business Day, and, in the case of a payment
of principal or past due interest, interest shall accrue and be payable thereon
for the period of such extension as provided in the Loan Document under which
such payment is due. Each payment under a Loan Document shall be due and
payable at Lender's offices at 501 West I-44 Service Road, Oklahoma City,
Oklahoma 73118.
2.6 Capital Adequacy. Borrower covenants and agrees that, subject to
----------------
Section 2.7, if at any time after the date hereof, and from time to time, Lender
- -----------
determines that the adoption or modification of any applicable law, rule or
regulation regarding taxation, increases Lender's required levels of reserves,
deposits, insurance or capital (including any allocation of capital requirements
or conditions), or similar requirements, or any interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation, administration or compliance of Lender
with any of such requirements, has or would have the effect of (a) increasing
Lender's costs relating to the Loan, or (b) reducing the yield or rate of return
of Lender on the Loan, to a level below that which such Lender could have
achieved but for the adoption or modification of any such requirements, then
Borrower shall, within 15 days of any request by Lender, pay to Lender such
additional amounts as (in Lender's sole judgment, after reasonable computation)
will compensate Lender for such increase in costs or reduction in yield or rate
of return. No failure by Lender to immediately demand payment of any additional
amounts payable hereunder shall constitute a waiver of Lender's right to demand
payment of such amounts at any subsequent time. Nothing herein contained shall
be construed or so operate so to require Borrower to pay any interest, fees,
costs or charges not permitted by
-10-
<PAGE>
Section 2.7.
- -----------
2.7 Maximum Lawful Interest Rate. It is not the intention of Lender
----------------------------
or Borrower to violate the laws of any applicable jurisdiction relating to usury
or other restrictions on the maximum lawful interest rate. The Loan Documents
and all other agreements between Borrower and Lender, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
event shall the interest paid or agreed to be paid to Lender for the use,
forbearance or detention of money loaned, or for the payment or performance of
any covenant or obligation contained herein or in any other Loan Document,
exceed the maximum amount permissible under applicable law. If from any
circumstances whatsoever fulfillment of any provision hereof or of any other
Loan Document, at the time the performance of such provision shall be due, shall
involve transcending the limit of validity prescribed by law, then, ipso facto,
the obligation to be fulfilled shall be reduced to the limit of such validity.
If from any such circumstances Lender shall ever receive anything of value
deemed interest under applicable law which would exceed interest at the highest
lawful rate, such excessive interest shall be applied to the reduction of the
principal amount owing hereunder, and not to the payment of interest, or if such
excessive interest exceeds any unpaid balance of principal, such excess shall be
refunded to Borrower. All sums paid or agreed to be paid to Lender for the use,
forbearance or detention of money shall, to the extent permitted by applicable
law, be amortized, pro rated, allocated and spread throughout the full term of
such indebtedness until payment in full so that the rate of interest on account
of such indebtedness is uniform throughout the term hereof. This paragraph
shall control every other provision of the Loan Documents and all other
agreements among Lender and Borrower contemplated thereby.
SECTION 3. CONDITIONS PRECEDENT
The obligation of Lender to make the Loan is subject to the
satisfaction of all of the following conditions:
3.1 Deliveries. Receipt by Lender, on or before the Closing Date, of
----------
the following, each in form and substance satisfactory to Lender:
(a) certified copies of the Certificate or Articles of
Incorporation (as amended), together with a good standing certificate from the
Secretary of State of the state of formation of each of Borrower and Guarantor,
each to be dated as of a recent date prior to the Closing Date.
(b) certificates of appropriate public officials as to the
existence, good standing and qualification to do
-11-
<PAGE>
business as a foreign corporation of Borrower and Guarantor in each jurisdiction
in which the ownership of its properties or the conduct of its business requires
such qualification.
(c) this Agreement executed by Borrower and Guarantor.
(d) the Note, executed by Borrower and payable to the order of
Lender.
(e) the Individual Pledge Agreement and Financing Statements
executed by Pledgors.
(f) the stock certificates covered by the Pledge Agreements,
together with Assignments Separate from Certificate covering such stock
certificates executed by Pledgors.
(g) the Guaranty executed by Guarantor.
(h) the Pledgor Guaranty executed by Pledgors.
(i) the Account Pledge Agreement executed by Guarantor and the
other Persons party thereto.
(j) the Control Agreements executed by the parties thereto.
(k) an Intercreditor Agreement with Bank One Oklahoma, in form
and substance satisfactory to Lender.
(l) a Subordination Agreement executed by Pledgors subordinating
the Debt of Borrower to Pledgors to the Loan hereunder, in form and substance
satisfactory to Lender.
(m) an Intercreditor Agreement with respect to the Production
Payment, in form and substance satisfactory to Lender.
(n) certificates of an officer and of the secretary or an
assistant secretary of Borrower and of Guarantor, certifying, inter alia (i)
true and complete copies of each of the articles or certificate of
incorporation, as amended and in effect of Borrower and of Guarantor, the
bylaws, as amended and in effect, of Borrower and of Guarantor and the
resolutions adopted by the Board of Directors of Borrower and Guarantor (A)
authorizing the execution, delivery and performance by Borrower and Guarantor of
this Agreement and the other Loan Documents to which each of Borrower and
Guarantor is or will be a party and the Loan to be made hereunder, (B) approving
the forms of the Loan Documents to which each of Borrower and Guarantor is or
will be a party and which will be delivered at or prior to the closing date
-12-
<PAGE>
and (C) authorizing officers of Borrower and Guarantor to execute and deliver
the Loan Documents to which each of Borrower and Guarantor is or will be a party
and any related documents, including any agreement contemplated by this
Agreement, and (ii) the incumbency and specimen signatures of the officers of
Borrower and Guarantor executing any documents on its behalf.
(o) a certificate from an Authorized Officer of Borrower and
Guarantor certifying (i) that no Default or Event of Default has occurred and is
continuing and (ii) that Borrower and Guarantor are in compliance with all
covenants contained in Sections 5 and 6 hereof.
----------------
(p) a favorable, signed opinion addressed to Lender from counsel
to Borrower and Guarantor, in form and substance satisfactory to Lender and its
counsel.
(q) the payment to Lender of all reasonable fees and expenses
(including the reasonable fees and disbursements of McAfee & Taft) agreed upon
by such parties to be paid on the Closing Date.
(r) Federal Reserve Forms U-1 executed by Borrower.
3.2 Commitment Fee. The commitment fee required by Section 2.3
-------------- -----------
hereof shall have been paid to Lender.
3.3 Other Loan. The Other Loan shall have closed and all conditions
----------
to funding thereunder shall have been satisfied.
3.4 Representations and Warranties. The representations and
------------------------------
warranties contained herein and in each of the Loan Documents shall be true,
correct and complete in all material respects on and as of the Closing Date.
3.5 No Default. No Default or Event of Default shall exist and be
----------
continuing.
3.6 Performance. Borrower and Guarantor shall have performed in all
-----------
material respects all agreements and satisfied all conditions which this
Agreement provides shall be performed by them on or before the Closing Date.
The acceptance of the benefits of the Loan shall constitute a representation and
warranty by Borrower and Guarantor to Lender that all of the conditions
specified in this Section above shall have been satisfied or waived as of that
time.
SECTION 4. BORROWER'S AND GUARANTOR'S REPRESENTATIONS AND WARRANTIES
-13-
<PAGE>
In order to induce Lender to enter into this Agreement and to make the
Loan, Borrower and Guarantor represent and warrant to Lender that the statements
in this Section 4 are true, correct and complete:
4.1 Organization, Powers and Qualification. Each of Borrower and
--------------------------------------
Guarantor is a corporation validly existing and in good standing under the laws
of the state of its organization, has all requisite power and authority to own
and operate its properties, to carry on its business as now conducted, to enter
into this Agreement, to issue the Note and the Guaranty, to carry out the
transactions contemplated hereby and thereby and is duly qualified, licensed and
in good standing as a foreign corporation in all jurisdictions in which its
properties or business make such qualification necessary.
4.2 Subsidiaries. Schedule 4.2 hereto lists all Subsidiaries of
------------ ------------
Borrower, the nature and amount of interest owned therein and the jurisdictions
in which each is qualified to do business. There are no options or warrants or
other agreements or rights which require any of such Subsidiaries to issue any
additional capital stock or entitle any Person to acquire any capital stock or
other interest of any such Subsidiary.
4.3 Authorization of Borrowing; Binding Obligation. The execution,
----------------------------------------------
delivery and performance of this Agreement, the issuance, delivery and payment
of the Note and the Guaranty and the execution, delivery and performance of the
Loan Documents have been duly authorized by all necessary corporate action by
Borrower and Guarantor. This Agreement and the Note, the Guaranty and the other
Loan Documents executed by Borrower and Guarantor are the legally valid and
binding obligations of each of Borrower and Guarantor, enforceable against each
in accordance with their respective terms, except as enforcement may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights generally.
4.4 No Conflict. The execution, delivery and performance by Borrower
-----------
and Guarantor of this Agreement, the issuance, delivery and payment of the Note
and the Guaranty and the execution, delivery and performance of the Loan
Documents do not and will not (i) violate any provision of law applicable to
Borrower or Guarantor, the Certificate of Incorporation or Bylaws of Borrower or
Guarantor, or any order, judgment or decree of any court or other agency of
government binding on Borrower or Guarantor, (ii) conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any Contractual Obligation of Borrower or Guarantor, (iii) result in or
require the creation or imposition of any Lien upon any of their properties or
assets, or (iv) require any approval of
-14-
<PAGE>
stockholders or any approval or consent of any Person under any Contractual
Obligation of Borrower or Guarantor other than approvals or consents which have
been obtained and disclosed in writing to Lender.
4.5 Governmental Consents. The execution, delivery and performance
---------------------
by each of Borrower and Guarantor of this Agreement and the issuance, delivery
and payment of the Note and the Guaranty do not and will not require any
registration with, authorization, license, consent or approval of, or notice to,
or other action to, with or by, any Federal, state or other governmental
authority or regulatory body.
4.6 Financial Statements. Borrower has furnished to Lender the
--------------------
unaudited balance sheet, income statement and statement of cash flow for
Borrower as of December 31, 1997, an unaudited balance sheet and income
statement for Borrower as of September 30, 1998 and an unaudited balance sheet
and income statement for Guarantor as of January 31, 1999 (such financials the
"Financials"). The Financials have been prepared in conformity with GAAP
- -----------
consistently applied (except as otherwise disclosed in the Financials)
throughout the periods involved and present fairly, in all material respects,
the financial condition of Borrower and Guarantor as of the dates thereof and
the results of their operations for the periods then ended. No Material Adverse
Effect has occurred in the financial condition of Borrower since September 30,
1998 or Guarantor since November 30, 1998.
4.7 Title to Properties; Liens. Borrower has defensible title to its
--------------------------
oil and gas properties and each of Borrower and Guarantor has good, valid and
legal title to the balance of its properties and assets reflected in the most
recent balance sheets referred to in Section 4.6 except for assets acquired or
-----------
disposed of in the ordinary course of business since the date of such balance
sheets. Except for Permitted Liens, all such properties and assets are free and
clear of Liens.
4.8 Litigation. Except as listed on Schedule 4.8 hereof, no
---------- ------------
proceedings against or affecting Borrower, any Subsidiary, or Guarantor are
pending or, to the knowledge of Borrower or Guarantor, threatened before any
court or governmental agency or department which involve a material risk of
having a Material Adverse Effect.
4.9 Adverse Facts. Neither Borrower, any Subsidiary, nor Guarantor
-------------
is (i) in violation of any applicable law which would have a Material Adverse
Effect, or (ii) subject to or in default with respect to any final judgment,
writ, injunction, decree, rule or regulation of any court or Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which
-15-
<PAGE>
would have a Material Adverse Effect.
4.10 Payment of Taxes. All tax returns and reports of Borrower, its
----------------
Subsidiaries, and Guarantor required to be filed by them have been timely filed,
either when originally due or within the duly approved extension period (of
which Lender has been notified simultaneously with application therefor), and
all taxes, assessments, fees and other governmental charges upon such Persons
and upon their properties, assets, income and franchises which are due and
payable have been paid when due and payable. Neither Borrower nor Guarantor
knows of any proposed tax assessment against any of such Persons.
4.11 Governmental Regulation. Neither Borrower nor any Subsidiary nor
-----------------------
Guarantor is subject to regulation under the Public Utility Holding Company Act
of 1935, the Federal Power Act, the Investment Company Act of 1940 (as any of
the preceding acts have been amended), or any other law (other than Regulation
X) which regulates the incurring by such Person of Debt, including but not
limited to laws relating to common contract carriers or the sale of electricity,
gas, steam, water, or other public utility services.
4.12 Environmental Regulations. Each of Borrower, its Subsidiaries
-------------------------
and Guarantor is in material compliance with all Environmental Laws applicable
to them.
4.13 Use of Proceeds; Margin Stock. The proceeds of the Loan will be
-----------------------------
used by Borrower solely for acquisition of the Sonat Exploration Company
properties. None of such proceeds will be used for the purpose of purchasing or
carrying any Margin Stock or for the purpose of reducing or retiring any Debt
which was originally incurred to purchase or carry a Margin Stock or for any
other purpose which might constitute this transaction a "purpose credit" within
the meaning of Regulation U or Regulation X. Neither Borrower nor Guarantor is
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stocks.
4.14 ERISA. (a) No Reportable Event has occurred and is continuing
-----
with respect to any Plan; (b) PBGC has not instituted proceedings to terminate
any Plan; (c) neither Borrower, Guarantor, any member of the Controlled Group,
or any duly-appointed administrator of a Plan (i) has incurred any liability to
PBGC with respect to any Plan other than for premiums not yet due or payable, or
(ii) has instituted or intends to institute proceedings to terminate any Plan
under Sections 4041 or 4041A of ERISA or withdraw from any Multi-Employer
Pension Plan (as that term is defined in Section 3(37) of ERISA); (d) each Plan
of Borrower has been maintained and funded in all material respects in
accordance with its terms and with all provisions of
-16-
<PAGE>
ERISA applicable thereto; and (e) Borrower has no obligation or unfunded
liability with respect to any post-retirement benefits under any "welfare
benefit plans" (as defined in Section 3(1) of ERISA) other than liability for
continuing health coverage under Part 6 of Subtitle B of Title 1 of ERISA, which
(individually or collectively) could not be unilaterally terminated by Borrower
without incurring any material liability.
4.15 Licenses; Reports; Etc. Each of Borrower and Guarantor holds all
-----------------------
Licenses for present operation of its business except where the failure to hold
such Licenses would not, in the aggregate, have a Material Adverse Effect.
Neither Borrower nor Guarantor is aware of any facts or circumstances which
would prevent such Persons from continuing to hold all Licenses or to renew any
License.
4.16 Casualties. Neither the business nor the properties of Borrower,
----------
any Subsidiary or Guarantor are currently affected by any environmental hazard,
fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or other casualty (whether or not
covered by insurance), which could have a Material Adverse Effect.
4.17 Solvency. After giving effect to the Loan hereunder and all
--------
other Debt, each of Borrower and Guarantor has (a) capital sufficient to carry
on its businesses and transactions, and (b) assets, the fair market value of
which exceeds its liabilities (as reflected on the Financial or on the financial
statements most recently delivered to Lender).
4.18 Disclosure. No representation or warranty of Borrower or
----------
Guarantor contained in this Agreement or any other document, certificate or
written statement furnished to Lender by or on behalf of Borrower or Guarantor
for use in connection with the transactions contemplated by this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading. There is no fact known to Borrower or Guarantor which materially
adversely affects its business, operations, property, assets or condition
(financial or otherwise) which has not been disclosed herein or in such other
documents, certificates and statements furnished to Lender for use in connection
with the transactions contemplated hereby.
4.19 No Default. No event has occurred and is continuing which
----------
constitutes a Default or Event of Default.
SECTION 5. AFFIRMATIVE COVENANTS
Each of Borrower and Guarantor covenants and agrees that, until full
and final payment of the Obligations and the
-17-
<PAGE>
termination of this Agreement, unless Lender shall otherwise give prior written
consent, each of Borrower and Guarantor shall perform or cause to be performed
all covenants in this Section 5.
---------
5.1 Payment and Performance. Each of Borrower and Guarantor will pay
-----------------------
all amounts owed under the Loan Documents in accordance with the terms thereof
and will observe, perform and comply with every covenant, term and condition
expressed or implied in the Loan Documents.
5.2 Financial Statements and Other Reports. Each of Borrower and
--------------------------------------
Guarantor will maintain systems of accounting established and administered in
accordance with sound business practices to permit preparation of financial
statements in conformity with GAAP. Borrower and Guarantor will deliver to
Lender:
(a) On or before April 30 of each year, financial statements
showing the financial conditions and results of operations of Borrower and its
Subsidiaries as of, and for the fiscal year ended on, the preceding December 31,
accompanied by (i) the opinion, without material qualification, of other
independent certified public accountants selected by Borrower and acceptable to
Lender, based on an audit using generally accepted auditing standards, that the
financial statements were prepared in accordance with GAAP and present fairly
the financial condition and results of operations of Borrower and its
Subsidiaries, and (ii) an Officer's Certificate with respect to such financial
statements in the form of Exhibit 5.2(a) attached hereto.
--------------
(b) Within 45 days after the last day of each calendar quarter,
financial statements prepared in accordance with GAAP showing the financial
conditions of Borrower and Guarantor including a balance sheet and an income
statement.
(c) On or before April 30 of each year, annual financial
statements of Guarantor prepared by accountants and in form and substance
satisfactory to Lender which will include a balance sheet and statement of
income and will disclose all contingent liabilities.
(d) Within fifteen (15) days after the last day of each month,
statements from each Broker detailing the content and market value of each
Brokerage Account as of the last day of such month, together with such other
information as Lender might reasonably require.
(e) Notice, promptly after Borrower or Guarantor knows or has
reason to know of, (i) the existence and status of any litigation with respect
to Borrower or Guaranty which could, in the event of an unfavorable outcome,
have a Material Adverse
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<PAGE>
Effect, (ii) any change in any material fact or circumstance represented or
warranted in this Agreement or in any of the Loan Documents, (iii) a Default or
Event of Default, specifying the nature thereof and what action Borrower or
Guarantor has taken, are taking, or proposes to take with respect thereto, or
(iv) the occurrence of a reportable event (as defined in ERISA) with respect to
any employee benefit plan of Borrower, or the complete or partial withdrawal
from participation in a multiemployer pension plan (as such terms are defined in
ERISA) by Borrower (or the intention of Borrower to do so), or that the PBGC or
Borrower has instituted or will institute proceedings under ERISA to terminate
any such plan or that any event has occurred or condition exists which might
constitute grounds for termination of any such benefit plan under ERISA.
(f) Promptly upon request therefor by Lender, such information
respecting the business affairs, assets, and liabilities of Borrower or
Guarantor, and such opinions, certifications, projections (with underlying
assumptions) and documents, in addition to those mentioned in this Agreement, as
Lender may reasonably request.
5.3 Corporate Existence, Capital Stock, Etc. Each of Borrower and
----------------------------------------
Guarantor will at all times preserve and keep in full force and effect its
corporate existence and rights, franchises, Licenses and authorizations material
to its business. Guarantor will not issue (a) any additional shares of any
class of capital stock in Guarantor, (b) any securities convertible voluntarily
by the holder thereof or automatically on the occurrence or nonoccurrence of any
event or condition into, or exchangeable for, any shares of Guarantor, or (c)
any warrants, options, rights, or other commitments entitling any person to
purchase or otherwise acquire any shares of Guarantor.
5.4 Payment of Trade Debt, Taxes, Etc. Each of Borrower and
---------------------------------
Guarantor will (i) timely file all required tax returns; (ii) timely pay all
taxes, assessments, and other governmental charges or levies imposed upon it or
upon its income, profits or property; (iii) pay all Debt owed by it on ordinary
trade terms to vendors, suppliers and other Persons providing goods and services
used by it in the ordinary course of business; (iv) pay and discharge when due
all other Debt now or hereafter owed by it; and (v) maintain appropriate
accruals and reserves for all of the foregoing Debt in accordance with GAAP.
Any such Person may, however, delay paying or discharging any such Debt so long
as it is in good faith contesting the validity thereof by appropriate
proceedings and it has set aside on its books adequate reserves therefor to the
extent required by GAAP.
5.5 Maintenance of Properties; Insurance. Each of Borrower and
------------------------------------
Guarantor will maintain, preserve, protect and keep
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<PAGE>
all property used or useful in the conduct of its business in good condition and
in material compliance with all applicable laws, rules and regulations, and will
from time to time make all repairs, renewals and replacements needed to enable
the business and operations carried on in connection therewith to be promptly
and advantageously conducted at all times. Each of Borrower and Guarantor will
maintain or cause to be maintained insurance with respect to its properties and
business in such amounts, against such risks, in such form and with such
responsible and reputable insurers as shall be usually carried by companies
engaged in similar businesses and owning similar properties in the same general
areas in which Borrower and Guarantor operate, satisfactory to Lender from time
to time.
5.6 Inspection. Borrower will permit any authorized representatives
----------
designated by Lender to visit and inspect any of the properties of Borrower or
Guarantor, including their financial and accounting records, and to make copies
and take extracts therefrom, and to discuss their affairs, finances and accounts
with their officers and independent public accountants, all upon reasonable
notice and at such reasonable times during normal business hours and as often as
may be reasonably requested.
5.7 Compliance with Laws, Etc. Borrower and Guarantor shall comply
--------------------------
with the requirements of all applicable laws, rules, regulations and orders of
any governmental authority, noncompliance with which would cause a Material
Adverse Effect. Borrower shall immediately notify Lender if any governmental
authority asserts noncompliance by any such Person with any such laws, rules,
regulations or orders.
5.8 Other Loan. Borrower and Guarantor will at all times comply in
----------
all respects with the terms, conditions and covenants of the Other Loan
Documents.
5.9 Brokerage Account Value.
-----------------------
(a) On the date of execution of this Agreement, the market value
of the Brokerage Accounts (the "Accounts Value") shall be equal to or greater
than $7,200,000.
(b) Borrower and Guarantor will continuously maintain or cause to
be maintained an Accounts Value to Loan Ratio (the "Ratio") of at least 1.2 to
1, meaning that for each $1.00 of principal outstanding on the Loan, Lender will
have a first priority security interest in Brokerage Accounts having a current
market value of at least $1.20. If the Ratio should ever be less than 1.2 to 1,
Borrower and Guarantor will take such action as might be necessary to restore
the Ratio, including, without limitation, the pledge of additional collateral
acceptable to Lender to secure payment of the Loan, or the principal reduction
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<PAGE>
of the Loan. The Ratio will be measured by Lender monthly, on the fifteenth
(15th) day of each month. Borrower and Guarantor will cure any breach of the
Ratio within ten (10) days from the date of the monthly measurement.
5.10 Deposits to Brokerage Accounts. Until the Loan has been paid in
------------------------------
full, Guarantor will cause all Cash Flow of Guarantor to be deposited in the
Brokerage Accounts covered by the Account Pledge Agreement.
SECTION 6. NEGATIVE COVENANTS
Each of Borrower and Guarantor agrees that, until full and final
payment of the Obligations and the termination of this Agreement, unless Lender
shall otherwise give prior written consent:
6.1 Limitation on Debt. Guarantor shall not incur, create, contract,
------------------
waive, assume, have outstanding, guarantee or otherwise be or become, directly
or indirectly, liable in respect of any Debt, except (i) Debt arising out of
this Agreement, (ii) Debt in respect of current accounts payable (other than
for borrowed funds or purchase money obligations) accrued and incurred in the
ordinary course of business, provided that all such liabilities, accounts and
claims shall be promptly paid and discharged when due or in conformity with
customary trade terms, and (iii) Debt existing on the date hereof and previously
disclosed in writing to Lender.
6.2 Limitation on Liens. Guarantor shall not create, incur, permit
-------------------
or suffer to exist any Lien upon any of its assets except Permitted Liens, and
the Lien of Williams Energy Services Company (formerly known as Williams Energy
and Derivatives Trading Company) on the Gas Purchase Agreement with CoEnergy
Ventures, Inc. dated July 27, 1990.
6.3 Dividends. Guarantor shall not pay or declare any Dividend or
---------
set apart any sum of money or assets for payment of Dividends during any fiscal
year.
6.4 Limitation on Investments. Guarantor will not, directly or
-------------------------
indirectly, make or have outstanding any Investments, other than Investments
----- ----
consistent with those previously made by Guarantor, which include publicly
traded common and preferred equity securities, publicly traded mutual funds,
U.S. Treasury securities, U.S. government agency bonds, including mortgage
backed securities, and investment grade corporate bonds and commercial paper.
6.5 Limitation on Debt of Others. Guarantor shall not guarantee,
----------------------------
agree to purchase or repurchase or become liable or
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<PAGE>
remain liable with respect to the Debt of any Person.
6.6 Affiliate Transactions. Except for the transaction contemplated
----------------------
by the Coral Agreement, neither Borrower, Guarantor nor any Subsidiary will,
directly or indirectly, enter into any transaction (including, but not limited
to, the sale or exchange of property or the rendering of service) with any of
its Affiliates other than in the ordinary course of business and upon fair and
----------
reasonable terms no less favorable than Borrower, Guarantor or such Subsidiary
could obtain in an arm's-length transaction with a Person not an Affiliate.
Guarantor will not make loans, advances or other extensions of credit, direct or
indirect, to or for the benefit of Affiliates.
6.7 Limitation on Sale of Properties. Guarantor shall not sell,
--------------------------------
assign, convey, exchange, lease or otherwise dispose of all or any substantial
portion of its properties, rights, assets or business, whether now owned or
hereafter acquired, whether pursuant to a single transaction or a series of
transactions.
6.8 Fiscal Year and Accounting Method. Neither Borrower nor
---------------------------------
Guarantor shall change its fiscal year or method of accounting except as
required by GAAP.
6.9 Liquidation, Mergers and Consolidations. Except for the
---------------------------------------
transaction contemplated by the Coral Agreement, Borrower shall not dissolve or
liquidate, or become a party to any merger or consolidation, or acquire by
purchase, lease or otherwise all or substantially all of the assets or capital
stock of any Person.
6.10 Other Loan Documents. Borrower shall not violate any of the
--------------------
negative covenants applicable to it under the Other Loan Documents.
SECTION 7. EVENTS OF DEFAULT; REMEDIES
7.1 Events of Default. An "Event of Default" shall exist if any one
-----------------
or more of the following events shall occur and be continuing:
(a) Borrower shall fail to pay within ten (10) days of any due
date the Obligations, or any part thereof, including without limitation any
principal of, or interest on, the Note, any Fee, any Expenses or other payment
under the Loan Documents ("Payment Default"); provided the failure to pay
monthly interest caused by a failure by Borrower to comply with the Cash Flow
Coverage Ratio covenant of the Other Loan Documents shall not constitute an
Event of Default hereunder as long as such failure to comply does not constitute
a Default or Event of Default under any of the Other Loan Documents; or
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<PAGE>
(b) any representation or warranty made under this Agreement, or any
of the other Loan Documents, or in any certificate or statement furnished or
made to Lender pursuant hereto or in connection herewith or with the
Obligations, shall prove to be untrue or inaccurate in any material respect as
of the date on which such representation or warranty is made; or
(c) default shall occur in the performance of any of the covenants or
agreements of Borrower or Guarantor contained in this Agreement or in any of the
other Loan Documents and shall continue for thirty (30) days after the earlier
of (i) written notice of such default shall have been given to an Authorized
Officer of Borrower by Lender, or (ii) Borrower has knowledge of such default,
provided no notice or cure period will be permitted for a default in the
performance of the covenants or agreements contained in Section 5.2(e); or
--------------
(d) default shall occur in the payment of Debt of Borrower, Guarantor,
or either of them, in the aggregate amount of $50,000 or more (other than the
Obligations); or default shall occur in respect of any note, loan agreement or
credit agreement relating to any such Debt and such default shall continue for
more than the period of grace, if any, specified therein or any such Debt shall
become due before its stated maturity by acceleration of the maturity thereof;
or
(e) any of the Loan Documents shall cease to be legal, valid and
binding agreements enforceable against the Person executing the same in
accordance with the respective terms thereof or shall in any way be terminated
or become or be declared ineffective or inoperative or shall in any way
whatsoever cease to give or provide the respective remedies, powers or
privileges intended to be created thereby; or
(f) Borrower, Guarantor or any Subsidiary shall (i) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself or of all or a substantial part of such Person's assets,
(ii) file a voluntary petition in bankruptcy, admit in writing that such Person
is unable to pay such Person's debts as they become due or generally not pay
such Person's debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) file a petition or answer seeking reorganization or
an arrangement with creditors or to take advantage of any bankruptcy or other
laws for the benefit of debtors, (v) file an answer admitting the material
allegations of, or consent to, or default in answering, a petition filed against
such Person in any bankruptcy, reorganization or insolvency proceeding, or (vi)
take corporate action for the purpose of effecting any of the foregoing; or
(g) an involuntary petition or complaint shall be
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<PAGE>
filed against Borrower, Guarantor or any Subsidiary, seeking bankruptcy or
reorganization or such Person or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of such Person, or all or substantially all of
such Person's assets, and such petition or complaint shall not have been
dismissed within sixty (60) days of the filing thereof; or an order, order for
relief, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition or complaint
seeking reorganization of any Borrower or Guarantor or appointing a receiver,
custodian, trustee, intervenor or liquidator of such Person, or of all or
substantially all of such Person's assets; or
(h) any final judgment(s) for the payment of money in excess of the
sum of $100,000 in the aggregate shall be rendered against Borrower, Guarantor
or any Subsidiary and such judgment or judgments shall not be satisfied or
discharged at least ten (10) days prior to the date on which any of its assets
could be lawfully sold to satisfy such judgment; or
(i) both the following events shall occur: (i) either (x) proceedings
shall have been instituted to terminate, or a notice of termination shall have
been filed with respect to, any Plan (other than a Multi-Employer Pension Plan
as that term is defined in Section 3(37) of ERISA) by Borrower, any member of
the Controlled Group, PBGC or any representative of any thereof, or any such
Plan shall be terminated, in each case under Section 4041 or 4042 of ERISA, or
(y) a Reportable Event, the occurrence of which would cause the imposition of a
Lien under Section 4068 of ERISA, shall have occurred with respect to any Plan
(other than a Multi-Employer Pension Plan as that term is defined in Section
3(37) of ERISA) and be continuing for a period of sixty (60) days; and (ii) the
sum of the estimated liability to PBGC under Section 4062 of ERISA and the
currently payable obligations of such Borrower to fund liabilities (in excess of
amounts required to be paid to satisfy the minimum finding standard of Section
412 of the Code) under the Plan or Plans subject to such event shall exceed ten
percent (10%) of Borrower's Tangible Net Worth at such time; or
(j) any or all of the following events shall occur with respect to any
Multi-Employer Pension Plan (as that term is defined in Section 3(37) of ERISA)
to which Borrower contributes or contributed on behalf of its employees: (i)
Borrower incurs a withdrawal liability under Section 4201 of ERISA; or (ii) any
such plan is "in reorganization" as that term is defined in Section 4241 of
ERISA; or (iii) any such Plan is terminated under Section 4041A of ERISA and
Agent determines in good faith that the aggregate liability likely to be
incurred by Borrower, as a result of all or any of the events specified in
Subsections (i), (ii) and (iii) above occurring, shall have a
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<PAGE>
material adverse effect; or
(k) a Material Adverse Change shall occur in the financial
condition of Borrower or Guarantor; or
(l) a Default or Event of Default shall occur under the Other
Loan; or
(m) any rescission, abandonment or disclaimer (or commencement of
any action to effect the same) by any party to any of the material contracts of
Guarantor, including all gas purchase and sale contracts, or a default or
failure to perform by any party to any of such contracts.
7.2 Remedies Upon Event of Default. If an Event of Default shall
------------------------------
have occurred and be continuing, then Lender may exercise any one or more of the
following rights and remedies, and any other remedies provided in any of the
Loan Documents, as Lender in its sole discretion, may deem necessary or
appropriate:
(a) declare the Obligations, including without limitation the
Note, to be forthwith due and payable, whereupon the same shall forthwith become
due and payable without presentment, demand, protest, notice of default, notice
of acceleration or of intention to accelerate or other notice of any kind, all
of which Borrower hereby expressly waives, anything contained herein or in the
Note to the contrary notwithstanding;
(b) reduce any claim to judgment;
(c) exercise any right of offset including Set-Off as provided in
Section 8.6;
- -----------
(d) without notice of default or demand, pursue and enforce any
of Lender's rights and remedies under the Loan Documents, or otherwise provided
under or pursuant to any applicable law or agreement; provided, however, that if
any Event of Default specified in Sections 7.1 (f) or (g) shall occur, the
-----------------------
Obligations, including without limitation the Note, shall thereupon become due
and payable concurrently therewith, without any further action by Lender and
without presentment, demand, protest, notice of default, notice of acceleration
or of intention to accelerate or other notice of any kind, all of which Borrower
hereby expressly waives; and
(e) exercise any other remedy at law or in equity.
7.3 Application of Proceeds. So long as an Event of Default shall
-----------------------
continue, all money received by Lender (i) from any Guarantor pursuant to the
terms of any Guaranty, (ii) Borrower
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<PAGE>
under any Loan Document or (iii) as a result of the enforcement of the rights
and remedies of Lender under the Loan Documents or otherwise, shall, except as
otherwise required by law, be distributed by Lender as follows:
(a) first, to payment of the expenses of sale or other
realization of the collateral securing the Obligations and all expenses,
liabilities and advances incurred or made by Lender in connection therewith and
any other unreimbursed expenses for which Lender is to be reimbursed pursuant to
Section 8.2.
- -----------
(b) second, to the payment of accrued unpaid interest on the
------
Obligations,
(c) third, to the payment of unpaid principal on the Obligations,
-----
(d) fourth to Borrower or as a court of competent jurisdiction
------
may direct.
SECTION 8. MISCELLANEOUS
8.1 Amendments. No amendment or waiver of any provision of this
----------
Agreement, the Note or any other Loan Document, nor consent to any departure by
Borrower or Guarantor herefrom or therefrom, shall in any event be effective
unless the same shall be in writing and signed by Borrower and Guarantor, as to
amendments, and by Lender in all cases, and then, in any case, such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
8.2 Expenses. Whether or not the transactions contemplated hereby
--------
shall be consummated, Borrower and Guarantor agree to promptly pay (i) all the
actual and reasonable costs and expenses of Lender in the preparation of this
Agreement, the Note, and the other Loan Documents, including the reasonable fees
and out-of-pocket expenses of counsel for Lender, and all the costs of
furnishing all opinions by counsel for Borrower and Guarantor (including without
limitation any opinions requested by Lender as to any legal matters arising
hereunder); (ii) the reasonable fees, expenses and disbursements of outside
counsel to Lender in connection with the administration of this Agreement and
the Note, and the Loan hereunder, and the negotiation, preparation, and
execution of any amendments and waivers hereto; and (iii) after the occurrence
of an Event of Default, all costs and expenses (including reasonable attorneys'
fees and costs of settlement) incurred by Lender in enforcing any Obligations of
or in collecting any payments due from any Person hereunder or under the Note by
reason of such Event of Default or in connection with any refinancing or
restructuring of the credit arrangements provided under this Agreement in the
nature of a "work-out" or of any
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<PAGE>
insolvency or bankruptcy proceeding.
8.3 Indemnity. In addition to the payment of expenses pursuant to
---------
Section 8.2, whether or not the transactions contemplated hereby shall be
- -----------
consummated, Borrower and Guarantor agree to indemnify, pay and hold Lender and
any transferee of the Note, and the officers, directors, employees and agents of
Lender and such transferees (collectively called the "Indemnitees") harmless
from and against, any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, the reasonable
fees and disbursements of counsel for such Indemnitees in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitee shall be designated a party thereto), which may be imposed on,
incurred by, or asserted against that Indemnitee, in any manner relating to or
arising out of: (i) the breach of any representation or warranty of Borrower or
Guarantor set forth in the Loan Documents; (ii) the failure of Borrower or
Guarantor to perform any obligation required to be performed by such Person
pursuant to the Loan Documents; (iii) the presence, disposal, release,
threatened release, removal or production of any hazardous substances, solid
wastes or Hazards which are on, in, from or affecting any portion of the
properties of Borrower; (iv) any personal injury (including wrongful death) or
property damage (real or personal) arising out of or related to such hazardous
substances, solid wastes or Hazards; (v) any lawsuit brought or threatened,
settlement reached, or order by any governmental authority relating to such
hazardous substances, solid wastes or Hazards; (vi) any violation of any
Environmental Laws or demands of any governmental authorities, or violation of
any policies or requirements of Lender which are based upon or in any way
related to such hazardous substances, solid wastes or Hazards, regardless of
whether or not any of the conditions described under any of the foregoing
subsections was or is caused by or within the control of Borrower; and/or (vii)
the use or intended use of the proceeds of the Loan hereunder and any matter
related thereto (the "indemnified liabilities"); provided that Borrower and
Guarantor shall have no obligation to an Indemnitee hereunder with respect to
indemnified liabilities arising from the gross negligence or willful misconduct
of that Indemnitee. To the extent that the undertaking to indemnify, pay and
hold harmless set forth in the preceding sentence may be unenforceable because
it is violative of any law or public policy, Borrower and Guarantor shall
contribute the maximum portion which they are permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all indemnified liabilities
incurred by the Indemnitees or any of them.
8.4 Entire Agreement. This Agreement constitutes the entire
----------------
understanding and agreement of the parties relative to the
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<PAGE>
Loan, and supersedes all previous oral or written understandings and agreements
concerning the Loan.
8.5 Independence of Covenants. All covenants hereunder shall be
-------------------------
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of an Event of Default or potential Event of Default if
such action is taken or condition exists.
8.6 Set-Off. In addition to any rights now or hereafter granted
-------
under applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, Lender is hereby authorized by Borrower and
Guarantor at any time or from time to time, without notice to Borrower,
Guarantor or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and to apply any and all deposits (general or
special, including, but not limited to, indebtedness evidenced by certificates
of deposit, whether matured or unmatured but not including trust accounts) and
any other indebtedness at any time held or owing by Lender to or for the credit
or the account of Borrower or Guarantor or against and on account of the
obligations and liabilities of Borrower and Guarantor to Lender under this
Agreement and the Note, including, but not limited to, all claims of any nature
or description arising out of or connected with this Agreement or the Note,
irrespective of whether or not (a) Lender shall have made any demand hereunder
or (b) Lender shall have declared the principal of and interest on the Loan and
Note and other amounts due hereunder to be due and payable as permitted by
Section 7 and although said obligations and liabilities, or any of them, may be
- ---------
contingent or unmatured. Lender acknowledges that the escrow account on deposit
with Lender into which Borrower deposits prepayments for drilling and completion
costs will be treated as a trust account for the purposes of this section.
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<PAGE>
8.7 Notices. Unless otherwise specifically provided herein, any
-------
notice or other communication herein required or permitted to be given shall be
in writing and may be personally served, telecopied, telexed, or sent by United
States mail, Federal Express or other nationally regarded overnight delivery
services. Any such notice shall be deemed to have been given (whether actually
received or not) when delivered in person, upon transmission by telecopy or
telex, four Business Days after deposit in the United States mail, registered or
certified, with postage prepaid and properly addressed or one Business Day after
deposit with Federal Express or other nationally regarded overnight delivery
service and otherwise when actually received; provided that notices to Lender
shall not be effective until received. For the purposes hereof, the addresses
of the parties hereto (until notice of a change thereof is delivered as provided
in this section 8.7) shall be as set forth below each party's name on the
-----------
signature pages hereof.
8.8 Survival of Warranties and Agreements. All agreements,
-------------------------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement, the making of the Loan hereunder and the execution
and delivery of the Note.
8.9 Failure or Indulgence Not Waiver; Remedies Cumulative. No
-----------------------------------------------------
failure or delay on the part of Lender in the exercise of any power, right or
privilege hereunder or under the Note or any Loan Documents shall impair such
power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any
other right, power or privilege. All rights and remedies existing under this
Agreement, the Note or any of the other Loan Documents are cumulative to and not
exclusive of, any rights or remedies otherwise available.
8.10 Severability. In case any provision in or obligation under this
------------
Agreement, the Note or any of the other Loan Documents shall be invalid, illegal
or unenforceable in any jurisdiction, the validity, legality and enforceability
of the remaining provisions or obligations, or of such provision or obligation
in any other jurisdiction, shall not in any way be affected or impaired thereby.
8.11 Headings. Section and subsection headings in this Agreement are
--------
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
8.12 Applicable Law. This Agreement and the other Loan Documents
--------------
shall be governed by, and shall be construed and
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<PAGE>
enforced in accordance with the laws of the State of Oklahoma.
8.13 Submission to Jurisdiction; Venue; Waiver of Jury Trial. TO
-------------------------------------------------------
INDUCE AGENT AND LENDER TO ENTER INTO THIS AGREEMENT, BORROWER AND GUARANTOR
IRREVOCABLY AGREE THAT, SUBJECT TO LENDER'S SOLE AND ABSOLUTE ELECTION, ALL
SUITS, ACTIONS OR OTHER PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS AGREEMENT, THE NOTES, THE GUARANTY OR ANY DOCUMENT
EXECUTED IN CONNECTION HEREWITH, SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING
SITUS WITHIN OKLAHOMA CITY, OKLAHOMA. SUCH PERSONS HEREBY CONSENT AND SUBMIT TO
THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN OKLAHOMA
CITY, OKLAHOMA.
8.14 Successors and Assigns; Transferees of Note. This Agreement
-------------------------------------------
shall be binding upon the parties hereto and their respective successors and
assigns and shall inure to the benefit of the parties hereto and the successors
and transferees of Lender. The terms and provisions of this Agreement shall
inure to the benefit of any transferee of the Note. Borrower may not assign or
transfer any of its rights or obligations hereunder.
8.15 Counterparts; Effectiveness. This Agreement and any amendments,
---------------------------
waivers, consents, or supplements may be executed in any number of counterparts,
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Agreement shall
become effective upon the execution of a counterpart hereof by each of the
parties hereto and written or telephonic notification of such execution and
authorization of delivery thereof has been received by Borrowers and Lender.
8.16 Restatement of Existing Credit Agreement. This Agreement is a
----------------------------------------
restatement of the Credit Agreement among Borrower, Guarantor and Lender, dated
December 22, 1997, as amended by First Amendment (the "Existing Credit
Agreement"). This Agreement is an amendment and restatement of the Existing
Credit Agreement in its entirety, provided that, the indebtedness described in
the Existing Credit Agreement, as reduced, shall continue in full force and
effect against all obligors named therein, all collateral described in the
Existing Credit Agreement and in the Individual Pledge Agreement (except as
specifically released) and the Account Pledge Agreement, shall continue in full
force and effect to secure the Obligations, and the Subordination Agreement, the
Guaranty and the Pledgor Guaranty shall continue in full force and effect. Any
reference to the Credit Agreement in any of such documents shall be deemed a
reference to this Agreement.
-30-
<PAGE>
WITNESS the due execution hereof by the respective duly authorized
officers or individuals as of the date first written above.
INDIAN OIL COMPANY, an Oklahoma corporation
By_______________________________
Roger Graham, President
Notice Address:
9400 North Broadway
One Benham Place, Suite 800
Oklahoma City, Oklahoma 73114
Fax: (405) 475-7777
("Borrower")
CIBOLA CORPORATION, a Wyoming corporation
By_____________________________
Michael C. Black, President
Notice Address:
1131 13th Street, Suite 206
Cody, Wyoming 82414
("Guarantor")
___________________________________
Richard R. Dunning
___________________________________
Larry D. Hartzog
___________________________________
Michael C. Black
-31-
<PAGE>
DUNNING FAMILY LIMITED PARTNERSHIP, an Oklahoma
limited partnership
By Dunning Management L.L.C., an Oklahoma limited
liability company, General Partner
By_____________________________________
Richard R. Dunning, Manager
__________________________________________
MICHAEL C. BLACK, Trustee of the Michael C. Black
Revocable Trust
("Pledgors")
MIDFIRST BANK
By________________________________________
Alan H. Kraft, Senior Vice
President
Notice Address:
501 West I-44 Service Road, Suite 600
Oklahoma City, Oklahoma 73118
Fax: (405) 879-6155
("Lender")
-32-
<PAGE>
Exhibit 10.6(b)
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This First Amendment to Credit Agreement is entered into as of May ____,
1999, by Indian Oil Company ("Borrower"), Cibola Corporation ("Guarantor"),
Richard R. Dunning, Larry D. Hartzog, Michael C. Black, Dunning Family Limited
Partnership, and Michael C. Black, Trustee of the Michael C. Black Revocable
Trust ("Pledgors"), and MidFirst Bank ("Lender"), with respect to the following:
A. Lender, Borrower, Guarantor and Pledgors entered into a Credit
Agreement as of March 31, 1999 (the "Agreement") with respect to a certain
extension of credit by Lender to Borrower in the form of a Term Loan in the
principal of $6,000,000 due on March 1, 2000.
B. Lender, Borrower, Guarantor and Pledgors have agreed to amend the
Agreement to modify the requirement with respect to the payment of interest on
the Loan prior to the Maturity Date.
NOW, THEREFORE, in consideration of the recitals and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. Section 2.2 of the Loan Agreement is amended to read, in full, as
follows:
2.2 Interest; Payments of Principal and Interest. The Loan
--------------------------------------------
(exclusive of any past due principal or interest) shall bear interest on
each day at the Base Rate in effect on such day. All past due principal
and past due interest on the Loan shall bear interest on each day
outstanding at the Late Payment Rate in effect on such day, and such past
due interest shall be due and payable immediately as it accrues. Accrued
and unpaid interest on the Loan shall be payable on the Maturity Date.
Notwithstanding anything to the contrary herein, Borrower may, but shall
not be obligated to, make payments from time to time of accrued interest
hereunder prior to the Maturity Date, but only if (i) such payments would
not cause Borrower to violate Section 7.2 of the Loan Agreement for the
Other Loan, or (ii) an event of default under such Loan Agreement has not
occurred or is not continuing.
2. Section 7.1(a) of the Loan Agreement is amended to read, in full, as
follows:
(a) Borrower shall fail to pay within ten (10) days of any due date
the Obligations, or any part thereof, including without limitation any
principal of, or interest on (subject to Section 2.2, as amended, which
provides that Borrower is not obligated to make accrued interest payments
on the Loan prior to the Maturity Date), the Note, any Fee, any Expenses or
other payment under the Loan Documents ("Payment Default"); or
3. Continuation/Ratification. Except as amended by this First Amendment,
-------------------------
the Agreement and the Loan Documents, including any guaranties, shall continue
in full force and
<PAGE>
effect and are ratified and confirmed in all respects. Any reference to the
Credit Agreement in any Loan Document shall be deemed a reference to the
Agreement, as amended.
4. Representations True, No Default. The representations and warranties
--------------------------------
of Borrower and Guarantor contained in the Agreement are true and correct in all
material respects on and as of the date hereof as though made on and as of the
date hereof, except to the extent such representations and warranties relate
solely to an earlier date; and after giving effect to this Amendment, no Default
or Event of Default under the Agreement has occurred and is continuing.
5. Execution. This Amendment has been duly authorized, executed and
---------
delivered on behalf of Borrower, Guarantor and each Pledgor.
6. Construction. Capitalized terms used herein and not otherwise defined
------------
shall have the same meaning as in the Agreement.
IN WITNESS WHEREOF, the parties have cause this First Amendment to Credit
Agreement to be duly executed as of the date first set forth above.
INDIAN OIL COMPANY,
an Oklahoma corporation
BY: _________________________________
_____________________, President
CIBOLA CORPORATION,
a Wyoming corporation
BY: _________________________________
Michael C. Black, President
_______________________________________
Richard R. Dunning
_______________________________________
Larry D. Hartzog
_______________________________________
<PAGE>
Michael C. Black
DUNNING FAMILY LIMITED PARTNERSHIP,
an Oklahoma limited partnership
BY: DUNNING MANAGEMENT, L.L.C., an
Oklahoma limited liability company,
General Partner
BY: ______________________________
Richard R. Dunning, Manager
_________________________________________
Michael C. Black, Trustee of the Michael C. Black
Revocable Trust
MIDFIRST BANK
BY: ____________________________________
Alan H. Kraft, Senior Vice President
<PAGE>
Exhibit 10.6(c)
INTERCREDITOR AGREEMENT
-----------------------
THIS INTERCREDITOR AGREEMENT is dated this ___ day of March, 1999 by
and among MidFirst BANK and its successors and assigns ("MidFirst"), CORAL
RESERVES, INC., an Oklahoma corporation ("Coral Reserves"), CORAL RESERVES
ENERGY CORP., an Oklahoma corporation ("Coral Energy"), CORAL RESERVES GROUP,
LTD., an Oklahoma corporation ("Coral Ltd.") (collectively, Coral Reserves,
Coral Energy, and Coral Ltd. are referred to herein as the "Coral Group"), and
INDIAN OIL COMPANY, an Oklahoma corporation (the "Borrower").
RECITALS:
--------
WHEREAS, on December 22, 1997, Borrower and MidFirst entered into that
certain Credit Agreement and other loan documents providing for a loan in the
principal amount of $12,000,000.
WHEREAS, on February 15, 1999, the Coral Group and Borrower entered
into that certain Agreement and Plan of Merger ("Merger Agreement").
WHEREAS, pursuant to the Merger Agreement, the Coral Group purchased
or shall purchase from Borrower, for $6,000,000, an unsecured contingent
production payment.
WHEREAS, in return for such $6,000,000 purchase, Borrower has agreed
to make a production payment to the Coral Group from proceeds received from
Borrower's interests in oil and gas properties in the amount of $56,250 per
month (the "Contingent Production Payment").
WHEREAS, Borrower intends to pay $6,000,000 against the indebtedness
owing to MidFirst.
WHEREAS, Borrower and MidFirst intend to enter into a Credit Agreement
(the "MidFirst Loan Agreement") and promissory note in the principal amount of
$6,000,000 (the "MidFirst Note") and other loan documents (the "MidFirst Loan
Documents") providing for a loan by MidFirst to Borrower in the amount of
$6,000,000.
WHEREAS, all indebtedness evidenced by the MidFirst Loan Agreement,
the MidFirst Note and the MidFirst Loan Documents is referred to herein as the
"MidFirst Debt."
WHEREAS, this Intercreditor Agreement sets forth the subordination of
the payment of the Contingent Production Payment to the MidFirst Debt.
NOW, THEREFORE, in consideration of the mutual promises herein
contained and such other good and valuable consideration
<PAGE>
the sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
I. REPRESENTATIONS AND WARRANTIES. The Coral Group and Borrower
------------------------------
represent and warrant to MidFirst that:
(a) The Contingent Production Payment. As of the date hereof,
---------------------------------
the total indebtedness owing by Borrower to the Coral Group is evidenced by the
Contingent Production Payment.
(b) Default. There is no default in the indebtedness from
-------
Borrower to the Coral Group or under any other agreements between Borrower and
third parties.
II. JUNIOR PRIORITY OF CONTINGENT PRODUCTION PAYMENT. In order to
------------------------------------------------
induce MidFirst to extend a loan to Borrower, it is agreed as follows:
(a) Junior Priority. The Coral Group agrees that the Contingent
---------------
Production Payment shall be and hereby is inferior and junior to the MidFirst
Debt, unless otherwise agreed to in writing by MidFirst, and the Coral Group
shall be entitled to no payments pursuant to the Contingent Production Payment
until the full cash payment of any and all indebtedness (including all interest
after the date of filing of a petition by or against Borrower under any
bankruptcy act) of any nature whatsoever now due to MidFirst from Borrower
pursuant to the MidFirst Loan, as the same may be amended from time to time.
Notwithstanding the above, the Coral Group shall be entitled to the monthly
Contingent Production Payment so long as Borrower is not in default of the
MidFirst Loan Agreement. Upon the occurrence of a Default or an Event of
Default under the MidFirst Loan Agreement, the Contingent Production Payment
shall be suspended and not made until such Default or Event of Default has been
cured to MidFirst's satisfaction.
(b) No Action by the Coral Group. The Coral Group will not,
----------------------------
without MidFirst's prior written consent, accelerate, assert, collect or enforce
the Contingent Production Payment or any part thereof and/or otherwise exercise
its remedies pursuant to the Contingent Production Payment and the Merger
Agreement until the MidFirst Debt has been paid in full.
(c) No Amendment. The Coral Group shall not amend or permit
------------
amendment of the terms of any instrument or agreement evidencing the Contingent
Production Payment without the prior written consent of MidFirst.
(d) Payments Held in Trust. In the event that any payment of
----------------------
principal or interest or other payment or distribution of assets of Borrower
shall be received by any holder
-2-
<PAGE>
of the Contingent Production Payment in violation of the provisions hereof, and
before payment in full of the MidFirst Debt, such payment or distribution shall
be held by such holder of the Contingent Production Payment in trust for the
holder of the MidFirst Debt by such holder of the Contingent Production Payment
(subject to the rights of Bank One Oklahoma, N.A. under its Intercreditor
Agreement with the Coral Group and Borrower of even date (the "Bank One
Agreement")) to the extent necessary to make payment of any unpaid MidFirst
Debt.
(e) Permissive Payments. Borrower agrees with MidFirst that,
-------------------
after the execution hereof, it will not pay the Contingent Production Payment to
the Coral Group until the MidFirst Debt is paid in full; provided, however, as
long as no Default or Event of Default under the MidFirst Credit Agreement has
occurred or is continuing under the MidFirst Loan, MidFirst agrees that Borrower
shall be allowed to service the monthly Contingent Production Payment.
(f) MidFirst Modifications. With respect to the MidFirst Debt,
----------------------
the Coral Group agrees that MidFirst may grant extensions of the time of payment
or performance, make compromises, including releases of collateral and
settlements with Borrower, or otherwise modify the MidFirst Debt without
affecting the agreements of the Coral Group or Borrower hereunder.
(g) Discontinuance of MidFirst Debt. If, at any time hereafter,
-------------------------------
MidFirst shall determine to discontinue the extension of credit to Borrower,
MidFirst may do so. This Agreement shall continue in full force and effect
until Borrower shall have satisfied all obligations and MidFirst shall have been
paid in full on all indebtedness, of any nature whatsoever that may be due on
the MidFirst Loan Agreement or any amendments thereto to MidFirst from Borrower.
III. MISCELLANEOUS.
-------------
(a) Insolvency. In the event of any liquidation, dissolution or
----------
winding up of the Borrower, or any execution sale, receivership, insolvency,
bankruptcy, liquidation, readjustment, reorganization or other similar
proceeding relative to the Borrower or its property, all principal, interest and
other amounts owing on the MidFirst Debt shall first be paid in full in cash
before any payment is made upon the Contingent Production Payment; and in any
such event, and in the event of any payment in violation of this Intercreditor
Agreement, any payment or distribution of any kind or character, whether in
cash, property or securities which shall be made upon or in respect of the
Contingent Production Payment shall (subject to the rights of Bank One under the
Bank One Agreement) be paid over to MidFirst for application in payment thereof
unless and until the MidFirst Debt
-3-
<PAGE>
shall have been paid or satisfied in full in cash.
(b) Proof and Vote of Claims. The Coral Group hereby appoints,
------------------------
which appointment is irrevocable and coupled with an interest, MidFirst, its
successors and assigns, as the Coral Group's true and lawful attorney, with full
power of substitution, in the name of the Coral Group, MidFirst or otherwise.
Such appointment shall be for the sole use and benefit of MidFirst, to the
extent permitted by law, to prove and vote all claims relating to the Contingent
Production Payment, and to receive and collect all distributions and payments to
which the Coral Group would be otherwise entitled on any liquidation of Borrower
or in any proceeding affecting Borrower or its property under any bankruptcy or
insolvency laws or any laws or proceedings relating to the relief of the
Borrower, readjustment, composition or extension of indebtedness or
reorganization, subject to the rights of Bank One under the Bank One Agreement.
(c) Administrative Proceedings. The Coral Group agrees that
--------------------------
it will not commence, prosecute or participate in any administrative, legal, or
equitable action against Borrower or in any administrative, legal or equitable
action arising out of Borrower's failure to make the Contingent Production
Payment that might adversely affect Borrower or its interest, without MidFirst's
prior written consent.
(d) No Interference. The Coral Group agrees that it will not
---------------
take any action that will impede, interfere with or restrict or restrain the
exercise by MidFirst of its rights and remedies under the MidFirst Loan
Documents and, upon the commencement of any bankruptcy of the Borrower, will
take such actions as may be reasonably necessary or appropriate to effectuate
the subordination provided hereby. In furtherance thereof, the Coral Group
hereby agrees not to oppose any motion filed or supported by MidFirst for relief
from the automatic stay, for adequate protection in respect of the MidFirst
Debt, and/or for the Borrower's use of cash collateral or post-petition
borrowing from MidFirst.
(e) Collection Actions. If the Coral Group, in violation of
------------------
this Agreement, shall commence, prosecute or participate in any suit, action or
proceeding against Borrower, Borrower may interpose as a defense or plea the
making of this Agreement and MidFirst may intervene and interpose such defense
or plea in MidFirst's name or in the name of Borrower. If the Coral Group shall
attempt to enforce any security agreements, real estate mortgages or any lien
instrument or other encumbrances, MidFirst or Borrower may by virtue of this
Agreement restrain the enforcement thereof in MidFirst's name or in the name of
Borrower. If the Coral Group obtains any assets of the Borrower as a result of
any administrative, legal, or equitable action, or otherwise,
-4-
<PAGE>
the Coral Group agrees to forthwith pay, deliver, and assign to MidFirst any
such assets for application upon the amount now or hereafter owing to MidFirst
by Borrower, subject to the rights of Bank One under the Bank One Agreement.
(f) The Coral Group Rights. Nothing contained in this
----------------------
Agreement is intended to or shall impair, as between Borrower and the holder of
the Contingent Production Payment, the obligation of Borrower, which is absolute
and unconditional, to pay to the holder of the Contingent Production Payment
such indebtedness.
(g) Limitation on Assignments. The Coral Group shall not sell,
-------------------------
assign or transfer any of the Contingent Production Payment, unless the buyer,
assignee or transferee thereof shall agree in writing to become bound by the
provisions of this Agreement and the holders of the MidFirst Debt shall have
been furnished with original copies of such agreement.
(h) Borrower Agreement. Borrower agrees, for the benefit of the
------------------
holder of the MidFirst Debt, that, in the event the Contingent Production
Payment is declared due and payable before its expressed maturity, Borrower will
give prompt notice in writing of such happening to the holder of the MidFirst
Debt. Borrower further agrees and covenants not to make any distribution or
payment to the Coral Group in violation of the terms hereof.
(i) Governing Law. This Agreement and the obligations which it
-------------
secures and all rights and liabilities of the parties shall be governed as to
validity, interpretation, enforcement and effect by the laws of the State of
Oklahoma.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of this ____ day of March, 1999.
BORROWER: INDIAN OIL COMPANY
By_______________________________
CORAL GROUP: CORAL RESERVES, INC.
By_______________________________
Name:__________________________
Title:_________________________
-5-
<PAGE>
CORAL RESERVES ENERGY CORP.
By_______________________________
Name:__________________________
Title:_________________________
CORAL RESERVES GROUP, LTD.
By_______________________________
Name:__________________________
Title:_________________________
MidFirst: MidFirst BANK
By_______________________________
Alan H. Kraft
Senior Vice President
-6-
<PAGE>
EXHIBIT 10.6(d)
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
This SECOND AMENDMENT TO CREDIT AGREEMENT is entered into as of
February 1, 2000, by INDIAN OIL COMPANY ("Borrower"), CIBOLA CORPORATION
("Guarantor"), RICHARD R. DUNNING, LARRY D HARTZOG, MICHAEL C. BLACK, DUNNING
FAMILY LIMITED PARTNERSHIP, and MICHAEL C. BLACK, TRUSTEE OF THE MICHAEL C.
BLACK REVOCABLE TRUST ("Pledgors"), and MIDFIRST BANK ("Lender"), with respect
to the following:
A. Borrower, Guarantor, Pledgors and Lender entered into a Credit
Agreement on March 31, 1999, as amended by First Amendment to Credit Agreement
dated as of May ___, 1999 (the "Agreement") with respect to a certain extension
of credit by Lender to Borrower in the form of a Term Loan in the principal
amount of $6,000,000 due on March 1, 2000.
B. Borrower, Guarantor and Pledgors have requested that the Loan
amount be increased in an amount sufficient to capitalize accrued and unpaid
interest on the Loan (in the maximum additional amount of $425,000), and that
the Maturity Date of the Loan be extended until March 1, 2001, and have agreed
to make a principal and interest payment on July 1, 2000 and to pay interest
quarterly as it accrues thereafter, and Lender has agreed to such increase and
extension, subject to the terms and conditions contained herein, and the parties
desire to amend the Agreement to set forth their agreements.
NOW THEREFORE, in consideration of the recitals and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Definitions of Terms. The definitions of terms contained in the
--------------------
Agreement and not otherwise defined herein shall define the terms used in this
Amendment, except as follows:
"Maturity Date" means March 1, 2001.
-------------
2. Interest; Payments of Principal and Interest. Section 2.2 of the
--------------------------------------------
Agreement is amended to read as follows:
"The Loan (exclusive of any past due principal or
interest) shall bear interest on each day at the
Base Rate in effect on such date. All past due
principal and interest on the Loan shall bear
interest on each day outstanding at the Late
Payment Rate in effect on such day, and such
interest shall be due and payable immediately as
it accrues. The following payments shall be made
on July 1, 2000:
(a) a principal payment in an amount
sufficient to reduce the outstanding
principal balance of the Loan to $6,000,000;
and
<PAGE>
(b) all accrued and unpaid interest.
Thereafter, accrued interest on the Loan shall be
payable quarterly, with the first payment to be
made on September 30, 2000 and thereafter on the
last day of each quarter until the Maturity Date,
at which time all remaining accrued but unpaid
interest and all principal shall be due and
payable."
3. Events of Default. Section 7.1(a) of the Agreement is amended to
-----------------
read as follows:
"(a) Borrower shall fail to pay within ten (10)
days of any due date the Obligations, or any part
thereof, including, without limitation, any
principal of, or interest on, the Note, any Fee,
any Expenses or other payment under the Loan
Documents; or"
4. Conditions to Effectiveness. The effectiveness of this Amendment
---------------------------
is subject to receipt by Lender of the following, each in form and substance
satisfactory to Lender:
(a) this Amendment executed by Borrower, Guarantor and Pledgors.
(b) the Promissory Note in the form of Exhibit 2.1 executed by
-----------
Borrower.
(c) documentation executed by Bank One, Oklahoma, N.A.
consenting to the amendments contained herein, and extending the maturity of the
Other Loan until January 15, 2001.
(d) An amendment to the Intercreditor Agreement with respect to
the Production Payment executed by the parties thereto, together with evidence
that the Coral Agreement is in full force and effect and there are no defaults
or events of default thereunder.
(e) a certificate of the president and of the secretary or an
assistant secretary of Borrower and Guarantor, certifying, inter alia (i) true
and complete copies of the resolutions adopted by the board of directors of
Borrower and Guarantor authorizing the execution, delivery and performance by
Borrower and Guarantor of this Amendment and (ii) the incumbency and specimen
signatures of the officers of Borrower and Guarantor executing this Amendment on
their behalf.
(f) the payment to Lender of all reasonable fees and expenses
(including the reasonable fees and disbursements of McAfee & Taft) incurred in
connection with this Amendment.
2
<PAGE>
5. Substitution of Exhibit. Exhibit 2.1 attached hereto shall be
----------------------- -----------
substituted for Exhibit 2.1 attached to the original Credit Agreement.
-----------
6. Increase in Loan. The Guaranty, the Pledgor Guaranty, the
----------------
Account Pledge Agreement, the Individual Pledge Agreement and each other Loan
Document is hereby amended to reflect a Loan in the increased principal amount
set forth in the Note, each of which Loan Documents shall cover such principal
amount, which is hereby incorporated therein, and each of the Loan Documents, as
amended, is hereby ratified and confirmed in all respects.
7. Representations True; No Default. Borrower, Guarantor and
--------------------------------
Pledgors represent and warrant that:
(a) this Amendment has been duly authorized, executed and
delivered on behalf of each of them and the Agreement, as amended hereby,
constitutes a valid and legally binding agreement of Borrower, Guarantor and
Pledgors enforceable in accordance with its terms, except as enforceability
thereof may be limited by bankruptcy, insolvency reorganization or moratorium or
other similar laws relating to creditors' rights and by general equitable
principles which may limit the right to obtain equitable remedies (regardless of
whether such enforceability is considered in a proceeding, in equity or at law);
(b) the representations and warranties of Borrower, Guarantor
and Pledgors contained in the Agreement are true and correct in all material
respects on and as of the date hereof as though made on and as of the date
hereof, except to the extent such representations and warranties relate solely
to an earlier date; and
(c) after giving effect to this Amendment, no Default or Event
of Default under the Agreement has occurred and is continuing.
8. Expenses. Borrower shall pay to Lender all reasonable expenses
--------
in connection with preparation of this Amendment, including reasonable fees and
expenses of counsel to Lender.
9. Continuation; Ratification. Except as amended by this Amendment,
--------------------------
the Agreement and the Loan Documents, including each Guaranty, shall continue in
full force and effect and are ratified and confirmed in all respects. Any
reference to the Credit Agreement in any Loan Document shall be deemed a
reference to the Agreement, as amended.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Second Amendment to
Credit Agreement to be duly executed as of the date first set forth above.
INDIAN OIL COMPANY, an Oklahoma corporation
By__________________________________________
_______________________________, President
Notice Address:
9400 North Broadway
One Benham Place, Suite 800
Oklahoma City, Oklahoma 73114
Fax: (405) 475-7777
("Borrower")
CIBOLA CORPORATION, a Wyoming corporation
By__________________________________________
Michael C. Black, President
Notice Address:
1131 13th Street, Suite 206
Cody, Wyoming 82414
("Guarantor")
____________________________________________
Richard R. Dunning
____________________________________________
Larry D. Hartzog
____________________________________________
Michael C. Black
4
<PAGE>
DUNNING FAMILY LIMITED PARTNERSHIP,
an Oklahoma limited partnership
By Dunning Management L.L.C., an
Oklahoma limited liability company,
General Partner
By_________________________________
Richard R. Dunning, Manager
____________________________________________
MICHAEL C. BLACK, Trustee of the Michael C.
Black Revocable Trust
("Pledgors")
MIDFIRST BANK
By__________________________________________
W. Thomas Portman, Vice President
Notice Address:
501 West I-44 Service Road
Oklahoma City, Oklahoma 73118
Fax: (405) 879-6155
("Lender")
5
<PAGE>
EXHIBIT 2.1
RENEWAL PROMISSORY NOTE
-----------------------
$____________________ Oklahoma City, Oklahoma
February ____, 2000
FOR VALUE RECEIVED, the undersigned, INDIAN OIL COMPANY, an Oklahoma
corporation ("Borrower"), promises to pay to the order of MIDFIRST BANK
("Lender"), the principal sum of ________________________________________ AND
NO/100 DOLLARS ($______________), together with interest on the unpaid principal
balance thereof as hereinafter set forth, both principal and interest payable in
lawful money of the United States of America at the office of MidFirst Bank, at
501 West I-44 Service Road, Oklahoma City, Oklahoma 73118, or such other place
as from time to time may be designated in writing by Lender. Borrower promises
to pay interest on the unpaid principal balance of this Note until said
principal amount is paid in full, at the times and at the rate or rates
specified in the Credit Agreement (as hereafter defined). If not paid earlier
as herein required, all unpaid principal and accrued interest thereon shall be
due and payable on the Maturity Date.
This Note is the Note referred to in, and is subject to the terms and
provisions of, the Credit Agreement dated as of March 31, 1999, amended by First
Amendment to Credit Agreement dated as of May ___, 1999, amended by Second
Amendment to Credit Agreement dated as of the date hereof, among Borrower,
Cibola Corporation, as Guarantor and Lender (herein, as from time to time
supplemented, modified, amended or restated, called the "Credit Agreement").
The Credit Agreement, among other things, (i) provides for the making
of the Loan by Lender to Borrower, the indebtedness of Borrower to Lender being
evidenced by this Note, (ii) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified, (iii) provides for installments of
interest to be made hereunder and (iv) provides for collateral to secure payment
of this Note. Reference is hereby made to the Credit Agreement for a description
of the rights, limitations of rights, obligations and duties of the parties
hereto. All terms not expressly defined herein shall have the same definitions
as set forth in the Credit Agreement.
The makers, endorsers, sureties, guarantors, and all other persons who
may become liable for all or any part of this obligation severally waive demand,
presentment for payment, protest, notice of nonpayment and notice of intention
to accelerate the maturity hereof. Such parties consent to any extension of time
(whether one or more) of payment hereof, any renewal (whether one or more)
hereof, release of all or any part of the security for payment hereof and any
release of any party liable for payment of this obligation. Any such extension,
renewal or release may be made at any time and from time to time without notice
to any such party and without discharging such party's liability hereunder.
1
<PAGE>
If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented hereby is
proved, established or collected in any court or in any bankruptcy,
receivership, debtor relief, probate or other court proceedings, Borrower and
all endorsers, sureties and guarantors of this Note jointly and severally agree
to pay reasonable attorneys' fees and collection costs to the holder hereof in
addition to the principal and interest payable hereunder.
This Note and the rights and duties of the parties hereto shall be
governed by the laws of the State of Oklahoma.
IN WITNESS WHEREOF, the undersigned has executed this instrument of
the day and year first above written.
INDIAN OIL COMPANY, an Oklahoma
corporation
By_____________________________________,
_____________________________President
2
<PAGE>
EXHIBIT 10.6(e)
FIRST AMENDMENT TO INTERCREDITOR AGREEMENT
------------------------------------------
This FIRST AMENDMENT TO INTERCREDITOR AGREEMENT is entered into as of
February 1, 2000 by and among MIDFIRST BANK ("MidFirst"), CORAL RESERVES, INC.,
an Oklahoma corporation ("Coral Reserves"), CORAL RESERVES ENERGY CORP., an
Oklahoma corporation ("Coral Energy"), CANAAN ENERGY CORPORATION, an Oklahoma
corporation, formerly known as Coral Reserves Group, Ltd. ("Canaan")
(collectively, Coral Reserves, Coral Energy and Canaan are referred to herein as
the "Coral Group"), and INDIAN OIL COMPANY, an Oklahoma corporation
("Borrower"), with respect to the following:
A. On March 31, 1999 the parties entered into an Intercreditor
Agreement providing for subordination of the Contingent Production Payment to
the MidFirst Debt.
B. Borrower has requested that MidFirst extend and increase the
principal balance of the MidFirst Debt, and the parties desire to amend the
Intercreditor Agreement in connection with such extension and increase.
NOW, THEREFORE, in consideration of the recitals and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Definitions of Terms. The definitions of terms contained in the
--------------------
Intercreditor Agreement and not otherwise defined herein shall define the terms
used in this Amendment.
2. Extension and Increase. The Coral Group acknowledges and consents
----------------------
to the increase in the MidFirst Debt and the extension of the maturity date of
the MidFirst Debt, as set forth in the Second Amendment to Credit Agreement
amending the terms of the MidFirst Debt, a copy of which is attached hereto as
Exhibit A.
3. Payments. The Coral Group acknowledges and consents to the
--------
principal and interest payments on the MidFirst Debt, as set forth in the Second
Amendment to Credit Agreement.
4. Merger Agreement. The Coral Group represents and warrants that
----------------
the Merger Agreement is in full force and effect and there are no defaults or
events of default thereunder.
5. Continuance; Ratification. Except as amended by this Amendment,
-------------------------
the Intercreditor Agreement shall continue in full force and effect and is
ratified and confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to
Intercreditor Agreement to be duly executed as of the date first set forth
above.
INDIAN OIL COMPANY, an Oklahoma corporation
By___________________________________________
("Borrower")
CORAL RESERVES, INC., an Oklahoma corporation
By___________________________________________
CORAL RESERVES ENERGY CORP., an Oklahoma
corporation
By___________________________________________
CANAAN ENERGY CORPORATION, an Oklahoma
corporation formerly known as Coral Reserves
Group, Ltd.
By___________________________________________
("Coral Group")
MIDFIRST BANK
By___________________________________________
W. Thomas Portman, Vice President
("MidFirst")
2
<PAGE>
Exhibit 10.7(a)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
IN COMPLIANCE WITH SUCH LAWS. THE TRANSFER OF THIS NOTE IS ALSO SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE PARTICIPATING SHAREHOLDER'S AGREEMENT,
DATED OCTOBER 30, 1992, BETWEEN THE COMPANY AND THE PAYEE.
INDIAN OIL COMPANY
UNSECURED NOTE
Date: January 20, 1993
$415,094.34
On or before January 20, 2003, INDIAN OIL COMPANY, an Oklahoma corporation
(the "Company"), for value received, hereby promises to pay to LARRY D. HARTZOG
the principal amount of Four Hundred Fifteen Thousand Ninety-Four Dollars and
Thirty-Four Cents ($415,094.34), together with interest on the principal amount
from time to time remaining unpaid hereon at the rate of 10% per annum from the
date hereof until maturity, payable on the first day of each March, June,
September, and December of each year and at maturity. Both the principal hereof
and interest hereon are payable at the principal office of the Company in coin
or currency of the United States of America which at the time of payment shall
be legal tender for the payment of public and private debts. If any amount of
principal or interest on or in respect of this Note becomes due and payable on
any date which is not a Business Day, such amount shall be payable on the next
following Business Day. "Business Day" means any day other than a Saturday,
Sunday, statutory holiday or other day on which national banks in the United
States are required by law to close or are customarily closed. Interest shall be
computed on the actual number of days elapsed based on a year consisting of 360
days.
This Note is one of several Notes, all dated January 20, 1993, issued by
the Company in the aggregate principal amount of $2,000,000, and is issued under
and pursuant to the terms and provisions of those certain Participating
Shareholder's Agreements, all dated as of October 30, 1992, entered into by the
Company with the original purchasers of the Notes. All of the terms, conditions,
representations, warranties, covenants, and agreements contained in the
Participating Shareholder's Agreement are hereby incorporated by reference
herein.
This Note and any other Notes outstanding under the Participating
Shareholder's Agreements may be declared due prior to their expressed maturity
dates, all in the events, on the terms and in the manner and amounts as provided
in the Participating Shareholder's Agreements. Any payment of principal and, to
the extent legally enforceable, interest which is not paid when due shall bear
interest at the rate of 18% per annum from the due date until paid.
The Company may prepay the Notes in whole or in part at any time without
penalty, provided that prepayments shall be made on a pro rata basis on all
Notes and all unpaid accrued interest on the full unpaid principal balance of
the Note shall be paid with any prepayment.
<PAGE>
This Note is subject to certain restrictions on transfer as set forth in
the Participating Shareholder's Agreements.
Notwithstanding any agreement to the contrary, in no event, whether by
reason of acceleration of the maturity of this Note, prepayment of this Note in
whole or in part or otherwise, shall the amount paid or agreed to be paid for
the use, forbearance, or detention of the money loaned hereunder, or for the
payment or performance of any covenant or obligation contained in any other
document evidencing, securing or pertaining to this Note, exceed the maximum
amount permissible under applicable state law, if any, and federal law. If from
any circumstances whatsoever fulfillment of any provision hereof or of any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then, ipso
----
facto, the obligation to be fulfilled shall be reduced to the limit of such
- -----
validity, and if from any such circumstance there shall be paid interest or
anything of value deemed interest under applicable law which would exceed the
maximum rate allowed under law, such amount which would be excessive interest
shall be applied to the reduction of the principal amount owing on account of
this Note and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal of this Note, such excess shall be
refunded to the Company. All sums paid or agreed to be paid for the use,
forbearance or detention of the indebtedness of the Company shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so the
actual rate of interest on account of such indebtedness complies with applicable
law throughout the term thereof. The terms and provisions of this paragraph
shall control and supersede every other provision of all agreements relating to
the indebtedness evidenced by this Note.
This Note is governed by and construed in accordance with the laws of
Oklahoma.
INDIAN OIL COMPANY
By:
---------------------------------
Richard R. Dunning, President
<PAGE>
Exhibit 10.7(b)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
IN COMPLIANCE WITH SUCH LAWS. THE TRANSFER OF THIS NOTE IS ALSO SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE PARTICIPATING SHAREHOLDER'S AGREEMENT,
DATED OCTOBER 30, 1992, BETWEEN THE COMPANY AND THE PAYEE.
INDIAN OIL COMPANY
UNSECURED NOTE
Date: January 20, 1993
$1,232,679.24
On or before January 20, 2003, INDIAN OIL COMPANY, an Oklahoma corporation
(the "Company"), for value received, hereby promises to pay to RICHARD R.
DUNNING the principal amount of One Million Two Hundred Thirty-Two Thousand Six
Hundred Seventy-Nine Dollars and Twenty-Four Cents ($1,232,679.24), together
with interest on the principal amount from time to time remaining unpaid hereon
at the rate of 10% per annum from the date hereof until maturity, payable on the
first day of each March, June, September, and December of each year and at
maturity. Both the principal hereof and interest hereon are payable at the
principal office of the Company in coin or currency of the United States of
America which at the time of payment shall be legal tender for the payment of
public and private debts. If any amount of principal or interest on or in
respect of this Note becomes due and payable on any date which is not a Business
Day, such amount shall be payable on the next following Business Day. "Business
Day" means any day other than a Saturday, Sunday, statutory holiday or other day
on which national banks in the United States are required by law to close or are
customarily closed. Interest shall be computed on the actual number of days
elapsed based on a year consisting of 360 days.
This Note is one of several Notes, all dated January 20, 1993, issued by
the Company in the aggregate principal amount of $2,000,000, and is issued under
and pursuant to the terms and provisions of those certain Participating
Shareholder's Agreements, all dated as of October 30, 1992, entered into by the
Company with the original purchasers of the Notes. All of the terms, conditions,
representations, warranties, covenants, and agreements contained in the
Participating Shareholder's Agreement are hereby incorporated by reference
herein.
This Note and any other Notes outstanding under the Participating
Shareholder's Agreements may be declared due prior to their expressed maturity
dates, all in the events, on the terms and in the manner and amounts as provided
in the Participating Shareholder's Agreements. Any payment of principal and, to
the extent legally enforceable, interest which is not paid when due shall bear
interest at the rate of 18% per annum from the due date until paid.
The Company may prepay the Notes in whole or in part at any time without
penalty, provided that prepayments shall be made on a pro rata basis on all
Notes and all unpaid accrued interest on the full unpaid principal balance of
the Note shall be paid with any prepayment.
<PAGE>
This Note is subject to certain restrictions on transfer as set forth in
the Participating Shareholder's Agreements.
Notwithstanding any agreement to the contrary, in no event, whether by
reason of acceleration of the maturity of this Note, prepayment of this Note in
whole or in part or otherwise, shall the amount paid or agreed to be paid for
the use, forbearance, or detention of the money loaned hereunder, or for the
payment or performance of any covenant or obligation contained in any other
document evidencing, securing or pertaining to this Note, exceed the maximum
amount permissible under applicable state law, if any, and federal law. If from
any circumstances whatsoever fulfillment of any provision hereof or of any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then, ipso
----
facto, the obligation to be fulfilled shall be reduced to the limit of such
- -----
validity, and if from any such circumstance there shall be paid interest or
anything of value deemed interest under applicable law which would exceed the
maximum rate allowed under law, such amount which would be excessive interest
shall be applied to the reduction of the principal amount owing on account of
this Note and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal of this Note, such excess shall be
refunded to the Company. All sums paid or agreed to be paid for the use,
forbearance or detention of the indebtedness of the Company shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so the
actual rate of interest on account of such indebtedness complies with applicable
law throughout the term thereof. The terms and provisions of this paragraph
shall control and supersede every other provision of all agreements relating to
the indebtedness evidenced by this Note.
This Note is governed by and construed in accordance with the laws of
Oklahoma.
INDIAN OIL COMPANY
By:________________________________
Richard R. Dunning, President
<PAGE>
Exhibit 10.7(c)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
IN COMPLIANCE WITH SUCH LAWS. THE TRANSFER OF THIS NOTE IS ALSO SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN THE PARTICIPATING SHAREHOLDER'S AGREEMENT,
DATED OCTOBER 30, 1992, BETWEEN THE COMPANY AND THE PAYEE.
INDIAN OIL COMPANY
UNSECURED NOTE
Date: January 20, 1993
$352,226.42
On or before January 20, 2003, INDIAN OIL COMPANY, an Oklahoma corporation
(the "Company"), for value received, hereby promises to pay to MICHAEL C. BLACK
the principal amount of Three Hundred Fifty-Two Thousand Two Hundred Twenty-Six
Dollars and Forty-Two Cents ($352,226.42), together with interest on the
principal amount from time to time remaining unpaid hereon at the rate of 10%
per annum from the date hereof until maturity, payable on the first day of each
March, June, September, and December of each year and at maturity. Both the
principal hereof and interest hereon are payable at the principal office of the
Company in coin or currency of the United States of America which at the time of
payment shall be legal tender for the payment of public and private debts. If
any amount of principal or interest on or in respect of this Note becomes due
and payable on any date which is not a Business Day, such amount shall be
payable on the next following Business Day. "Business Day" means any day other
than a Saturday, Sunday, statutory holiday or other day on which national banks
in the United States are required by law to close or are customarily closed.
Interest shall be computed on the actual number of days elapsed based on a year
consisting of 360 days.
This Note is one of several Notes, all dated January 20, 1993, issued by
the Company in the aggregate principal amount of $2,000,000, and is issued under
and pursuant to the terms and provisions of those certain Participating
Shareholder's Agreements, all dated as of October 30, 1992, entered into by the
Company with the original purchasers of the Notes. All of the terms, conditions,
representations, warranties, covenants, and agreements contained in the
Participating Shareholder's Agreement are hereby incorporated by reference
herein.
This Note and any other Notes outstanding under the Participating
Shareholder's Agreements may be declared due prior to their expressed maturity
dates, all in the events, on the terms and in the manner and amounts as provided
in the Participating Shareholder's Agreements. Any payment of principal and, to
the extent legally enforceable, interest which is not paid when due shall bear
interest at the rate of 18% per annum from the due date until paid.
The Company may prepay the Notes in whole or in part at any time without
penalty, provided that prepayments shall be made on a pro rata basis on all
Notes and all unpaid accrued interest on the full unpaid principal balance of
the Note shall be paid with any prepayment.
<PAGE>
This Note is subject to certain restrictions on transfer as set forth in
the Participating Shareholder's Agreements.
Notwithstanding any agreement to the contrary, in no event, whether by
reason of acceleration of the maturity of this Note, prepayment of this Note in
whole or in part or otherwise, shall the amount paid or agreed to be paid for
the use, forbearance, or detention of the money loaned hereunder, or for the
payment or performance of any covenant or obligation contained in any other
document evidencing, securing or pertaining to this Note, exceed the maximum
amount permissible under applicable state law, if any, and federal law. If from
any circumstances whatsoever fulfillment of any provision hereof or of any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then, ipso
----
facto, the obligation to be fulfilled shall be reduced to the limit of such
- -----
validity, and if from any such circumstance there shall be paid interest or
anything of value deemed interest under applicable law which would exceed the
maximum rate allowed under law, such amount which would be excessive interest
shall be applied to the reduction of the principal amount owing on account of
this Note and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal of this Note, such excess shall be
refunded to the Company. All sums paid or agreed to be paid for the use,
forbearance or detention of the indebtedness of the Company shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so the
actual rate of interest on account of such indebtedness complies with applicable
law throughout the term thereof. The terms and provisions of this paragraph
shall control and supersede every other provision of all agreements relating to
the indebtedness evidenced by this Note.
This Note is governed by and construed in accordance with the laws of
Oklahoma.
INDIAN OIL COMPANY
By: --------------------------------------
Richard R. Dunning, President
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED PROMISSORY NOTE
Issue Date: April 21, 1993
Amended and Restated Date: January 1, 2000
Indian Oil Company, an Oklahoma corporation ("Company"), for value
received, hereby promises to pay to the order of CIBOLA CORPORATION, a Wyoming
corporation, the principal amount of Six Hundred Fifty-Six Thousand and Eighty
Dollars $656,080, together with interest on the principal amount from time to
time remaining unpaid hereon at a rate equal to the Prime Rate in effect from
time to time plus .5 percent. The amount of $16,680 shall be due and payable on
the first day of each February, May, August and November of each year until
maturity, and the unpaid principal balance and accrued interest thereon shall be
due and payable on the date which is eight years after the Issue Date of this
Note. The term "Prime Rate" shall mean the rate of interest designated by Chase
Manhattan Bank, N.A., New York, New York, from time to time as its prime rate or
base rate of interest, whether or not such prime rate is actually charged or
published, and whether or not a lower or better rate of interest is charged to
other customers or borrowers. The Prime Rate in effect under this Note shall be
6.0 percent and the rate in effect under this Note shall be 6.5 percent from the
Issue Date hereof through July 31, 1993, and such rates shall thereafter be
determined on the first day of each August and February during the term of this
Note. If any amount of principal or interest on or in respect of this Note
becomes due and payable on any date which is not a Business Day, such amount
shall be payable on the next following Business Day. "Business Day" means any
day other than a Saturday, Sunday, statutory holiday or other day on which
national banks in the United States are required by law to close or are
customarily closed. Interest shall be computed on the actual number of days
elapsed based on a year consisting of 365 days. All payments shall be applied
first to any expenses incurred in collecting payment hereof, then to interest
accrued hereon, and then to the principal balance hereof.
At the holder's option, all sums due hereunder shall become due and payable
upon (i) the failure of Company to make any payment due under the terms of this
Note within 10 days of the Company receiving notice that such payment was not
received by the holder of this Note on or before its due date, (ii) any change
in the stock ownership of Company which results in any person or group of
persons who is not or are not stockholders of Company on the Issue Date of this
Note beneficially owning more than 50 percent of the outstanding stock of
Company, or (iii) the occurrence of any event of default as provided in the
Stock Pledge Agreement. For purposes of this Note, the Stockholders of Company
on the Issue Date of this Note shall be deemed to include Larry D. Hartzog,
Richard R. Dunning, Michael C. Black, and any person or entity who at the time
he, she or it becomes a stockholder of the Company is controlled directly or
indirectly in any capacity by one or more of them. After the occurrence of any
such event, all sums due hereunder shall bear
<PAGE>
interest at a rate equal to 5% in excess of the Prime Rate from the date of
default to the date on which such default is cured. All past due sums shall be
paid at the time of and as a condition precedent to the curing of any default
hereunder.
Company agrees that if this Note is placed in the hands of an attorney for
collection after default, Company will pay to the holder hereof its reasonable
attorney's fees, together with all court costs and other expenses incurred by
the holder in collecting the obligation evidenced by this Note.
Except with respect to the 10 day cure period described above, Company and
all other persons who may become liable for all or any part of the obligation
evidenced by this Note severally waive presentment for payment, protest and
notice of non-payment. Company and such persons consent to any extension of time
of payment hereof, any renewal hereof, and any release of any party liable for
payment of this Note, without notice to any such party and without discharging
such party's liability hereunder. The failure of the holder hereof to exercise
any of the remedies or options set forth in this Note or in any instrument
securing payment hereof, upon the occurrence of any default hereunder or
thereunder, shall not constitute a waiver of the right to exercise the same or
any other remedy at any subsequent time in respect to the same or any other
event of default. Acceptance by the holder hereof of any payment which is less
than the total of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the foregoing remedies
or options at that time or at any subsequent time, or nullify any prior exercise
of any such remedy or option, without the express consent of the holder hereof,
except as and to the extent otherwise provided by law.
Company may prepay this Note in whole or in part at any time without
penalty, provided that all unpaid accrued interest on the full unpaid principal
balance of the Note shall be paid with any prepayment.
Notwithstanding any agreement to the contrary, in no event, whether by
reason of acceleration of the maturity of this Note, prepayment of this Note in
whole or in part or otherwise, shall the amount paid or agreed to be paid for
the use, forbearance, or detention of the money loaned hereunder, or for the
payment or performance of any covenant or obligation contained in any other
document evidencing, securing or pertaining to this Note, exceed the maximum
amount permissible under applicable state law, if any, and federal law. If from
any circumstances whatsoever fulfillment of any provision hereof or of any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then, ipso
facto, the obligation to be fulfilled shall be reduced to the limit of such
validity, and if from any such circumstance there shall be paid interest or
anything of value deemed interest under applicable law which would exceed the
maximum rate allowed under law, such amount which would be excessive interest
shall be applied to reduce the principal balance of this Note and not to the
payment of interest, or if such excessive interest exceeds the unpaid
-2-
<PAGE>
principal balance of this Note, such excess shall be refunded to Company. All
sums paid or agreed to be paid for the use, forbearance or detention of the
indebtedness of Company shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the actual rate of interest on
account of such indebtedness complies with applicable law throughout the term
hereof. The terms and provisions of this paragraph shall control and supersede
every other provision of all agreements relating to the obligation evidenced by
this Note.
The obligation evidenced by this Note shall at all times be subordinate and
junior in right of payment to any and all amounts owed from time to time by
Company, regardless of whether such indebtedness is or was incurred by Company
before or after the Issue Date of this Note, to (i) any state or nationally
chartered financial institution, including but not limited to indebtedness owed
by Company to Bank of Oklahoma, N.A. and (ii) any stockholder of Company,
including but not limited to the indebtedness owed by Company to Richard R.
Dunning, Larry D. Hartzog and Michael C. Black evidenced by those certain
promissory notes, dated January 20, 1993, in the aggregate principal amount of
$2,000,000 (all such indebtedness being referred to herein as "Senior Debt"), in
the following manner:
(i) in the event of any liquidation, dissolution or winding-up of
Company, or of any execution, sale, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceeding
relative to Company or its property, all principal and interest owing on
all Senior Debt shall be paid first in full before any payment is made on
this Note, and if in any such event any payment or distribution of any kind
or character shall be made upon or in respect of the Note, such payment or
distribution shall be paid over by the holder of this Note to the holders
of the Senior Debt, pro rata, for application and payment thereof unless
and until all Senior Debt shall have been paid or satisfied in full;
(ii) in the event this Note is declared or becomes due and payable
because of the occurrence of any event of default hereunder which is not
waived or cured, the holder shall be entitled to payments only after all
Senior Debt has been paid in full or payment thereof shall have been
provided for in a manner satisfactory to the holders of such Senior Debt;
and
(iii) upon the occurrence of any event of default with respect to any
Senior Debt and during the continuance thereof, no payment of principal or
interest shall be made on this Note.
This Note is governed by and construed in accordance with the laws of
Oklahoma.
THIS NOTE RENEWS, AMENDS, AND RESTATES, AND IS GIVEN IN MODIFICATION AND
REPLACEMENT OF (BUT NOT IN SATISFACTION OF OR WITH
-3-
<PAGE>
ANY INTENT OF EXTINGUISHMENT) THAT CERTAIN PROMISSORY NOTE DATED APRIL 21, 1993,
IN THE ORIGINAL PRINCIPAL AMOUNT OF $656,080 MADE BY COMPANY IN FAVOR OF TIMOTHY
J. MOYLAN, WHICH NOTE WAS ENDORSED TO MAINLINE ENERTECH CORPORATION, AND WHICH
NOTE WAS SUBSEQUENTLY ACQUIRED BY CIBOLA CORPORATION BY VIRTUE OF A MERGER OF
MAINLINE ENERTECH CORPORATION INTO CIBOLA CORPORATION ON APRIL 10, 1996.
INDIAN OIL COMPANY, an Oklahoma corporation
By: /s/ Richard R. Dunning
-----------------------------------------------
Richard R. Dunning, President
NOTE1.WPD
-4-
<PAGE>
AMENDED AND RESTATED PROMISSORY NOTE
Issue Date: July 31, 1993
Amended and Restated Date: January 1, 2000
Indian Oil Company, an Oklahoma corporation ("Company"), for value
received, hereby promises to pay to the order of KENNETH D. SNYDER the principal
amount of Six Hundred Fifty-Six Thousand and Eighty Dollars $656,080, together
with interest on the principal amount from time to time remaining unpaid hereon
at a rate equal to the Prime Rate in effect from time to time plus .5 percent.
The amount of $16,680 shall be due and payable on the first day of each
February, May, August and November of each year until maturity, and the unpaid
principal balance and accrued interest thereon shall be due and payable on the
date which is eight years after the Issue Date of this Note. The term "Prime
Rate" shall mean the rate of interest designated by Chase Manhattan Bank, N.A.,
New York, New York, from time to time as its prime rate or base rate of
interest, whether or not such prime rate is actually charged or published, and
whether or not a lower or better rate of interest is charged to other customers
or borrowers. The Prime Rate in effect under this Note shall be 6.0 percent and
the rate in effect under this Note shall be 6.5 percent from the Issue Date
hereof through July 31, 1993, and such rates shall thereafter be determined on
the first day of each August and February during the term of this Note. If any
amount of principal or interest on or in respect of this Note becomes due and
payable on any date which is not a Business Day, such amount shall be payable on
the next following Business Day. "Business Day" means any day other than a
Saturday, Sunday, statutory holiday or other day on which national banks in the
United States are required by law to close or are customarily closed. Interest
shall be computed on the actual number of days elapsed based on a year
consisting of 365 days. All payments shall be applied first to any expenses
incurred in collecting payment hereof, then to interest accrued hereon, and then
to the principal balance hereof.
At the holder's option, all sums due hereunder shall become due and payable
upon (i) the failure of Company to make any payment due under the terms of this
Note within 10 days of the Company receiving notice that such payment was not
received by the holder of this Note on or before its due date, (ii) any change
in the stock ownership of Company which results in any person or group of
persons who is not or are not stockholders of Company on the Issue Date of this
Note beneficially owning more than 50 percent of the outstanding stock of
Company, or (iii) the occurrence of any event of default as provided in the
Stock Pledge Agreement. For purposes of this Note, the Stockholders of Company
on the Issue Date of this Note shall be deemed to include Larry D. Hartzog,
Richard R. Dunning, Michael C. Black, and any person or entity who at the time
he, she or it becomes a stockholder of the Company is controlled directly or
indirectly in any capacity by one or more of them. After the occurrence of any
such event, all sums due hereunder shall bear
<PAGE>
interest at a rate equal to 5% in excess of the Prime Rate from the date of
default to the date on which such default is cured. All past due sums shall be
paid at the time of and as a condition precedent to the curing of any default
hereunder.
Company agrees that if this Note is placed in the hands of an attorney for
collection after default, Company will pay to the holder hereof its reasonable
attorney's fees, together with all court costs and other expenses incurred by
the holder in collecting the obligation evidenced by this Note.
Except with respect to the 10 day cure period described above, Company and
all other persons who may become liable for all or any part of the obligation
evidenced by this Note severally waive presentment for payment, protest and
notice of non-payment. Company and such persons consent to any extension of time
of payment hereof, any renewal hereof, and any release of any party liable for
payment of this Note, without notice to any such party and without discharging
such party's liability hereunder. The failure of the holder hereof to exercise
any of the remedies or options set forth in this Note or in any instrument
securing payment hereof, upon the occurrence of any default hereunder or
thereunder, shall not constitute a waiver of the right to exercise the same or
any other remedy at any subsequent time in respect to the same or any other
event of default. Acceptance by the holder hereof of any payment which is less
than the total of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the foregoing remedies
or options at that time or at any subsequent time, or nullify any prior exercise
of any such remedy or option, without the express consent of the holder hereof,
except as and to the extent otherwise provided by law.
Company may prepay this Note in whole or in part at any time without
penalty, provided that all unpaid accrued interest on the full unpaid principal
balance of the Note shall be paid with any prepayment.
Notwithstanding any agreement to the contrary, in no event, whether by
reason of acceleration of the maturity of this Note, prepayment of this Note in
whole or in part or otherwise, shall the amount paid or agreed to be paid for
the use, forbearance, or detention of the money loaned hereunder, or for the
payment or performance of any covenant or obligation contained in any other
document evidencing, securing or pertaining to this Note, exceed the maximum
amount permissible under applicable state law, if any, and federal law. If from
any circumstances whatsoever fulfillment of any provision hereof or of any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then, ipso
facto, the obligation to be fulfilled shall be reduced to the limit of such
validity, and if from any such circumstance there shall be paid interest or
anything of value deemed interest under applicable law which would exceed the
maximum rate allowed under law, such amount which would be excessive interest
shall be applied to reduce the principal balance of this Note and not to the
payment of interest, or if such excessive interest exceeds the unpaid
-2-
<PAGE>
principal balance of this Note, such excess shall be refunded to Company. All
sums paid or agreed to be paid for the use, forbearance or detention of the
indebtedness of Company shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the actual rate of interest on
account of such indebtedness complies with applicable law throughout the term
hereof. The terms and provisions of this paragraph shall control and supersede
every other provision of all agreements relating to the obligation evidenced by
this Note.
The obligation evidenced by this Note shall at all times be subordinate and
junior in right of payment to any and all amounts owed from time to time by
Company, regardless of whether such indebtedness is or was incurred by Company
before or after the Issue Date of this Note, to (i) any state or nationally
chartered financial institution, including but not limited to indebtedness owed
by Company to Bank of Oklahoma, N.A. and (ii) any stockholder of Company,
including but not limited to the indebtedness owed by Company to Richard R.
Dunning, Larry D. Hartzog and Michael C. Black evidenced by those certain
promissory notes, dated January 20, 1993, in the aggregate principal amount of
$2,000,000 (all such indebtedness being referred to herein as "Senior Debt"), in
the following manner:
(i) in the event of any liquidation, dissolution or winding-up of
Company, or of any execution, sale, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceeding
relative to Company or its property, all principal and interest owing on
all Senior Debt shall be paid first in full before any payment is made on
this Note, and if in any such event any payment or distribution of any kind
or character shall be made upon or in respect of the Note, such payment or
distribution shall be paid over by the holder of this Note to the holders
of the Senior Debt, pro rata, for application and payment thereof unless
and until all Senior Debt shall have been paid or satisfied in full;
(ii) in the event this Note is declared or becomes due and payable
because of the occurrence of any event of default hereunder which is not
waived or cured, the holder shall be entitled to payments only after all
Senior Debt has been paid in full or payment thereof shall have been
provided for in a manner satisfactory to the holders of such Senior Debt;
and
(iii) upon the occurrence of any event of default with respect to any
Senior Debt and during the continuance thereof, no payment of principal or
interest shall be made on this Note.
This Note is governed by and construed in accordance with the laws of
Oklahoma.
THIS NOTE RENEWS, AMENDS, AND RESTATES, AND IS GIVEN IN MODIFICATION AND
REPLACEMENT OF (BUT NOT IN SATISFACTION OF OR WITH
-3-
<PAGE>
ANY INTENT OF EXTINGUISHMENT) THAT CERTAIN PROMISSORY NOTE DATED JULY 31, 1993,
IN THE ORIGINAL PRINCIPAL AMOUNT OF $656,080 MADE BY COMPANY IN FAVOR OF KENNETH
D. SNYDER, WHICH NOTE WAS ENDORSED TO MAINLINE ENERTECH CORPORATION, AND WHICH
NOTE WAS SUBSEQUENTLY ACQUIRED BY CIBOLA CORPORATION BY VIRTUE OF A MERGER OF
MAINLINE ENERTECH CORPORATION INTO CIBOLA CORPORATION ON APRIL 10, 1996.
INDIAN OIL COMPANY, an Oklahoma corporation
By: /s/ Richard R. Dunning
------------------------------------
Richard R. Dunning, President
NOTE2.WPD
-4-
<PAGE>
Exhibit 10.10
STOCK PURCHASE AGREEMENT
------------------------
AGREEMENT made November 30, 1998, among Coral Reserves Group, Ltd., an
Oklahoma Corporation (hereinafter referred to as the "Coral, Ltd."), Coral
Reserves, Inc., an Oklahoma Corporation (hereinafter referred to as the "Coral,
Inc.") and Coral Reserves Energy Corp., an Oklahoma Corporation (hereinafter
referred to as the "Coral Energy") or hereinafter collectively referred to as
"Corporations" and Michael Mewbourn (hereinafter called the "Purchaser").
1. Authority. This Agreement is made pursuant to resolutions adopted
---------
by the Directors and shareholders of the Corporations at meetings regularly
called for that purpose.
2. Effective Date. The Effective Date of this Agreement shall be
--------------
November 30, 1998.
3. Sale. The Corporations hereby sell to the Purchaser and the Purchaser
hereby purchases five (5) percent of the issued and outstanding common stock of
each Corporation as of the close of business on the Effective Date of this
Agreement. The purchase price shall be the fair market value of the stock.
Purchaser shall acquire the following number of shares of stock from each
Corporation:
Corporation No. of Shares
----------- -------------
Coral, Ltd. 32
Coral, Inc. 53
Coral Energy 53
4. Price. The purchase price paid for each share of stock pursuant to
-----
this agreement shall be an amount equal to (i) thirty (30) times the mean
average of the monthly net after tax income of the Corporations, based on the
six (6) month period including the month in which the purchase is made and the
five (5) months immediately preceding the month in which the purchase is made,
divided by (ii) the total issued and outstanding shares of stockof each
Corporation immediately prior to the purchase, however, the price shall not be
less than book value. In computing net after tax income, the annual base
salaries of the Shareholders shall be deducted as expenses, bonuses paid to the
Shareholders shall not be deducted as expenses, and taxes shall be estimated,
calculated and prorated on an annual basis and as if all the Corporations were
"C" Corporations rather than Subchapter "S" corporations. Except as required by
the terms of this agreement, the value of the Corporations shall be computed in
accordance with the methods consistently used by the Corporations in preparation
of their financial statements, as of the close of business on the last day of
each month. Goodwill shall not be included in the assets of the Corporations.
5. Payment. The Purchaser shall execute a promissory note, payable to
-------
the Corporations, and in the amount of the purchase price of the stock. The
note shall bear interest at an annual rate equal to the discount rate charged by
the New York Federal Reserve Bank. The
<PAGE>
interest rate shall be adjusted semi-annually. The promissory note shall be non-
recourse and secured by the stock being purchased. The note shall mature three
years from execution date and shall be due with accrued interest at that time.
However, the note and accrued interest shall be forgiven thirty-three and one
third (33 1/3) percent of each year of service to the Corporations by the
Purchaser after the Effective Date up to the full amount of the note and
interest. In addition, the Corporations shall pay at the time of forgiveness a
bonus to the Purchaser of forty (40) percent of each amount of principal and
interest forgiven.
6. Restriction of Stock. The stock sold to Purchaser shall be subject to
--------------------
the terms of the Shareholders Agreement of the Corporations effective November
20, 1998. The Purchaser represents that his purchase of stock is for investment
for his own account and not for resale.
7. Default. In the event that the Purchaser defaults in any payment of
-------
the purchase price and such default continues for a period of thirty (30) days,
the amounts previously received by the Corporations shall be retained as damages
and the Corporations may retain the stock as full payment of the note and the
Purchaser shall have no rights whatsoever in the stock nor any liability for the
unpaid balance of the purchase price.
8. Benefit. This Agreement shall be binding upon and shall inure to the
-------
benefit of the parties hereto, their respective successors, assigns, and legal
representative. The Corporations have the right to assign or pledge this
Agreement and to deliver and repledge the collateral, or any part thereof, and
such assignee or pledgee shall become entitled to all the rights of the
Corporations hereunder to the extent of such assignment, pledge, or repledge.
9. Construction. In the event any parts of this Agreement are found to
------------
be void, the remaining provisions of this Agreement shall nevertheless be
binding with the same effect as though the void parts were deleted.
10 Gender. Wherever in this Agreement, words, including pronouns, are
------
used in the masculine, they shall be read and construed in the feminine or
neuter whenever they would so apply, and wherever in this Agreement, words,
including pronouns, are used in the singular or plural, they shall be read and
construed in the plural or singular, respectively, wherever they would so apply.
11. Governing Law. This Agreement shall be subject to, and governed by,
-------------
the laws of the State of Oklahoma irrespective of the fact that one or more of
the parties now is, or may become, a resident of a different state.
12. Notices. All notices under this Agreement shall at the option of the
-------
sender be either served personally upon the party or parties to whom such notice
is directed, or shall be mailed certified mail, postage paid, to the party to
whom it is directed at the residence address of the party to whom directed of
which the sender is reasonably aware of or should be aware of and such mailing
shall constitute full and adequate notice on the date of such mailing of the
matter so mailed.
<PAGE>
13. Right to Alter. This Agreement may be altered, amended, or modified
--------------
only in writing signed by all of the parties hereto.
Coral Reserves Group, Ltd.
By:_________________________________
Leo E. Woodard
Coral Reserves, Inc.
By:_________________________________
Coral Reserves Energy Corp.
By:_________________________________
____________________________________
Michael Mewbourn
<PAGE>
Exhibit 10.11(a)
CONSULTING AGREEMENT
--------------------
This Consulting Agreement (the "Agreement") is made effective as of the 1st
day of April, 1999 (the "Effective Date"), between Anthony "Skeeter" Lasuzzo
(the "Consultant") and Indian Oil Company, an Oklahoma corporation (the
"Company").
In consideration of the mutual agreements set forth below and other good
and valuable consideration, the mutuality, adequacy, and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Engagement. As of the Effective Date, the Company shall engage the
----------
Consultant, and the Consultant shall accept the engagement of the Company, upon
the terms and conditions set forth in this Agreement. During the term of this
Agreement, the Consultant will perform such duties for the Company as described
herein in accordance with the highest professional standards. The Consultant
shall perform such duties as required herein for a minimum of twenty (20) full
business days per month.
2. Term. The term of this Agreement shall begin as of the Effective Date
----
and shall continue until terminated as provided for in Section 7 below.
3. Duties.
------
3.1 Background. The Company has entered in an Agreement and Plan of
----------
Merger (the "Merger Agreement") with Coral Reserves, Inc., Coral Reserves Energy
Corp., and Coral Reserves Group, Ltd. (collectively, the "Coral Group") pursuant
to which the Company and several affiliated limited partnerships of the Coral
Group will merge or otherwise reorganize (the "Reorganization") into a newly-
formed entity ("Coral Public"), whose common stock will be registered with the
Securities and Exchange Commission (the "Public Stock"), so that, upon
consummation of the Reorganization, the Company and such limited partnerships
will cease to exist and the partners of such limited partnerships and the
shareholders of the Company will receive Public Stock. The number of shares of
Public Stock to be received by the Company's shareholders will be determined
based on engineering reports (the "Reserve Report"), as adjusted as required by
the Merger Agreement, prepared by independent third party engineers setting
forth:
(i) The proven oil and gas reserves attributable to the oil and gas
properties of the Company;
(ii) the aggregate present value, determined on the basis of stated
pricing assumptions, of the future net income with respect to such oil and
gas properties, discounted as a stated per annum discount rate of proven
reserves; and
<PAGE>
(iii) projections of the annual rate of production, gross income and
net income with respect to such proven reserves.
3.2 Duties. The Consultant is hereby retained and appointed to
------
counsel, provide services, and assist the Company with preparing and assembling
the documents necessary for the Reserve Report to be delivered, with the primary
goal being to legitimately demonstrate as high a value as possible for Company's
reserves. The Consultant will assist the independent third party engineers in
all respects regarding the Reserve Report. In addition, the Consultant will
identify potential wells for the Company to sell, make recommendations regarding
participation elections, and perform such other tasks as may be necessary to
perform the duties required by this Section 3.2.
4. Extent of Services. This Agreement shall not prohibit the Consultant
------------------
from engaging in activities other than those required hereunder, whether for
family, recreation, investment, or charity, so long as those activities do not
interfere with the ability of the Consultant to fully carry out his duties,
covenants, and other obligations hereunder and so long as they are not
inconsistent with the interests of the Company or with this Agreement.
5. Compensation. The Consultant shall be entitled to receive $75,000
------------
cash (the "Fee") for his services to be performed hereunder; provided, however,
that the Fee may be reduced as provided in Section 8.3 if, for example, this
Agreement is terminated under Section 7.2 or 7.3. The Fee shall be paid on the
earlier to occur of (i) March 1, 2000, and (ii) the occurrence of an earlier
termination of this Agreement that requires payment of the Fee. The Consultant
may also be entitled to the additional bonus described in Sections 8.6 and 8.7.
6. Duty of Loyalty. The Consultant recognizes that he owes a duty of
---------------
loyalty and good faith to the Company and agrees that, during the term of this
Agreement, he will not in any way, directly or indirectly, by himself or through
any one or more other persons or entities, take advantage of any corporate
opportunity of the Company, engage in any act of self-dealing, sell or willfully
disclose any confidential or proprietary information or trade secrets of the
Company, or have any economic interest in any entity or arrangement which is in
any way competitive with the interests of the Company, without first disclosing
all facts and details relating thereto to the Board of Directors of the Company
in writing and obtaining the prior written approval of the Board of Directors.
Nothing in this Agreement is intended to prevent the Consultant from providing
services to the Coral Group prior to the delivery of the Reserve Report to the
Company so long as the Consultant devotes substantially all of his time and
attention to providing services to the Company as required hereunder. After the
delivery of the Reserve Report to the Company and prior to the
2
<PAGE>
termination of this Agreement, the Consultant shall be entitled to assist the
Coral Group with matters related to the Reorganization, so long as the work of
the Consultant is not inconsistent with the Company's interests.
7. Termination. This Agreement and the Consultant's engagement shall
-----------
terminate as provided for below:
7.1 By the Consultant After September 1, 2000 or Automatically Upon
---------------------------------------------------------------
Liquidation.
- -----------
(a) By the Consultant. At any time after September 1, 2000, the
-----------------
Consultant may terminate this Agreement and the Consultant's
engagement without cause and for any reason upon ten (10) days prior
written notice to the Company.
(b) Upon Liquidation. This Agreement and the Consultant's
----------------
engagement shall be automatically terminated upon termination of the
Merger Agreement and commencement of liquidation of the Company as
contemplated by Section 1.15 of the Merger Agreement.
7.2 By the Company For Cause. The Company may terminate this
------------------------
Agreement and the Consultant's engagement for cause, as follows:
(a) The Consultant breaches this Agreement (including but not
limited to the failure to provide the consulting services contemplated
by this Agreement in accordance with the highest professional
standards, regardless of whether such failure results in any
allegation of liability against the Company or otherwise);
(b) the Consultant is convicted of a felony or any crime
involving moral turpitude or the Consultant takes or fails to take any
action that, if he were prosecuted and convicted, would constitute a
felony involving dishonesty, fraud, theft, embezzlement or the like;
or
(c) the Consultant takes any actions that result or are intended
to result in damage to the Company (including damaged reputation) or
in wrongful personal enrichment of the Consultant at the expense of
the Company.
7.3 By the Consultant Prior to September 1, 2000. The Consultant
--------------------------------------------
may terminate this Agreement and his engagement at any time prior to September
1, 2000, without cause and for any reason, upon thirty (30) days prior written
notice to the Company.
3
<PAGE>
7.4 Upon the Death of the Consultant.
--------------------------------
(a) Death Prior to Delivery of the Reserve Report. This
---------------------------------------------
Agreement and the Consultant's engagement shall be terminated
effective immediately upon the death of the Consultant if such death
occurs prior to the delivery of the Reserve Report to the Company.
(b) Death After Delivery of the Reserve Report. If the
------------------------------------------
Consultant dies after the delivery of the Reserve Report to the
Company, then the Consultant's engagement and this Agreement shall
terminate except for the purposes described in Section 8.5.
7.5 Upon the Disability of the Consultant.
-------------------------------------
(a) Disability Prior to Delivery of the Reserve Report. If,
--------------------------------------------------
prior to the delivery of the Reserve Report to the Company, the
Consultant is unable to perform the services required of the
Consultant pursuant to this Agreement for a period of more than ten
(10) consecutive business days or of more than twenty (20) aggregate
business days during any consecutive two (2) months by reason of any
physical or mental illness or drug or alcohol addiction, then the
Company shall have the right to terminate this Agreement and the
Consultant's engagement by giving written notice to the Consultant.
Any such written notice shall set forth the effective date of
termination, which shall be not less than ten (10) days from the date
of notice.
(b) Disability After Delivery of the Reserve Report. If, after
-----------------------------------------------
the delivery of the Reserve Report to the Company, the Consultant
incurs a disability as described in Section 7.5(a), then the
Consultant's engagement and this Agreement shall terminate except for
the purposes described in Section 8.5.
7.6 Upon the Occurrence of the Reorganization. This Agreement and
-----------------------------------------
the Consultant's engagement shall be terminated effective immediately upon the
closing of the Reorganization, as defined in Section 3.1.
7.7 Upon the Occurrence of Other Transactions. If (i) the
-----------------------------------------
Reorganization has not occurred; (ii) a liquidation of the Company has not
occurred; (iii) this Agreement has not otherwise terminated; and (iv) prior to
March 1, 2001, the Company consummates another transaction pursuant to which (a)
the shareholders sell substantially all their stock or (b) the Company
consolidates or merges with any other corporation or other entity or entities in
a transaction that results in the voting securities of the Company outstanding
immediately prior to such consolidation
4
<PAGE>
or merger representing less than fifty percent (50%) of the combined voting
power of the securities of the Company or such surviving entity or any parent
thereof outstanding immediately after such consolidation or merger or (c) in a
single transaction or a series of related transactions the Company sells or
otherwise transfers all or substantially all of its assets, then this Agreement
and the Consultant's engagement shall terminate upon consummation of such other
transaction.
7.8 After March 1, 2001. This Agreement and the Consultant's
-------------------
engagement shall be automatically terminated on March 2, 2001 without any action
by any of the parties hereto.
8. Rights Upon Termination. Upon termination of this Agreement and the
-----------------------
Consultant's engagement, all rights and obligations of the Company and the
Consultant (including any personal or legal representative or successor in
interest to the Consultant if deceased or under a legal disability), such as any
payments required to be made to the Consultant hereunder, shall terminate and
cease, except as provided below:
8.1 Termination Under Section 7.1(a). If this Agreement and the
--------------------------------
Consultant's engagement are terminated under Section 7.1(a), then the
Consultant's sole compensation for his services hereunder shall be the Fee, if
not already paid.
8.2 Termination Under Section 7.1(b). If this Agreement and the
--------------------------------
Consultant's engagement are terminated under Section 7.1(b), then the Consultant
shall be entitled to receive the Fee, if not already paid, plus an additional
lump-sum bonus amount of $75,000 cash. All amounts required to be paid under
this Section 8.2 shall be paid within ten (10) days after completion of the
Company's liquidation.
8.3 Termination Under Sections 7.2, 7.3 or 7.8. If this Agreement
------------------------------------------
and the Consultant's engagement are terminated under Sections 7.2, 7.3 or 7.8,
then the Consultant shall be entitled to only that portion of the Fee, as
defined in Section 5, in cash that is equal to $6,000 multiplied by the number
of full (or fractional months) that the Consultant performed services for the
Company after the Effective Date and prior to the termination of this Agreement.
For example, if the Consultant terminates this Agreement under Section 7.3
effective as of December 15, 1999, then the Consultant would be entitled to
receive an amount in cash equal to the product of (i) $6,000 multiplied by (ii)
8.5. The amount required to be paid under this Section 8.3 shall be paid within
thirty (30) days of termination. In no event shall payment to the Consultant
upon termination of this Agreement under Sections 7.2, 7.3 or 7.8 exceed the
Fee, as defined in Section 5.
8.4 Termination Under Sections 7.4(a) or 7.5(a). If this Agreement
-------------------------------------------
and the Consultant's engagement are terminated under
5
<PAGE>
Sections 7.4(a) or 7.5(a), then the Consultant's personal or legal
representative or successor in interest shall be entitled to receive the Fee, if
not already paid, within twenty (20) days of termination.
8.5 Termination Under Sections 7.4(b) or 7.5(b). If this Agreement
-------------------------------------------
and the Consultant's engagement are terminated under Section 7.4(b) or 7.5(b),
then the Consultant's personal or legal representative or successor in interest
shall be entitled to receive, the Fee, if not already paid, within twenty (20)
days of termination, plus, upon consummation of a transaction described in
Section 7.6 or 7.7, an additional lump-sum bonus amount of $75,000 cash, to be
paid in accordance with the applicable Section 7.6 or 7.7; provided, however,
that if one of the transactions described in Sections 7.6 or 7.7 does not occur
on or before March 1, 2001, then this Agreement shall terminate in all respects
on March 2, 2001, and the Consultant's personal or legal representative or
successor in interest shall be entitled to no compensation other than the Fee,
if not already paid.
8.6 Termination under Section 7.6. If this Agreement and the
-----------------------------
Consultant's engagement are terminated under Section 7.6, then the Consultant
shall be entitled to receive the Fee, if not already paid, plus an additional
lump-sum bonus amount of $75,000 cash. All amounts required to be paid under
this Section 8.6 shall be paid immediately prior to the Closing of the
Reorganization.
8.7 Termination Under Section 7.7. If this Agreement and the
-----------------------------
Consultant's engagement are terminated under Section 7.7, then the Consultant
shall be entitled to receive, in addition to the Fee, if not already paid, an
additional lump-sum bonus amount of $75,000 cash. Any amounts payable to the
Consultant pursuant to this Section 8.7 shall be paid within two (2) business
days after receipt by the Company's shareholders of the consideration for which
they are entitled as a result of the consummation of the transaction described
in Section 7.7 and shall be paid in cash, stock or other property in the same
proportion as the Company's shareholders received upon the closing of such
transaction.
9. Survival of Covenants. The covenants of the Consultant under Section
---------------------
6 shall be continuing covenants which shall survive the termination of this
Agreement and the Consultant's engagement.
10. Breach and Remedies.
-------------------
10.1 In the event either party breaches any provision of this
Agreement, then the aggrieved party shall have all of the rights and remedies
provided for in this Agreement or as otherwise available at law or in equity,
without limitation.
10.2 In any action brought by a party to enforce this Agreement
against the other party, the prevailing party shall be
6
<PAGE>
entitled to collect from the other party the prevailing party's reasonable
attorneys' fees, court costs, and other expenses reasonably incurred in
connection with such action.
11. Indemnification. The Consultant shall indemnify and hold harmless the
---------------
Company against any losses or expenses of any kind whatsoever (including without
limitation penalties, interest and reasonable attorneys' fees) resulting from
(i) the assertion by any public or private party that the Consultant is not an
independent contractor or (ii) the gross negligence of the Consultant.
12. Miscellaneous.
-------------
12.1 Expenses. Each of the parties shall pay his or its own
--------
respective attorneys' fees and other expenses incidental to the negotiation,
preparation and consummation of this Agreement.
12.2 No Guarantee of Engagement. Except as expressly provided in
--------------------------
this Agreement, the Company has no obligation, either express or implied, to
engage or continue the engagement of the Consultant.
12.3 Notices. All notices required or permitted under this Agreement
-------
must be in writing and shall be sufficient if delivered personally or mailed by
certified or registered mail, return receipt requested, to the other party at
the addresses set forth below:
Company: Indian Oil Company
-------
ATTN: Richard R. Dunning
9400 N. Broadway Extension
Suite 800
Oklahoma City, Oklahoma 73114
Consultant: Anthony "Skeeter" Lasuzzo
----------
9400 N. Broadway Extension
Suite 800
Oklahoma City, Oklahoma 73114
Any notice given by personal delivery shall be deemed made on the first business
day following actual delivery or, if mailed, on the third business day following
date of postmark. Either party may change the notice person and address set
forth above by giving proper notice thereof to the other party.
12.4 Independent Contractor. The Consultant shall act as an
----------------------
independent contractor, not as an employee, of the Company. Neither federal, nor
state, nor any other payroll tax of any kind shall be withheld or paid by the
Company on behalf of the Consultant. The Consultant understands that he is
responsible to pay his income tax in accordance with federal and applicable
state law(s) and that he may be liable for Social Security ("FICA") and
7
<PAGE>
Federal Unemployment ("FUTA") taxes to be paid in accordance with all applicable
laws.
12.5 Construction. This Agreement shall be construed, enforced, and
------------
governed in accordance with the laws of the State of Oklahoma. In the event any
litigation of any kind should be instituted in connection with this Agreement,
the parties agree that the appropriate forum shall be the District Court of
Oklahoma County, Oklahoma, if in state court and, if in federal court, then in
the federal district court situated in Oklahoma City, Oklahoma.
12.6 Representations, Warranties and Covenants of the Consultant.
-----------------------------------------------------------
The Consultant hereby represents, warrants and covenants with the Company as
follows:
(a) He will not represent to the public or to any third party
that he has the authority to bind the Company to any contract,
obligation or agreement not expressly authorized in advance by the
Company's Board of Directors or one of the Company's executive
officers;
(b) he will not hold himself out to the public or to any third
party as an employee of the Company; and
(c) the Company's counsel has prepared this Agreement on behalf
of and in the course of its representation of the Company, that the
Consultant has been advised to seek the advice of independent counsel,
and that the Consultant has had the opportunity to seek the advice of
independent counsel.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
CONSULTANT: ______________________________
Anthony "Skeeter" Lasuzzo
COMPANY:
- -------
INDIAN OIL COMPANY,
an Oklahoma corporation
BY: ______________________________
Name: ________________________
Title: _______________________
9
<PAGE>
Exhibit 10.11(b)
STOCK RIGHTS CERTIFICATE
INDIAN OIL COMPANY
Date: April 1, 1999
This Stock Rights Certificate (the "Certificate") certifies that, for value
received, the holder of this Certificate (the "Holder") shall have the rights
and obligations with respect to the shares of common stock (the "Stock") of
Indian Oil Company, an Oklahoma corporation (the "Company"), to which this
Certificate relates. The rights and obligations contained in this Certificate
shall only apply to the Holder and only for so long as the Holder is the
registered holder of the shares of Stock to which this Certificate relates. The
Stock and this Certificate are transferable by the Holder, but only in the
manner provided herein.
The Holder of this Certificate is Anthony "Skeeter" Lasuzzo.
1. Stock to Which this Certificate Relates. This Certificate relates to
---------------------------------------
Three Thousand Two Hundred Eighty-Three (3,283) shares of Stock of the Company,
represented by Stock Certificate No. ___, issued on the 1st day of April, 1999
(the "Original Issue Date").
2. Antidilution Rights. The shares of Stock owned by the Holder represent
-------------------
five percent (5%) of the total issued and outstanding Stock of the Company.
Pursuant to this Certificate, if at any time after the date hereof shares
of Stock of the Company are issued for a price per share less than the then
current fair market value per share (a "Below Market Transaction"), then the
Holder shall be issued that number of additional shares of Stock in the Company,
which may, if the Holder so elects, become subject to this Certificate,
necessary to cause the value of the Holder's Stock after the issuance of such
additional shares in the Below Market Transaction to be the same as the value of
Holder's Stock before the issuance of such additional shares in the Below Market
Transaction. Notwithstanding anything to the contrary herein, the Holder shall
have no antidilution rights if additional shares of Stock are issued for a price
per share determined in good faith by the Company's Board of Directors to be
equal to or greater than fair market value. In determining the fair market
value of any stock issued by the Company, the Board of Directors shall consider,
among other factors (i) the aggregate value of the reserve report prepared by
independent third party engineers as required under the Merger Agreement, as
defined below, or any other more recently prepared reserve report; (ii) the
amount required to repay in full the Company's debt to MidFirst Bank and Bank
One, Oklahoma, N.A.; (iii) the amount owed to the Coral Group,
<PAGE>
as defined in the Merger Agreement; (iv) the amount paid on the Contingent
Production Payment, as defined in the Merger Agreement; (v) the Company's Net
Working Capital, as defined in the Merger Agreement; and (vi) the amount
required to make gas balancing computations in the manner required by the Merger
Agreement.
3. Lockup Agreement. Upon the occurrence of the Reorganization, as
----------------
defined in that certain Agreement and Plan of Merger, dated February 15, 1999
(the "Merger Agreement"), among the Company, Coral Reserves, Inc., Coral
Reserves Energy Corp., and Coral Reserves, the Company, or other parties, may
require that the Holder enter into a "lockup agreement" with respect to the
Holder's Stock in the Company or the Holder's Coral Public Common Stock, as
defined in the Merger Agreement. In such event, the Holder agrees to execute
such "lockup agreement."
4. Transfer of Certificate.
-----------------------
4.1 This Certificate may be transferred only in conjunction with the
transfer of the Stock to which this Certificate relates. Any purported transfer
made other than in accordance with this Certificate shall be null and void and
of no force and effect.
4.2 No person may be a Holder of this Certificate and have the rights
of a Holder hereunder unless that person also is the registered holder of the
Stock to which this Certificate relates.
5. Governing Law. This Certificate shall be construed in accordance with
-------------
the laws of the State of Oklahoma.
6. Successors. All the covenants and provisions of this Certificate by
----------
or for the benefit of Holder shall bind and inure to the benefit of the Holder's
successors and assigns.
7. Benefits of this Certificate. Except as set forth in this Section 7,
----------------------------
nothing in this Certificate shall be construed to give to any person other than
the Company, and its successors and assigns, and the registered Holder and its
successors and assigns, any legal or equitable right, remedy or claim under this
Certificate, but this Certificate shall be for the sole and exclusive benefit of
the Company and its respective successors and assigns hereunder and the Holder
of this Certificate and its successors and assigns. The Company hereby agrees
and acknowledges that Holder and Frank Harrison have certain options to purchase
Stock and Rick Dunning, Roger Graham and Larry Hartzog may have certain options
to purchase Stock. If Stock is issued pursuant to such options for a price per
share less than fair market value, then the Holder shall have antidilution
rights as provided above. If Stock is issued pursuant to
-2-
<PAGE>
such options for a price per share equal to or greater than fair market value,
then the Holder shall have no antidilution rights.
8. Excluded Assets. The Holder hereby acknowledges that certain assets
---------------
of the Company (known as the "Excluded Assets" in the Merger Agreement) have
been or will be transferred by the Company to the following or to an entity
owned by the following (the "Original Shareholders"): Larry Hartzog, Roger
Graham, Dunning Family Limited Partnership, and Michael C. Black, Trustee of the
Michael C. Black Revocable Trust. The Holder agrees that this Certificate
grants the Holder no interest in such Excluded Assets, no right to participate
in the transfer of such Excluded Assets, and no right to participate in the
ownership of any entity formed by the Original Shareholders for the purpose of
purchasing such Excluded Assets.
IN WITNESS WHEREOF, the Company has executed this Certificate as of the
date set forth above.
INDIAN OIL COMPANY
By:___________________________
Name: _____________________
Its: ______________________
______________________________
Anthony "Skeeter" Lasuzzo
-3-
<PAGE>
Exhibit 10.11(c)
Richard R. Dunning
9400 N. Broadway Extension
Suite 800
Oklahoma City, Oklahoma 73114
September 29, 1999
Anthony "Skeeter" Lasuzzo
9400 N. Broadway Extension
Suite 800
Oklahoma City, Oklahoma 73114
Dear Skeeter:
Reference is made to the Consulting Agreement, dated April 1, 1999, between
you and Indian Oil Company (the "Company"). Please consider this letter as
written confirmation of my agreement to grant you the option to purchase,
subject to the terms and conditions described below, shares of my Company stock
immediately prior to the Reorganization or liquidation of the Company or the
occurrence of certain other transactions described below (all capitalized terms
used in this letter and not otherwise defined shall have the same meaning as set
forth in the Consulting Agreement and the attachment hereto).
If the Consulting Agreement is terminated under Section 7.6 (which would be
a termination upon the occurrence of the Reorganization), Section 7.1(b) (which
would be a termination upon consummation of liquidation of the Company), or
Section 7.7 (which would be a termination upon the occurrence of a transaction
[an "Other Transaction"] of the type described in Section 7.7 of the Consulting
Agreement), then you will have the option to purchase from me that number of
shares of Company stock owned by me determined as follows:
1. If the Debt equals the Company's Value or the Debt exceeds the
Company's Value by less than $1,000,000 (calculated as of the Reorganization,
liquidation or closing of the Other Transaction), then you will have the option
to purchase that number of shares of Company stock owned by me that has a value,
determined upon consummation of the Reorganization, liquidation, or the Other
Transaction, equal to $75,000.
<PAGE>
September __, 1999
Page 2
2. If the Debt exceeds the Company's Value by $1,000,000 or more
(calculated as of the consummation of the Reorganization, liquidation, or
closing of the Other Transaction), then your options will terminate and you will
not have the option to purchase any shares of Company stock (or any other stock)
owned by me.
3. If the Company's Value exceeds the Debt by less than $3,000,000
(calculated as of the consummation of the Reorganization, liquidation, or
closing of the Other Transaction), then you will have the option to purchase
that number of shares of Company stock owned by me that has a value, determined
upon consummation of the Reorganization, liquidation, or closing of the Other
Transaction, equal to the sum of (i) $75,000 plus (ii) 2.5% times the amount
that the Company's Value exceeds the Debt.
4. If the Company's Value exceeds the Debt by $3,000,000 or more
(calculated as of the consummation of the Reorganization, liquidation, or
closing of the Other Transaction), then you will have the option to purchase
that number of shares of Company stock owned by me that has a value, determined
upon consummation of the Reorganization, liquidation, or closing of the Other
Transaction, equal to $150,000.
Consider these examples:
1. If the Company's Value is $29,500,000 and the Debt is $30,000,000
(i.e., the Debt exceeds the Company's Value by $500,000, which is less than
$1,000,000) (calculated as of the consummation of the Reorganization,
liquidation, or closing of the Other Transaction), then you will have the option
to purchase that number of shares of Company stock owned by me valued at
$75,000.
2. If the Debt is $31,500,000 (or greater) and the Company's Value is
$30,500,000 (i.e., the Debt exceeds the Company's Value by $1,000,000 or more)
(calculated as of the consummation of the Reorganization, liquidation, or
closing of the Other Transaction), then your options will terminate and you will
have no options to purchase any shares of Company stock owned by me.
3. If the Company's Value is $33,000,000 and the Debt is $30,500,000
(i.e., the Company's Value exceeds the Debt by $2,500,000, which is less than
$3,000,000) (calculated as of the consummation of the Reorganization,
liquidation, or closing of the Other Transaction), then you will have the option
to purchase that number of shares of Company stock owned by me valued at the sum
of (i) $75,000 plus (ii) 2.5% times $2,500,000. In other words, you
<PAGE>
September __, 1999
Page 3
would have the option to purchase that number of shares of Company stock owned
by me valued at $137,500.
4. If the Company's Value is $33,500,000 (or greater) and the Debt is
$30,500,000 (i.e., the Company's Value exceeds the Debt by $3,000,000 or more)
(calculated as of the consummation of the Reorganization, liquidation, or
closing of the Other Transaction), then you would have the option to purchase
that number of shares of Company stock owned by me valued at $150,000.
Your option to purchase shares of Company stock owned by me may only be
exercised in whole, and not in part, and must be exercised at least three (3)
days prior to commencement of the liquidation of the Company or closing of the
Reorganization or Other Transaction. I agree to give you notice at least ten
(10) days prior to closing of the Reorganization or Other Transaction or
consummation of the liquidation of the Company.
Your notice to me to exercise your option must be accompanied by a written
statement that the shares are being purchased for investment and not with a view
to distribution. Upon the exercise of such options, we agree to consummate the
purchase and sale of the applicable shares pursuant to terms and conditions
mutually agreeable to us at a closing. The closing shall occur as soon as
possible after the delivery of the notice to me. At the closing, I will deliver
to you a duly endorsed certificate or certificates representing the number of
shares of Company stock being purchased, and you agree to pay the purchase price
to me in cash or its equivalent. However, and notwithstanding anything to the
contrary herein, upon your exercise of the options granted hereunder, I may, in
my sole discretion, deliver to you the required amount in cash or certified
funds (i.e., $75,000 in the case of the first example above) in lieu of
delivering to you any shares of my Company stock. The delivery to you of the
required amount in cash or certified funds in lieu of Company stock will
completely extinguish any obligation to deliver any Company stock to you upon
your exercise of the option.
The price per share at which the shares of Company stock subject to this
option may be purchased shall be $1.00. The option price shall be paid in cash
or its equivalent. If I choose to deliver the required amount in cash or
certified funds in lieu of delivering Company stock to you, you will be refunded
any option price paid by you.
If you exercise your options to purchase Company stock prior to the closing
of the Reorganization, then you understand that you
<PAGE>
September __, 1999
Page 4
will be required to enter into various agreements in connection with the
Reorganization, such as a stock purchase agreement and a lock-up agreement. You
agree to promptly enter into such agreements.
Notwithstanding anything to the contrary herein, the options that I have
granted you under this letter shall terminate and lapse automatically on March
2, 2001.
Please sign below to confirm that this letter accurately reflects our
agreement.
Sincerely,
Richard R. Dunning
Agreed to and accepted by:
______________________________
Anthony "Skeeter" Lasuzzo
<PAGE>
APPENDIX
"Company's Value" - the aggregate value of the Reserve Report as determined
---------------
by independent third party engineers and as required under the Merger Agreement.
"Debt" - (i) the amount required at the commencement of the liquidation or
----
closing of the Reorganization or Other Transaction to repay in full the
Company's debt to Bank One, Oklahoma, N.A.; plus (ii) the amount required at the
commencement of the liquidation or closing of the Reorganization or Other
Transaction to repay in full the Company's debt to MidFirst Bank; plus (iii)
$6,000,000, less the amount of Contingent Production Payments, as defined in the
Merger Agreement, paid by the Company to the Coral Group, as defined in the
Merger Agreement; plus (iv) $3,000,000; less (v) the amount at the commencement
of the liquidation or closing of the Reorganization or Other Transaction of the
Company's Net Working Capital, as defined in the Merger Agreement, and the
amount required to make the gas balancing computations in the manner and as
required by the Merger Agreement.
"Merger Agreement" - that certain Agreement and Plan of Merger among the
----------------
Company, Coral Reserves, Inc., Coral Reserves Energy Corp., and Coral Group,
Ltd., dated February 15, 1999.
"Reserve Report" - the engineering reports required by the Merger Agreement
--------------
and prepared by independent third parties engineers setting forth:
(i) The proven oil and gas reserves attributable to the oil and gas
properties of the Company;
(ii) the aggregate present value, determined on the basis of stated
pricing assumptions, of the future net income with respect to such oil and
gas properties, discounted as a stated per annum discount rate of proven
reserves; and
(iii) projections of the annual rate of production, gross income and
net income with respect to such proven reserves.
For purposes of calculating the number of shares to be delivered to you, we
agree to use, to the extent practicable and to extent consistent with the
calculations required under the Merger Agreement, the above definitions to
determine the value of the Company stock. For instance, assume that the
Company's Value is $33,500,000 and the Debt is $30,000,000, and thus you are
entitled to $150,000 of Company stock (also assume that I do not elect to pay
you cash in lieu of such Company stock). Assume that there are 65,643 shares of
Company stock outstanding. Because each share of Company stock would be worth
$53.32 ($3,500,000 divided by 65,643),
<PAGE>
September __, 1999
Page 6
you would have the option to purchase from me 2,813 shares ($150,000 divided by
$53.32) of Company stock.
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Canaan Energy Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus/proxy statement.
KPMG LLP
Oklahoma City, Oklahoma
February 11, 2000
<PAGE>
Consent of Independent Auditors
The Board of Directors
Indian Oil Company:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus/proxy statement.
KPMG LLP
Oklahoma City, Oklahoma
February 11, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports herein and to the reference of our
firm under the heading "Experts" in the prospectus/proxy statement with respect
to the financial statements of Coral Reserves Natural Gas Income Fund 1990
Limited Partnership, Coral Reserves Natural Gas Income Fund 1991 Limited
Partnership, Coral Reserves Natural Gas Income Fund 1992 Limited Partnership,
Coral Reserves Natural Gas Income Fund 1993 Limited Partnership, Coral Reserves
1993 Institutional Limited Partnership, Coral Reserves Energy Income Fund 1995
Limited Partnership, Coral Reserves Energy Income Fund 1996 Limited Partnership
and Coral Reserves 1996 Institutional Limited Partnership.
William T. Zumwalt, CPA, Inc.
Tulsa, Oklahoma
February 11, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
Netherland, Sewell & Associates, Inc. does hereby consent to the use
of its reports relating to the proved oil and gas reserves of Indian Oil Company
and Canaan Energy Corporation (formerly Coral Reserves Group, Ltd.) and its
affiliated partnerships and to the reference to the firm as an expert in the
Form S-4 registration statement being filed by Canaan Energy Corporation with
respect to 5,000,000 shares of its common stock.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
_________________________________________
Frederic D. Sewell
President
Dallas, Texas
February 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AT DECEMBER 31, 1998 AND THE AUDITED CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 749,538
<SECURITIES> 0
<RECEIVABLES> 231,745
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 986,684
<PP&E> 897,656
<DEPRECIATION> (571,896)
<TOTAL-ASSETS> 1,312,444
<CURRENT-LIABILITIES> 616,754
<BONDS> 0
0
0
<COMMON> 632
<OTHER-SE> 1,311,812
<TOTAL-LIABILITY-AND-EQUITY> 1,312,444
<SALES> 134,652
<TOTAL-REVENUES> 198,079
<CGS> 27,953
<TOTAL-COSTS> 00000000000000
<OTHER-EXPENSES> 19,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 150,339
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,339
<EPS-BASIC> 173
<EPS-DILUTED> 173
</TABLE>
<PAGE>
Exhibit 99.2
Proxy and Cash Election Form
The undersigned limited partner of the partnership named below
("Partnership"), does hereby constitute and appoint Leo E. Woodard or John K.
Penton, duly authorized officers of the managing general partner of the
Partnership, as proxies, with full power of substitution and hereby authorizes
the proxies or any of them to represent the undersigned and to vote the
partnership interests listed below as indicated hereon at the special meeting of
the Partnership to be held on _____________, 2000, and any adjournments thereof.
Vote on Plan of Combination
- ---------------------------
1. The approval and adoption of the Plan of Combination as described in
the Canaan Energy Corporation Prospectus/Proxy Statement dated _____________,
2000 ("Prospectus").
[_] "FOR" [_] "AGAINST" [_] "ABSTAIN"
2. In their discretion, the proxies are authorized to vote upon such
other matters as may properly come before the meeting or any adjournments or
postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTIONS STATED. IF NO DIRECTION IS STATED, IT WILL BE VOTED "FOR" THE PLAN
OF COMBINATION.
Cash Election
- -------------
In order to make a cash election, limited partners MUST VOTE "FOR" the Plan
of Combination.
[_] Subject to the availability to elect a cash payment in lieu of CEC Common
Stock, I elect to receive cash in accordance with the Plan of Combination
as described in the Prospectus rather than CEC Common Stock.
Dissenters Rights of Appraisal
- ------------------------------
In order to exercise dissenters rights of appraisal, limited partners must
not vote "FOR" the Plan of Combination and must provide notice of demand for
- ---
dissenters rights of appraisal to the general partner in accordance with the
procedures described in the Prospectus.
Receipt of the Notice of Special Meeting of Limited Partners and the
Prospectus/Proxy Statement dated ___________, 2000 is acknowledged.
<PAGE>
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW AND RETURN IN THE ENCLOSED,
POSTAGE-PAID, PRE-ADDRESSED ENVELOPE BY ____________, 2000.
Mailing label with name, address, name of
partnership and % of revenues
(Signature) (Date)
(Name-please print)
(Signature of Joint Tenant, if applicable)
____________________________________
(Name of Joint Tenant - Please Print)
IF LIMITED PARTNERSHIP INTERESTS ARE HELD JOINTLY, ALL JOINT TENANTS MUST
SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE
NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
<PAGE>
EXHIBIT 99.3
LETTER OF TRANSMITTAL
This Letter of Transmittal relates to the ownership of the partnership
interests listed below and the transfer of such holder's/holders' rights, title
and interest in such partnership interests listed below. This Letter of
Transmittal should be completed, signed and submitted to the Exchange Agent
appointed by Canaan Energy Corporation as follows:
UMB Bank, N.A.
P.O. Box 410064
Kansas City, Kansas 64141-0064
Phone: (___) ____-_____
Fax: (___) ____-_____
In connection with the Plan of Combination dated ___________, 2000,
described in the Prospectus/Proxy Statement of Canaan Energy Corporation dated
___________, 2000 ("Prospectus"), subject to the closing of the transactions
described therein, the undersigned hereby surrenders the partnership interests
listed below to Canaan Energy Corporation ("CEC") in exchange for the
consideration described in the Prospectus; provided, however, if the undersigned
has elected to receive cash, the undersigned hereby assigns and transfers to CEC
all right, title and interest in the shares of CEC common stock otherwise
issuable to the undersigned in exchange for such cash payment.
IMPORTANT: The Instructions accompanying this Letter of Transmittal should
be read carefully before this Letter of Transmittal is executed.
IMPORTANT: This Letter of Transmittal and all other documents required
hereby should be delivered to _____ before the combined special meeting of the
Partnerships which is scheduled for ________, 2000.
REPRESENTATIONS AND WARRANTIES OF UNDERSIGNED
- ---------------------------------------------
The undersigned hereby represents warrants that the undersigned has full
power and authority to submit, sell, assign, and transfer the partnership
interests listed below, and that the partnership interests are free and clear of
all liens, charges and encumbrances and are not subject to any adverse claim.
The undersigned will, upon request, execute any additional documents necessary
or desirable, as determined by CEC, to surrender the partnership interests
listed below.
All authority herein conferred shall survive the death or incapacity of the
undersigned, and all obligations of the undersigned hereunder shall be binding
on the hers, personal representatives, successors and assigns of the
undersigned.
The undersigned understands that the surrender of the partnership interests
herein is not made in acceptable form until receipt by the Exchange Agent of
this Letter of Transmittal, duly completed and signed, together with all
accompanying evidences of authority in form satisfactory to CEC and the Exchange
Agent.
<PAGE>
PARTNERSHIP INFORMATION
- -----------------------
- -------------------------------
(Partnership Information Label)
- -------------------------------
- ------------------------------- ---------------------------
(Signature) (Date)
- ------------------------------- ----------------------------
(Name-please print) (Daytime Phone Number)
- ------------------------------------------
(Signature of Joint Tenant, if applicable)
- ------------------------------------------
(Name of Joint Tenant, if applicable)
- -------------------------------------------------------------------------------
TAXPAYER IDENTIFICATION NUMBER SUBSTITUTE FORM W-9
Please provide your Taxpayer Identification Number and simply sign and date
below. For most individual taxpayers, the Taxpayer Identification Number is such
person's Social Security Number.
_______________________________
(Taxpayer Identification Number)
Certification--Under the penalties of perjury, I certify that: (i) the number
provided is my correct taxpayer identification number, and (ii) I am not subject
to backup withholding because (a) I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or (b) the Internal Revenue Service has notified me that I am no longer subject
to backup withholding.
Dated:_______________ Sign Here:_________________________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS INFORMATION WILL RESULT IN BACKUP
WITHHOLDING ON PAYMENTS DUE TO YOU. SEE INSTRUCTIONS 2 AND 3 BELOW.
- --------------------------------------------------------------------------------
2
<PAGE>
INSTRUCTIONS
- ------------
1. DELIVERY OF LETTERS OF TRANSMITTAL.
The method of delivery of this Letter of Transmittal is at your option and
risk, but, if sent by mail, certified mail is suggested.
2. SIGNATURES.
The signature (or signatures, in the case of partnership interests owned by
two or more joint holders) on this Letter of Transmittal should correspond
exactly with the name(s) of the registered holder(s) as indicated in the
Partnership Information section of this Letter of Transmittal.
3. 31% BACKUP WITHHOLDING.
Under federal income tax law, a payer must generally withhold 31% of
interest, dividends and certain other payments if the payee fails to furnish
such payer with the correct Taxpayer Identification Number or is otherwise
subject to backup withholding. Certain penalties may also apply. For most
individual taxpayers, the Taxpayer Identification Number is such person's Social
Security Number. The registered holder should provide the Taxpayer
Identification Number and the certification in the "TAXPAYER IDENTIFICATION
NUMBER" BOX ABOVE. The payee must cross out Subpart (ii) of the certification
if the Internal Revenue Service has notified the payee that he or she is subject
to backup withholding due to the under reporting of dividends or interest on the
payee's tax returns and the payee has not received notice from the Internal
Revenue Service advising that backup withholding has terminated.
4. QUESTIONS.
If you have any questions regarding any instruction or procedure in this
Letter of Transmittal, you should contact __________________ of CEC at (405)
232-3222 or _____________________ at UMB Bank, N.A. at (___) ___-____.
3
<PAGE>
EXHIBIT 99.4
CONSENT OF NAMED DIRECTOR
The undersigned does hereby consent to being named as a person about
to become a director in the Form S-4 registration statement filed by Canaan
Energy Corporation relating to 5,000,000 shares of its common stock.
Dated: February 11, 2000 /s/ Thomas H. Henson
--------------------
Thomas H. Henson
