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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-14334
VENUS EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3299127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1250 N.E. Loop 410, Suite 1000, San Antonio, TX 78209
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (210) 930-4900
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant (all directors, officers and holders of five percent or more
of the Common Stock of the Company are presumed to be affiliates), computed by
reference to the closing bid price of such stock on March 18, 1998, was
approximately $14,160,511. As of March 18, 1998, the Registrant had outstanding
9,736,815 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report on Form 10-K will
be included in the Registrant's definitive Proxy Statement for its 1998 Annual
Shareholder Meeting. It is expected that the Proxy Statement will be filed with
the Commission not later than April 30, 1998, and the Proxy Statement is
incorporated into Part III by reference.
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TABLE OF CONTENTS
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PART I..................................................................................................... -1-
Item 1. BUSINESS................................................................................. -1-
Background............................................................................... -1-
1997 Business Combination and Property Acquisition....................................... -1-
Business Strategy........................................................................ -2-
Exploration.......................................................................... -2-
Exploitation and Development of Producing Fields..................................... -2-
Acquisitions, Strategic Alliances & Divestitures of Selected Properties.............. -3-
Recent Developments (since December 31, 1997)............................................ -3-
Forward-Looking Statements............................................................... -4-
Risk Factors............................................................................. -4-
Capital Expenditures and Availability of Financing................................... -4-
Competition.......................................................................... -4-
Acquisition Risks.................................................................... -5-
Drilling Risks....................................................................... -5-
Markets ............................................................................ -5-
Volatility of Prices................................................................. -5-
Estimation of Reserves............................................................... -5-
Replacement of Reserves.............................................................. -5-
Regulation of Production............................................................. -6-
Environmental Regulation............................................................. -6-
Other Government Regulations......................................................... -7-
Business Risks and Insurance......................................................... -7-
Dependence on Key Personnel.......................................................... -7-
Sales and Major Customers................................................................ -7-
Oil and Natural Gas Reserves............................................................. -8-
Drilling Activity........................................................................ -9-
Acreage ................................................................................ -11-
Production............................................................................... -11-
Products and Markets..................................................................... -12-
Regulation and Environmental Matters..................................................... -12-
Employees................................................................................ -12-
Executive Officers of Venus Exploration, Inc............................................. -12-
Definitions of Certain Oil and Gas Terms................................................. -13-
Item 2. PROPERTIES............................................................................... -16-
Title to Properties...................................................................... -16-
Item 3. LEGAL PROCEEDINGS........................................................................ -16-
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... -17-
Part II .................................................................................................. -18-
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ -18-
Item 6. SELECTED FINANCIAL DATA.................................................................. -19-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................... -19-
General ................................................................................ -20-
Results of Operations.................................................................... -21-
Year Ended December 31, 1997, Compared with Year Ended December 31, 1996............. -21-
Year Ended December 31, 1996, Compared with Year Ended December 31, 1995............. -22-
Accounting Policies...................................................................... -23-
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Liquidity and Capital Resources.......................................................... -24-
Liquidity............................................................................ -24-
Capital Resources.................................................................... -24-
Stratum Facility..................................................................... -25-
Hedging Activities................................................................... -25-
Wells Fargo Facility................................................................. -25-
Inflation................................................................................ -26-
Impact of Year 2000...................................................................... -26-
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... -27-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. -27-
Item 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................................. -27-
PART III .................................................................................................. -27-
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... -27-
Item 11. EXECUTIVE COMPENSATION................................................................... -27-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... -27-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... -28-
PART IV .................................................................................................. -28-
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES................................................. -28-
1. Financial Statements............................................................... -28-
2. Financial Statement Schedules...................................................... -28-
3. Exhibits........................................................................... -28-
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PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains statements that are considered
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995 and as described under "-Forward-Looking Statements" in this
Item 1 -"BUSINESS." Actual results may differ materially from those contemplated
by the forward-looking statements herein.
Certain oil and gas terms and abbreviations are defined in this Item 1 under
"-BUSINESS" - Definitions of Certain Oil and Gas Terms."
BACKGROUND
Venus Exploration, Inc. (collectively with its consolidated subsidiaries, unless
the context otherwise requires, "Venus" or the "Company") is engaged primarily
in the application of advanced geoscience technology to the exploration for
undiscovered onshore oil and gas reserves in the United States. The Company also
is actively involved in exploitation and/or development of existing oil and gas
fields and is actively seeking acquisitions of producing properties. The Company
presently has oil and gas properties, acreage and production in ten states.
Since the May 21, 1997 transactions discussed below, the Company's emphasis has
been on oil and gas exploration and development projects and prospects in Texas,
Oklahoma and Kansas. The Company was incorporated in the State of Delaware in
September 1985. The management of Venus has been involved as a privately held
independent oil and gas operator in the development and exploitation of several
large oil and gas fields.
The predecessor to Venus started in May 1996, and its primary assets were an
inventory of exploration Prospects and Prospect Leads and undeveloped producing
oil and gas fields with very little oil and gas production. In 1997, average
daily net production increased to 2,450 Mcfe/day from 565 Mcfe/day in 1996, a
333% increase. The total Proved Reserves increased from 2.8 Bcfe at year end
1996 to 12.4 Bcfe in 1997, or 343%, as a result of the reverse merger
transaction described below and as a result of the 1997 drilling program.
Approximately 52.5 % of the Company's reserves are natural gas reserves. Venus
operates 81% of its Net Wells.
1997 BUSINESS COMBINATION AND PROPERTY ACQUISITION
On May 21, 1997, the Company (then known as "Xplor Corporation") acquired
substantially all of the assets and liabilities of The New Venus Exploration,
Inc., a privately-held Texas corporation ("New Venus"), in exchange for
5,626,473 shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), and warrants to purchase an additional 272,353 shares of Common
Stock exercisable at $3.00 per share until October 23, 2000 ("Acquisition
Warrants"). Simultaneously, the Company acquired certain oil and gas properties
from Lomak Petroleum, Inc. ("Lomak") in exchange for 2,037,171 shares of the
Company's Common Stock and Acquisition Warrants to purchase an additional
272,353 shares of Common Stock. At the same time, Lomak acquired from an
existing stockholder of the Company 97,008 shares of Common Stock. These
transactions were completed in accordance with the Property Acquisition
Agreement dated April 29, 1997, and related agreements (collectively, the
"Acquisition Agreement"). As a result of these transactions (collectively, the
"Acquisition"), the former stockholders of New Venus acquired, as of the
effective date of the Acquisition, 58% of the Company's outstanding Common
Stock, and Lomak acquired 22%, while the preexisting stockholders of the Company
then owned 20% of the Common Stock.
The Acquisition Agreement provided, among other things, that the Board of
Directors of the Company be composed of four directors nominated by New Venus,
one director nominated by Lomak and two continuing directors of the Company. At
the consummation of the Acquisition, a stockholders agreement (the "Stockholders
Agreement") was entered into among certain former stockholders of New Venus
(collectively, the "Ames Group," which owns beneficially 3,721,600 shares of the
Company's Common Stock), certain major shareholders of the Company (collectively
the "Blair Group," which owns beneficially 1,066,512 shares) and Lomak. The
Stockholders Agreement provided that at the 1997 election of directors of the
Company, the Ames Group, the Blair Group and Lomak would vote their shares of
the
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Company for the four nominees designated by the Ames Group, the two nominees
designated by the Blair Group, and the one nominee designated by Lomak. The
Blair Group's right to designate two nominees is reduced to the right to
designate one nominee effective with the 1998 Annual Meeting of Stockholders of
the Company and ceases altogether effective with the 1999 Annual Meeting of
Stockholders. The Stockholders Agreement also provides for certain rights of
first refusal and rights of participation between the Ames Group and Lomak in
the event of a proposed sale of shares by either. The Stockholders Agreement has
a term of three years, but it terminates earlier as to any party in the event
that such party's beneficial ownership of the Company's Common Stock falls below
250,000 shares.
For accounting purposes, the Acquisition was treated as a reverse acquisition
with New Venus being deemed to have acquired the assets of Xplor Corporation and
the Lomak entities. Therefore, unless otherwise stated all accounting and other
operating data for periods before May 21, 1997, in this Annual Report on Form
10-K are data of New Venus and its predecessors, none of which had previously
been publicly reported. Information after that date reflects the operations of
the combined entities and acquired properties.
BUSINESS STRATEGY
As a result of the Acquisition, the Company adopted the growth strategy
previously practiced by the privately-held New Venus. Venus is now actively
pursuing an aggressive growth strategy of (i) exploration for oil and gas
reserves, (ii) exploitation and development drilling in existing oil and gas
fields, and (iii) strategic acquisition of producing properties with upside
potential. During 1997 and the first quarter of 1998, Venus participated in the
drilling of 5 Gross (2.3 Net) Exploratory Wells, of which 4 Gross (2 Net) Wells
were completed as producers and 1 Gross (0.3 Net) Well was a dry hole. The
Company also participated in the drilling of 10 Gross (6 Net) Development Wells.
As of March 25, 1998, eight Gross (5 Net) of those wells have been completed as
producers and two Gross (1 Net) Wells were awaiting final completion.
EXPLORATION - Exploration for oil and gas reserves and the generation of
drilling prospects in areas identified through the application of advanced
geoscience technology by the Company's exploration team provide the Company with
exposure to opportunities for the discovery of new oil and gas reserves and
rapid growth in asset values. Because of the inherent uncertainty and high
financial risk associated with the outcome of individual drilling prospects, the
Company attempts to maintain an inventory of many exploratory Prospect Leads
from which drilling prospects are confirmed and generated. This strategy has
been used successfully in the past by the Company's management.
The Company's exploration team currently concentrates on two primary
geographical focus areas; the south Midland Basin in West Texas and the Yegua
Trend of the Texas and Louisiana Gulf Coast. Other focus areas are under
consideration. An inventory of more than 40 Prospects and Prospect Leads is
currently being worked. The Company utilizes 2-D Seismic and 3-D Seismic data in
combination with advanced geological concepts to evaluate these Prospects and
Prospect Leads. The Company's in-house technical capability is an important
ingredient in the Company's current and continuing ability to conduct
comprehensive exploration programs and to continue to generate exploratory
prospects with merit.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - In addition to exploring for
new oil and gas reserves in previously undiscovered fields, the Company also
utilizes advanced geoscience technology to exploit and to develop oil and gas
reserves in currently producing fields. The fields being exploited or developed
consist of fields discovered by the Company or fields discovered by others but
that the Company believes are not fully developed. Venus is conducting active
exploitation and development activities in eleven different fields in Texas,
Oklahoma and Kansas. The Company's working interest in the fields being
developed varies in size from 2.5% to 100%, and Venus operates nine of the
eleven active fields.
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ACQUISITIONS, STRATEGIC ALLIANCES & DIVESTITURES OF SELECTED PROPERTIES - Venus
will continue to seek strategic producing property acquisitions that offer
near-term production and longer-term development and exploration opportunities
that can be investigated through the application of advanced technology by the
Company's exploration team. The Company also seeks to accomplish strategic
acquisitions of producing assets with development and exploratory potential
through strategic alliances with other oil and gas companies. Venus may also
sell non-strategic properties as a part of its effort to concentrate on its
focus areas.
RECENT DEVELOPMENTS (SINCE DECEMBER 31, 1997) -
Preliminary results from drilling activities in the first quarter of 1998 are
shown below. All of the six wells described below are also included in drilling
summary given in the first paragraph of the "-Business Strategy" immediately
above. Caution should be taken when considering these results because they are
not supported by production histories. Test results typically exceed, often by
large amounts, production output once a well has produced for some period of
time. In addition, test results often exceed state-mandated field allowables for
production.
(i) Culley #2 Well. Allen Field, Seminole County, Oklahoma. The
Company owns a 100% Working Interest in this well, which was a
discovery well in a new pay zone of the second Wilcox
formation between the depths of 4139 and 4142 feet subsurface.
The well's initial production test produced 297 Bbls in 23.5
hours.
(ii) Westbury Farms #1 Well. Constitution Field, Jefferson County,
Texas. The Company owns a 15% Working Interest in this well,
which was completed in a sand formation at a depth of
approximately 14,000 feet subsurface. The well's initial
production test produced 2050 Mcf/day and 357 Bbls of
condensate on a 15/64" choke with a flowing tubing pressure of
2289 psig.
(iii) Smith #3 Well. Fashing Field, Atascosa County, Texas. The
Company owns an 84.2% Working Interest in this well, which was
completed in the Edwards "A" Limestone at a depth between
10,654 and 10,725 feet subsurface. The well's initial
production test produced 440 Mcf/day and 13.8 Bbls on a 20/64"
choke with a flowing tubing pressure of 290 psig.
(iv) Duson #1 Well. Hutchins-Kubela (Frio) Field, Wharton County,
Texas. The Company owns a 22.15% Working Interest in this
well, which was plugged back from the Yegua formation and was
completed in the Frio sandstone at a depth between 4888 and
4891 feet subsurface. The well's initial production test
produced 658 Mcf/day on a 9/64" choke with a flowing tubing
pressure of 1761 psig.
(v) Simonson #25-1 Well. Wildcat, Seward County, Kansas. The
Company owns a 50% Working Interest in this well, which was
unsuccessfully completed in the Arbuckle formation. Current
plans are to attempt another completion in another formation.
(vi) Brown #26-1 Well. Wildcat, Seward County, Kansas. The Company
owns a 50% Working Interest in this well, which was
unsuccessfully completed in the Osage formation. Current plans
are to attempt another completion in another formation.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Those statements are contained under this Item
1 "-Business," under Item 7 "-Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-K. The
forward-looking statements are identified by language that speaks of future
events; e.g., words such as "may," "could," "believe," "expect," "intend,"
"anticipate," "estimate," "continue," "projected," "future," "will," "seek," and
"plan". The forward-looking statements address such matters as geological
estimates of oil and gas reserves, exploratory and development drilling plans
and schedules, capital expenditures, availability of capital resources,
financial projections, present values of future production, financing
assumptions and other statements that are not historical facts. Although
statements involving those matters are based on information available at the
time this Annual Report on Form 10-K was prepared and although Venus believes
that its statements are based on reasonable assumptions, it can give no
assurance that its goals will be achieved or that the level of production or
financial return expected can be achieved. Some of the important factors that
could cause actual results to differ materially from those predicted in the
forward-looking statements include (i) state and federal regulatory developments
and statutory changes, (ii) the timing and extent of changes in commodity prices
and markets, (iii) the timing and extent of success in acquiring leasehold
interests and in discovering, developing or acquiring oil and gas reserves, (iv)
the conditions of the capital and equity markets during the periods covered by
the forward-looking statements, (v) reliance on estimates of reserves, (vi)
drilling results, and (vii) other matters beyond the control of the Company;
e.g., the risk factors listed below.
RISK FACTORS
CAPITAL EXPENDITURES AND AVAILABILITY OF FINANCING - The implementation of
Venus's business strategy will require substantial new capital on a continuing
basis. Expected cash flow from existing properties will be insufficient to fund
the projects planned by the Company. Venus plans to address its long-term
liquidity and capital needs through bank financing, the issuance of debt and
equity securities, when market conditions permit, and through the use of
non-recourse production-based financing. Venus also continues to examine
alternative sources of long-term capital; e.g., the sale of net profits
interest, sales of non-strategic properties, prospects and technical
information, and joint venture financing. The amount and timing of Venus's
future capital requirements, if any, will depend upon a number of factors,
including drilling costs, transportation costs, equipment costs, marketing
expenses, staffing levels and competitive conditions, many, if not all, of which
are beyond Venus's control. Availability of these sources of capital and,
therefore, the Company's ability to execute its business plan will depend upon a
number of factors, many of which are beyond the control of the Company. Failure
to obtain such financing could materially and adversely affect Venus's growth,
cash flow and earnings.
COMPETITION - The oil and gas industry is highly competitive in all of its
phases and in particular in the acquisition of unexplored acreage, undeveloped
acreage and existing production. There are a large number of operators engaged
in oil and gas property acquisition and development, and Venus's competitive
position depends on its geological, geophyisical and engineering expertise, on
its financial resources and on its ability to find, to acquire and to prove new
oil and gas reserves. The Company encounters strong competition in acquiring
economically desirable properties and in obtaining equipment and labor to
operate and to maintain its properties. That competition is from major and
independent oil and gas companies, many of which possess greater financial
resources and larger staffs than Venus. Labor and equipment markets have shown
much volatility recently, and no assurance can be given as to their availability
at the prices budgeted by Venus.
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ACQUISITION RISKS - Venus intends to acquire producing oil and natural gas
properties. Any such acquisition will be on the basis of an evaluation of the
value of recoverable reserves associated with that property. Venus intends to
use reasonable efforts to assess the value of potential acquisitions, but it may
not have all the relevant facts because it is often not feasible to review in
detail every oil and gas lease or aspect of an acquisition. Furthermore, even a
detailed review may miss important facts; e.g., mechanical integrity of
equipment and environmental liability that is not obvious from a surface
inspection. For these and other reasons, there can be no assurance that oil and
natural gas properties acquired by Venus will be successfully integrated into
its operations or will achieve desired or projected profitability objectives.
DRILLING RISKS - Venus's drilling plans involve numerous risks; e.g., unexpected
costs and conditions attributable to overpressure in formations, equipment
failures and accidents, weather conditions, shortages or delays in obtaining
equipment and labor shortages. Some wells are dry holes and will return nothing
on the capital invested in those wells. Some wells are completed, but they do
not produce enough to repay the investment in pre-drilling, drilling and/or
operating expenses. Regardless of these factors and others or the success of a
well, Venus will incur the expenses attributable to those risks, and that may
affect its ability to work on other properties. There can be no assurance of
success or profitability of future drilling activities.
MARKETS - The availability of a ready market for any oil and gas produced by the
Company and the opportunities to find and to develop new oil and gas reserves
depends upon numerous factors beyond its control, the exact effect of which
cannot be accurately predicted. These factors include federal and state
regulatory developments and statutory enactments, the timing and extent of
changes in commodity prices, exploratory and development drilling success, the
amount of oil and gas available for sale, availability of professional expertise
and operating personnel, crude oil imports, access to adequate capital, the
availability of adequate pipeline and other transportation facilities, the
marketing of competitive fuels and other matters affecting the availability of a
ready market such as fluctuating supply and demand.
VOLATILITY OF PRICES - Venus's revenues, profitability and future rate of
growth, if any, are substantially dependent upon the prevailing prices for oil
and gas. Historically, the prices for oil and gas have been highly volatile.
This volatility is based on factors largely beyond the control of the Company.
For example, prices are affected by weather, actions of foreign and domestic
governments, international cartels and domestic and world economic conditions.
Any substantial or extended decline in prices like those experienced in the
first three months of 1998 would have a material adverse effect on Venus's
financial conditions and results of operations.
ESTIMATION OF RESERVES - The reserve data presented in this Annual Report on
Form 10-K are present estimates only. In general, estimates of reserves and the
future net revenues from those reserves are based on a number of variable
factors and subjective assumptions, such as historical production from the
properties, the assumed effects of government regulation of future production,
and assumptions about future oil and gas prices and future operating costs.
Future projections based on such factors and assumptions may, and likely will,
vary considerably from actual results.
REPLACEMENT OF RESERVES - The volume of production from oil and gas properties
usually declines as they are produced and the reserves are depleted. The decline
rates depend on reservoir characteristics and vary from steep decline curves to
the relatively slow declines of some properties such as the Company's gas
reserves in West Virginia. Unless Venus finds new reserves through its
exploration and development activities or it acquires properties containing
Proved Reserves, or both, the Proved Reserves of the Company will decline as
reserves are produced. Venus's future natural gas and oil production is,
therefore, highly dependent upon its level of success in finding or acquiring
additional reserves. To the extent that the Company is unsuccessful in replacing
depleted reserves and otherwise enlarging them, the Company's revenues will
decline over time.
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REGULATION OF PRODUCTION - Production of any oil and gas discovered or acquired
by the Company is affected to some degree by state and federal laws and
regulations. Many states have statutory provisions regulating the production and
sale of oil and gas, including provisions regarding deliverability. Other states
require drilling bonds, various permits related to drilling operations, and
operational reports. Such statutes, and the regulations promulgated in
connection therewith, are generally intended to prevent waste and to protect the
correlative rights of owners in a common reservoir to produce oil and gas from
that reservoir. Certain state regulatory authorities also regulate the amount of
oil and gas produced by assigning allowable rates of production to each well or
proration unit, and those allowable rates may increase or decrease in accordance
with supply and demand.
ENVIRONMENTAL REGULATION - The federal government and various state and local
governments have adopted laws and regulations regarding the control of
contamination of the environment. These laws and regulations are often changed,
and the scope of coverage enlarged. The current laws and regulations may require
the acquisition of a permit before drilling commences, may prohibit drilling
activities on certain lands lying within wilderness areas or where pollution
arises, and may impose substantial liabilities for pollution resulting from
drilling operations. Environmental regulations may cover many other areas of
Venus's operations. Violation of environmental legislation and regulations may
result in the imposition of fines and, in certain circumstances, the entry of an
order for the abatement of the conditions or suspension of the activities giving
rise to the violation. In certain cases, strict liability may be imposed by some
of those laws, rules and regulations; i.e., liability without regard to
negligence or fault. To date the Company has not been required to spend or to
invest material sums for environmental compliance.
Venus's operations could result in liability for personal injuries, property
damage, oil spills, discharge of hazardous substances, remediation and clean-up
costs and other environmental damages. Venus could also be liable for
environmental damages and assessments caused by previous owners. Any of these
could be substantial liabilities that could have a material adverse effect on
Venus's financial condition and results of operations. Venus maintains insurance
coverage for its operations, including limited coverage for sudden environmental
damages, but it does not believe that insurance coverage for environmental
damages that occur over time is available at a reasonable cost. Also, there are
significant gaps in the environmental insurance coverage that the Company does
have, and the Company could incur substantial uninsured costs related to the
applicable environmental laws and regulations.
Venus's activities are subject to the regulations promulgated by the
Environmental Protection Agency ("EPA") under, among others, the Oil Pollution
Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the Comprehensive
Environmental Response, Compensation and Liability Act and its amendments
("CERCLA" and "Superfund"), and the Clean Air Act and its amendments ("CAA").
Those activities are also potentially subject to state and local regulation.
Legislation is often proposed in the U.S. Congress to reclassify certain oil and
gas production wastes as "hazardous wastes," which reclassification would make
exploration and production wastes subject to much more stringent handling,
disposal and clean-up requirements. State initiatives to further regulate the
disposal of oil and gas wastes and naturally occurring radioactive materials are
also pending in certain states, including Texas, and these various initiatives
could have a similar impact on the Company.
CERCLA and the Superfund regulations impose liability, without regard to fault
or the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or the site where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. Persons
who are or were responsible for releases of hazardous substances found at the
site and persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. The Company is able to control directly
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the operation of only those wells with respect to which it acts as operator.
Notwithstanding the Company's lack of control over wells operated by others for
the benefit of the Company or others, the failure of the third-party operator to
comply with applicable environmental regulations may, in certain circumstances,
be attributed to the Company. The Company has no material commitments for
capital expenditures to comply with existing environmental requirements.
OTHER GOVERNMENT REGULATIONS - The oil and gas industry is subject to extensive
federal and state regulation governing the conduct of operations once production
is established. Matters that are subject to federal or state control include
permits to drill, the location of wells and limitations on production for
conservation purposes. Moreover, the Company's operations may be affected from
time to time in varying degrees by changes in federal and state laws and
regulations. The regulations specifically mentioned and these generally
described can increase Venus's cost of doing business and may affect the
Company's profitability. Because such rules and regulations are frequently
enacted, amended, expanded and reinterpreted, Venus is unable to predict the
future cost or effect of complying with such laws and regulations.
BUSINESS RISKS AND INSURANCE - The oil and gas business carries a number of
operating risks, and the exploration component of Venus's business has a
disproportionate share of such risks. Some of those risks are fire, explosions,
well blow-outs, pipe and pipeline failures, casing collapses, toxic gases,
over-pressured formations and potential environmental damages that may arise
from oil spills, gas leaks, pipe ruptures and discharges of toxic gases. Any of
these events could result in substantial losses to Venus. It maintains insurance
against some of these matters but not all of them. Furthermore, there is no
assurance that the insurance carried against the covered items will be
sufficient to cover all costs associated the covered event. The occurrence of a
loss due to lack of or insufficient coverage could have a materially adverse
effect on Venus and its financial condition. Furthermore, there is no assurance
that the insurance currently maintained will continue to be available at all or
at a price that Venus feels is reasonable.
DEPENDENCE ON KEY PERSONNEL - Venus is substantially dependent upon the services
of its Chairman and Chief Executive Officer and of its President. Venus is also
dependent upon the technical team for a large part of its business. The loss of
the services of that team or either one of the key management employees could
have a material adverse effect on Venus and its success.
SALES AND MAJOR CUSTOMERS
Venus's production is generally sold at the wellhead to various oil and natural
gas purchasing companies, typically those that are in the areas where the oil or
natural gas is produced. Crude oil and condensate are typically sold at prices
that are based on posted field prices. Natural gas is generally sold month to
month on the spot market. For example, in the month of December 1997, about 100%
of natural gas production from wells operated by Venus was sold at the wellhead
at spot market prices. The term "spot market" refers to contracts with a term of
six months or less or contracts that call for a redetermination of sales prices
every six months or more often. The Company believes that the loss of one or
more of its current natural gas spot purchasers should not have a material
adverse effect on the Company's business because any individual spot purchaser
could be readily replaced by another spot purchaser who would pay a similar
sales price. However, although the Company believes that there will be a spot
market available, that market is highly sensitive to changes in current market
prices, and a downward trend in spot market prices can have a significant impact
on the Company's cash flow.
Three customers each accounted for approximately 10% or more of consolidated
revenues in 1997. Those are Dow Hydrocarbons & Resources, Inc. (22%), Stephens &
Johnson Operating Company (10%) and Flying J Oil & Gas,Inc. (10%). In 1996 three
customers accounted for approximately 10% or more of consolidated revenues.
Those are Stephens & Johnson Operating Company (31%), Scurlock Permian
Corporation (17%), and Lantern Petroleum Corporation (10%).
-7-
<PAGE> 11
OIL AND NATURAL GAS RESERVES
At December 31, 1997, third-party independent petroleum engineers evaluated
properties representing approximately 88% of PV-10 Value, and Venus's in-house
engineers evaluated the remaining reserves. The PV-10 Values shown in this
Annual Report on Form 10-K are not intended to represent the current market
value of the estimated net Proved Reserves of oil and natural gas owned by
Venus. Neither prices nor costs have been escalated in the reserve estimates,
but prices do include the effects of hedging contracts in place at that date.
The Company has not filed any estimate of oil or gas reserve information with
any federal authority or agency other than the SEC. The following table
summarizes the estimates of the Company's net Proved Reserves as of December 31,
1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PROVED RESERVES
(AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------------------------
PDP PDNP PUD TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oil and Condensate (Mbbls) 459.00 213.00 305.00 977.00
- --------------------------------------------------------------------------------------------------
Natural Gas (Bcf) 4.11 1.58 0.80 6.49
- --------------------------------------------------------------------------------------------------
Combined Equivalent BCF (Bcfe) 6.90 2.90 2.60 12.40
- --------------------------------------------------------------------------------------------------
PV-10 Value (in thousands) $6,604 $3,193 $1,600 $11,397
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROVED RESERVES BY STATE
- ------------------------------------------------------------------------------------------------
STATE GROSS OIL GAS TOTAL GAS PERCENT OF PV-10 PERCENT
WELLS (MBBL) (BCF) EQUIV. (BCFE) TOTAL (BCFE) VALUE OF PV-10
($1,000) VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas 61 238 4.07 5.50 44.49% 5,766 50.6%
- ------------------------------------------------------------------------------------------------
Oklahoma 95 381 0.37 2.66 21.51% 2,536 13.3%
- ------------------------------------------------------------------------------------------------
Kansas 3 20 0.02 0.14 1.51% 187 22.2%
- ------------------------------------------------------------------------------------------------
Other(1) 19 336 0.41 2.42 19.60% 1,396 1.6%
- ------------------------------------------------------------------------------------------------
West Virginia 57 2 1.63 1.64 13.26% 1,512 12.3%
- ------------------------------------------------------------------------------------------------
TOTAL 235 977 6.50 12.36 100% 11,397 100%
- ------------------------------------------------------------------------------------------------
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado and California.
</TABLE>
The foregoing table represents an increase in value and an increase in amount of
reserves as compared with December 31, 1996. See Note 12 of Notes to
Consolidated Financial Statements (Supplementary Oil and Gas Disclosures) for
further information.
-8-
<PAGE> 12
The reserve data set forth herein present estimates only. In general, estimates
of economically recoverable oil and gas reserves and of the future net revenues
therefrom are based upon a number of variable factors and assumptions, such as
historical production from the subject properties, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, all of which may vary considerably from
actual results. All reserves are evaluated based on the assumption that all
reported data are stated at standard temperature and pressure. If that
assumption proves to be incorrect, there can be a substantial effect on
estimated gas reserves. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net revenues expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
The Company, therefore, emphasizes that the actual production, revenues,
severance and excise taxes, development and operating expenditures with respect
to its reserves will likely vary from such estimates, and such variances could
be material.
Estimates with respect to Proved Reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations in the initially estimated
reserves, and those variations may be substantial.
In accordance with applicable requirements of the SEC, the estimated discounted
future net revenues from estimated Proved Reserves are based on prices and costs
as of the date of the estimate unless such prices or costs are contractually
determined at such date. Actual future prices and costs may be materially higher
or lower. Actual future net revenues also will be affected by factors such as
actual production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
DRILLING ACTIVITY
The Company drilled 9 Development Wells and 10 Exploratory Wells during the
three years ended December 31, 1997. The following table sets forth the
Company's drilling activity over the last 3 years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DEVELOPMENT WELLS
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.00 -- 2.00 0.20 -- 0.20
- ------------------------------------------------------------------------------------------------
1996 2.00 -- 2.00 0.40 -- 0.40
- ------------------------------------------------------------------------------------------------
1997 5.00 -- 5.00 2.90 -- 2.90
- ------------------------------------------------------------------------------------------------
TOTALS 9.00 -- 9.00 3.50 -- 3.50
- ------------------------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 13
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EXPLORATORY WELLS
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1.00 3.00 4.00 0.01 0.13 0.14
- ------------------------------------------------------------------------------------------------
1996 2.00 0.00 2.00 0.10 0.00 0.10
- ------------------------------------------------------------------------------------------------
1997 3.00 1.00 4.00 2.00 0.30 2.30
- ------------------------------------------------------------------------------------------------
TOTALS 6.00 4.00 10.00 2.11 0.43 2.54
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS
(AS OF DECEMBER 31, 1997)
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
STATE OIL GAS TOTAL OIL GAS TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Texas 9.00 38.00 47.00 2.39 5.81 8.20
- ------------------------------------------------------------------------------------------------
Oklahoma 81.00 17.00 98.00 9.02 0.59 9.61
- ------------------------------------------------------------------------------------------------
Kansas 1.00 0.00 1.00 0.50 0.00 0.50
- ------------------------------------------------------------------------------------------------
West Virginia 0.00 61.00 61.00 0.00 57.09 57.09
- ------------------------------------------------------------------------------------------------
Other(1) 14.00 6.00 20.00 3.13 1.06 4.19
- ------------------------------------------------------------------------------------------------
TOTALS 105.00 122.00 227.00 15.04 64.55 79.59
- ------------------------------------------------------------------------------------------------
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado and California.
</TABLE>
On December 31, 1997, three wells were being drilled. As of March 18,
1998, two of those wells were producing, and the third well was shut-in and
waiting on a gas pipeline connection to be constructed before production could
continue.
-10-
<PAGE> 14
ACREAGE
The following table sets forth the Developed and Undeveloped Acreage of the
Company as of December 31, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DEVELOPED AND UNDEVELOPED ACREAGE
- ------------------------------------------------------------------------------------------------
GROSS ACRES NET ACRES
- ------------------------------------------------------------------------------------------------
STATE DEVELOPED UNDEVELOPED DEVELOPED UNDEVELOPED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oklahoma 13,655 219 432 187
- ------------------------------------------------------------------------------------------------
Texas 8031 15,380 1324 2764
- ------------------------------------------------------------------------------------------------
Utah 4943 0 1536 0
- ------------------------------------------------------------------------------------------------
West Virginia 2239 0 2042 0
- ------------------------------------------------------------------------------------------------
Louisiana 820 580 40 290
- ------------------------------------------------------------------------------------------------
Colorado 478 0 478 0
- ------------------------------------------------------------------------------------------------
Alabama 400 0 136 0
- ------------------------------------------------------------------------------------------------
California 400 0 26 0
- ------------------------------------------------------------------------------------------------
Kansas 240 1840 120 880
- ------------------------------------------------------------------------------------------------
Michigan 240 0 108 0
- ------------------------------------------------------------------------------------------------
TOTALS 31,446 18,019 6,234 4,121
- ------------------------------------------------------------------------------------------------
</TABLE>
PRODUCTION
The following table summarizes the net oil and gas production, weighted average
sales prices and average production (lifting) costs per unit of production for
the Company for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
UNITS OF PRODUCTION AVERAGE SALES PRICE
- -------------------------------------------------------------------------------------------
DECEMBER 31, OIL GAS OIL GAS AVERAGE LIFTING COST
- -------------------------------------------------------------------------------------------
(Mbls) (Bcf) $/Bbl $/Mcf $/Mcfe
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 34 0.176 16.17 1.43 1.27
- -------------------------------------------------------------------------------------------
1996 23 0.069 18.80 2.55 1.39
- -------------------------------------------------------------------------------------------
1997 81 0.410 17.72 2.44 1.08
- -------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE> 15
PRODUCTS AND MARKETS
Oil and natural gas are the principal products currently produced by Venus.
Venus does not refine or process the oil or natural gas that it produces. Venus
sells the oil it produces under short-term contracts at market prices for the
areas in which the producing properties are located, generally at FOB field
prices posted by the principal purchaser of oil in the area. Venus sells the
natural gas produced from its properties under short-term contracts to entities
that have pipelines in the vicinity of the production or that will build short
gathering lines to such properties. In some instances, Venus will own the
gathering line. Typically, the contracts for natural gas sales are for terms
less than six months. Venus Development, Inc., a wholly-owned subsidiary of the
Company, uses financial hedging instruments to manage its exposure to
fluctuations in commodity prices.
REGULATION AND ENVIRONMENTAL MATTERS
See "-Risk Factors -Regulation of Production," "-Environmental Regulation" and
"-Other Governmental Regulations" for a discussion of various laws and
regulations that affect the Company and its business.
EMPLOYEES
As of March 18, 1998, the Company had 26 employees. In the middle of 1997 the
Company outsourced accounting functions to professional oil and gas accounting
services firms and well tending to professional contractors.
EXECUTIVE OFFICERS OF VENUS EXPLORATION, INC.
At March 1, 1998, the executive officers of the Company were Eugene L. Ames,
Jr., John Y. Ames, James E. Gayle, Eugene L. Ames III, and Patrick A. Garcia.
Eugene L. Ames, Jr., age 64, became Chairman, Chief Executive Officer and a
director of the Company following the Acquisition. He has been in the oil and
gas business since 1954 and has been associated with New Venus and its
predecessor entities since 1962 and chief executive officer of those predecessor
entities since 1991. Ames received a B.S. degree in Geology from the University
of Texas at Austin in 1955. He served as Chairman of the Independent Petroleum
Association of America from 1991 to 1993 and currently serves as a member of the
management committee of the American Petroleum Institute.
John Y. Ames, age 42, became President, Chief Operating Officer and a director
of the Company following the Acquisition. He is a graduate of the University of
Texas at Austin with a BBA degree in Petroleum Land Management. He had eight
years of experience in the energy business before becoming associated with New
Venus and its predecessor entities as a Vice President in 1984. He became
Executive Vice President of those predecessor entities in 1995 and President and
Chief Operating Officer in 1996.
James E. Gayle, age 48, Executive Vice President, was elected as a director and
as chief executive officer of XPLOR Corporation in June 1994, Chairman effective
July 1994 and President effective September 1994. He manages the Company's
Houston office. Since 1979, he has been Chairman, President and sole stockholder
of HGX Energy Corporation which provides market and contract consulting services
to independent oil and gas exploration and production companies, natural gas
pipeline companies and local distribution companies. Prior to Mr. Gayle's
election as an officer and director of the Company, HGX was acting as a
consultant to the Company since October 1993.
-12-
<PAGE> 16
Eugene L. Ames, III, age 38, became Vice President-Exploration following the
Acquisition. He held similar positions with the Venus predecessor entities since
1991. He is a graduate of Trinity University with BS degrees in both Geology and
Business Administration. He has 12 years of experience in operations and
petroleum exploration.
Patrick A. Garcia, age 41, became Treasurer of the Company following the
Acquisition and was appointed as Chief Financial Officer in June of 1997. He
held similar positions with the Venus predecessor entities since 1980. He is a
graduate of Texas A&M University with a BBA degree in Accounting. He worked with
Peat, Marwick, Mitchell & Company for 3 years before becoming associated with
New Venus and its predecessor entities in 1980.
DEFINITIONS OF CERTAIN OIL AND GAS TERMS
The terms defined in this section are used throughout this Annual Report on Form
10-K.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas and related compounds at standard
conditions.
Bcfe. Equivalent of one billion cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit at standard conditions.
Completion. The installation of permanent equipment for the production of oil or
gas, or, in the case of a dry hole, the reporting of abandonment to the
appropriate authority.
Developed Acreage. The number of acres that are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled or to be drilled within the proved area of an
oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry Hole or Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as a producing oil or gas
well.
Exploitation. The process whereby the value of a property is attempted to be
increased by working over existing wells, by making new completions in existing
wells and by conducting other similar operations intended to increase production
from existing wells in a developed area.
Exploratory Well. A well drilled to find and to 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
beyond the currently
-13-
<PAGE> 17
expected limits of the known reservoir. These wells involve a high degree of
risk, given the unknown nature of the horizons being tested.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
LIBOR. A rate per annum at which deposits in U.S. Dollars in immediately
available and freely transferable funds would be offered in the London Interbank
Eurodollar market.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million Btu's.
Mcf. One thousand cubic feet of natural gas and related compounds at standard
conditions.
Mcfe. The equivalent of one thousand cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmcfe. The equivalent of one million cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net Acres or Net Wells. The sum of the fractional Working Interests owned in
Gross Acres or Gross Wells.
Production Cost. Also referred to as lifting cost, the cost of operation and
maintenance of wells, related equipment and facilities that are expensed as
incurred as a part of the cost of oil and gas produced; e.g., labor to operate
the wells and facilities, repair and maintenance expenses, materials and
supplies consumed, taxes and insurance on property, and severance taxes.
PV-10 Value, or Present Value of Estimated Future Net Revenues. The present
value of estimated future net revenues as of a specified date, after deducting
estimated production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. The estimated future net
revenues are discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream and should not be construed as being the fair market value
of the properties. Estimates have been made using constant oil and natural gas
prices and operating costs at the specified date.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Prospect. An area that has been interpreted to be prospective for commercial
hydrocarbon accumulation based on seismic evaluations; leases may or may not
have been acquired in the area of the Prospect.
Prospect Lead. An area that preliminary evaluations suggest may be prospective
for commercial hydrocarbon accumulation; usually no seismic studies will have
been conducted on such an area, nor will have any leases been acquired in it.
-14-
<PAGE> 18
Proved Developed Producing Reserves, or PDP. Proved Reserves to be produced by
existing wells from completion intervals open to production.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved Developed Non-Producing Reserves, or PDNP. Proved Reserves to be produced
from existing wells but that are now behind the casing or at minor depths below
the bottom of the hole. The cost of opening up such reserves are expected to be
relatively minor.
Proved Reserves. The estimated quantities of crude oil, 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 and operating conditions.
Proved Undeveloped Reserves, or PUD. Proved Reserves that are under undeveloped
spacing units that are so close and so related to developed spacing units that
they may be assumed with confidence to become commercially productive when
drilled.
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of the oil and gas produced, free of costs of production.
Seismic Data. Geophysical information collected by transmitting sound waves into
the earth from a transmitter, or source, and measuring, with appropriate
receivers, the time of the sound waves' arrival and their intensity when they
are reflected or refracted back to the surface.
2-D seismic data is collected along a surface line of sources and receivers,
giving a section representing a slice through the earth.
3-D seismic data is collected by distributing sources and receivers over an
area, yielding a volume of information representing the 3-dimensional section of
earth beneath the area being studied. The improved imaging of 3-D data makes it
the preferred advanced technological method of attempting to determine the
location, extent and properties of hydrocarbon accumulations.
Undeveloped Acreage. 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, or WI. The cost-bearing operating interest that gives the
owner the right to drill, to produce and to conduct operating activities on the
property and to share a proportionate part of production.
-15-
<PAGE> 19
ITEM 2. PROPERTIES
TITLE TO PROPERTIES
Substantially all of Venus's properties are Working Interests derived from oil
and gas leases on property owned by third parties. Very little of its property
is mineral or fee ownership. Venus usually performs title research before
acquiring leases or interests in leases, and it believes that it has
satisfactory title to its producing properties. The degree of research varies
depending on the value initially assessed to the property, whether the property
is producing at the time of acquisition, and other factors. The properties are
usually subject to the rights of lessors to be paid a Royalty Interest out of
production. They are also often subject to overriding royalties and other
burdens, none of which the Company believes to be a material burden on the value
of the Company's interest. Substantially all of the Company's properties are and
will continue to be subject to liens and mortgages to secure borrowings under
its credit facilities.
Substantially all of the properties owned by Venus are subject to exploration or
development agreements with third parties. The exploration and development
agreements are subject to "Area of Mutual Interest," or "AMI," provisions that
give the third party participants certain limited rights of first refusal on
interests acquired within the AMI. If the third party elects not to acquire such
interest, Venus usually will have the right to acquire the third party's
proportionate part of the interest. Once interests are acquired, the parties to
the agreements usually also have an election before a well is drilled. If a
party elects not to drill, Venus usually has the right to acquire certain
interests from the non-drilling party, but depending upon the size of the
interest and the cost of the proposed well, Venus may or may not elect to
acquire that interest. In several of the exploration and development projects in
which Venus is involved, the election not to participate or not to drill by a
third party owner of a large part of the project could materially affect the
value of Venus's interest in that project.
In May of 1997, the Company's executive and operating offices were relocated to
San Antonio, Texas, where it occupies premises of approximately 12,570 useable
square feet pursuant to a lease that expires on December 31, 2002. It also
maintains an office in Houston, Texas. The Houston office was formerly the
Company's principal executive office, and its address is 16800 Greenspoint Park
Drive, Suite 300 South, Houston, Texas 77060. That lease terminates on July 31,
1998. The Company's annual rental expense is approximately $257,000. The lease
of the San Antonio office space provides for increased rents at stated amounts
and intervals and an adjustment for variations in utility costs.
See "Item 1 - BUSINESS" for additional information concerning the Company's oil
and gas properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party in a number of lawsuits arising in the ordinary course of
business. In the opinion of management, final judgments or settlements, if any,
that may be awarded or entered into in connection with any one or more of these
suits would not have a material adverse effect on the Company's financial
position or results of operations.
-16-
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders (in lieu of the Annual Meeting) of the Company
was held on October 28, 1997, for the following purposes:
(i) To elect seven directors to serve until the next Annual Meeting
of Stockholders;
(ii) To ratify the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company to serve for the fiscal year
ending December 31, 1997;
(iii) To approve an amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock to
30,000,000 shares and to increase the number of authorized
shares of Preferred Stock to 5,000,000 shares; and
(iv) To approve the 1997 Incentive Plan.
All the matters were approved by the vote of the stockholders of the Company,
and the results are tabulated below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------
(i) Election of Directors
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
E.L. Ames, Jr. 6,711,334 2,227 0
- ----------------------------------------------------------------------------------------
John Y. Ames 6,713,562 0 0
- ----------------------------------------------------------------------------------------
Martin A. Bell 6,713,562 0 0
- ----------------------------------------------------------------------------------------
J. Morton Davis 6,713,562 0 0
- ----------------------------------------------------------------------------------------
James W. Gorman 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
Jere W. McKenny 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
John H. Pinkerton 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
(ii) Ratification of KPMG 6,708,975 2,352 2,234
- ----------------------------------------------------------------------------------------
(iii) Amendment to Certificate 6,702,438 8,198 2,925
- ----------------------------------------------------------------------------------------
(iv) 1997 Incentive Plan 6,700,706 11,814 1,040
- ----------------------------------------------------------------------------------------
</TABLE>
-17-
<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Stock Market(TM)
under the symbol "VENX." The following table sets forth the range of high and
low closing bid prices for each quarterly period during the two most recent
fiscal years as reported by the NASDAQ SmallCap Stock Market(TM). All SmallCap
quotations represent inter-dealer quotations, without retail mark-up, mark-down
or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
----------------------------------------------
1997(1) HIGH LOW
----------------------------------------------
<S> <C> <C>
First Quarter $6 1/4 $2 1/8
----------------------------------------------
Second Quarter 5 1/2 3 7/8
----------------------------------------------
Third Quarter 5 5/8 3
----------------------------------------------
Fourth Quarter 5 3 1/2
----------------------------------------------
1996(1) HIGH LOW
----------------------------------------------
First Quarter $2 1/4 $1 5/8
----------------------------------------------
Second Quarter 3 3/8 1 7/8
----------------------------------------------
Third Quarter 3 2 1/8
----------------------------------------------
Fourth Quarter 2 7/8 1 3/4
----------------------------------------------
</TABLE>
(1) Stock prices shown for dates prior to
May 21, 1997, are attributable to Xplor
Corporation (NASDAQ SmallCap Stock
Market(TM):XPLR), and its financial
history is not contained in this Annual
Report on Form 10-K. Therefore,
comparisons of the stock price history
with other historical financial data
shown herein for the period before May
21, 1997, would be misleading.
On March 18, 1998, the closing bid price for the Company's Common Stock was
$3 5/8 per share.
The Company had 922 stockholders of record as of March 18, 1998. The Company has
not paid dividends since January 1991 and has no present intention to resume
payment of dividends. It presently intends to reinvest its net revenues in its
ongoing business.
The Company entered into a Second Amended and Restated Loan Agreement dated
December 19, 1997. Under the loan agreement, the Company is not permitted to
declare or to pay any dividend on any of its shares or to make any distribution
to its stockholders.
-18-
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the period indicated selected historical
financial data for the Company. The selected historical financial data as of and
for each of the years in the four-year period ended December 31, 1997, have been
derived from the audited historical financial statements of the Company. The
Company acquired significant producing oil and gas properties in all the periods
presented. Selected data as of and for the year ended December 31, 1993, has
been derived from unaudited financial statements of the Company, but in the
opinion of management, such statements contain all adjustments necessary for the
fair presentation in accordance with generally accepted accounting principles.
Those acquisitions affect the comparability of the historical financial and
operating data for the periods presented. The information below should be read
in conjunction with Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Historical Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report on
Form 10-K, including the reference to reverse acquisition accounting treatment
given to the Acquisition.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
AS OF AND FOR THE FIVE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $2,476 $543 $798 $841 $1,149
- --------------------------------------------------------------------------------------------------
Dividends paid -- 35 72 20 --
- --------------------------------------------------------------------------------------------------
Net income (loss) (4,168) (2,007) (696) 337 (848)
- --------------------------------------------------------------------------------------------------
Net income (loss) per common
share (.57) (.60) (1) (1) (1)
- --------------------------------------------------------------------------------------------------
Long term debt 2,005 -- -- 72 206
- --------------------------------------------------------------------------------------------------
Other long-term liabilities 27 -- -- -- --
- --------------------------------------------------------------------------------------------------
Convertible redeemable -- 4,955,000 -- -- --
preference shares
- --------------------------------------------------------------------------------------------------
Total assets 12,862 4,343 3,031 5,939 6,169
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's predecessor was a privately-held S Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K (particularly this Item 7) contains statements
that are considered "forward-looking statements," as defined in the Private
Securities Litigation Reform Act of 1995. As discussed in Item 1 - "BUSINESS"
under "-Forward-Looking Statements" and "-Risk Factors," actual results may
differ materially from those contemplated by those forward-looking statements.
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<PAGE> 23
GENERAL
In 1997, the Company went through a major transformation as a result of the
Acquisition discussed in Item 1 "BUSINESS" above. Legally, Xplor Corporation
acquired the assets of New Venus. However, accounting principles require that
this transaction be treated as a reverse acquisition of the Company by New
Venus. After the transaction, the Company's name was changed from Xplor
Corporation to Venus Exploration, Inc. Under the reverse acquisition accounting
principles, the results of operations and financial information for prior years
shown in this report are those of the predecessor Venus entities, not Xplor
Corporation. Moreover, operational data shown herein for periods prior to May
21, 1997; e.g., production information, reflect the operations of New Venus and
its predecessors. Accordingly, comparison of information in this report with
prior Xplor Corporation corporate reports previously filed under the Security
Exchange Act of 1934 is not an appropriate performance measure.
The oil and gas reserves added by the Acquisition, plus the completion of new
wells drilled in the Company's 1997 drilling program, increased Venus' Proved
oil and gas Reserves, net of 1997 production and revisions of previous
estimates, by over 300% from 2.8 Bcfe on December 31, 1996, to 12.4 Bcfe on
December 31, 1997.
In 1997, the production obtained and the revisions of previous estimates of
reserves that were incurred together resulted in a reduction of reserves of
approximately 1 Bcfe, so the gross increase in Proved Reserves was 10.6 Bcfe. Of
that gross increase in Proved Reserves, 69%, or 7.3 Bcfe, is attributable to the
Acquisition transaction, and 31%, or 3.3 Bcfe, to the Company's 1997 exploration
and development program. Of the 3.3 Bcfe Proved Reserves increase from the
drilling and exploration programs in 1997, 29.8%, or 1 Bcfe, was comprised of
Proved Undeveloped Reserves in the Constitution Field, Jefferson County, Texas,
and 24.4%, or 0.8 Bcfe, was comprised of Proved Developed and Proved Undeveloped
Reserves in the Allen Field, Seminole County, Oklahoma. The balance of the
Company's Proved Reserve growth was through extensions, discoveries and
additions in other fields, including the Shanghai Field, Wharton County, Texas,
and the Vidor - South Field, Orange County, Texas.
The Company's 1997 drilling program resulted in the drilling of 15 wells during
1997 and the first quarter of 1998. Five of the 15 wells drilled were
Exploratory Wells, and 10 were Development Wells. Twelve of the 15 wells have
been completed as oil and gas wells, one well was completed as a non-commercial
oil well, and as of March 20, 1998, two wells were in the process of being
completed. Six of the 15 wells drilled by the 1997 drilling program were
producing revenue in December 1997; as of the end of March 1998, 10 are expected
to be producing revenue.
Management's business plan for its 1998 program provides for capital
expenditures of approximately $7 million for exploration and development
drilling and land and 3-D seismic acquisition. Approximately $1 million of this
amount ($7 million) is expected to be financed under the Stratum Facility
described below, leaving approximately $6 million to be financed by other
sources of corporate finance as discussed below. The number of wells proposed to
be drilled under management's 1998 program is 9 Exploratory and 11 Development
Wells. The cost of 3-D Seismic acquisition included in the 1998 plan is
estimated at $750,000. The Company may elect to reduce its interests, through
sales, farmouts or other transactions, in certain wells or seismic projects or
to include those wells or projects in a joint venture with industry
participants, in which event the Company's capital investment and upside
potential would be lower. The actual timing of the drilling of the wells is
dependent upon may unpredictable factors, and in all likelihood the 1998
drilling program will not be completed until 1999.
The number of wells that were drilled in 1997 and that are currently being
operated required a large increase in Venus's operations, accounting and
administrative staff. However, Venus believes that the current staff levels can
manage the new wells in the 1998 drilling program at a lower marginal cost than
experienced in 1997.
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<PAGE> 24
The Company's general and administrative expense increased significantly from
1995 to 1997. This increase is due primarily to two factors; i.e., significantly
expanded exploration activities and various corporate restructurings during 1996
and 1997. The corporate restructurings included (i) the incorporation of a
United Kingdom public limited company, (ii) the repatriation of the United
Kingdom company, and (iii) the Acquisition. All contributed to the significant
increase in both 1996 and 1997 of the Company's general and administrative
costs.
Venus uses the successful efforts method of accounting of its oil and gas
activities. It capitalizes the costs to acquire mineral interests in oil and gas
properties, to drill and to equip Exploratory Wells that result in Proved
Reserves, and to drill and to equip Development Wells. It expenses the costs to
drill Exploratory Wells that do not result in Proved Reserves, costs of
geological, geophysical and seismic data and analysis, and the costs of carrying
and retaining unproved properties. Capitalized costs of producing oil and gas
properties, after considering estimated abandonment costs and estimated salvage
values, are depreciated and depleted using the unit-of-production method.
Unproved oil and gas properties that are individually significant are
periodically reviewed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance.
The Acquisition and the corporate restructuring in 1996 affected the reported
financial results in various ways. The historical financial statements of the
Company are that of a predecessor entity for all of 1995 and the first six
months of 1996. On July 1, 1996, that predecessor entity transferred most but
not all of its interest in the oil and gas properties to another predecessor
entity of the Company. Comparisons of revenues and expenses between 1997 and
1996 are affected by the inclusion in the first half of 1996 of the revenues and
expenses attributable to oil and gas properties and other assets and liabilities
that were, for accounting purposes, deemed distributed on July 1, 1996.
Likewise, comparisons of 1996 results with 1995 results are affected because
1995 contains 12 months of activity attributable to the assets and liabilities
deemed distributed as of July 1, 1996, while 1996 contains six months of
activity.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996 -
The Company experienced a net loss of $4.2 million for 1997 versus a net loss of
$2.0 million for 1996. The Company reported impairment losses in 1997 and 1996
of $1.1 million and $1 million, respectively. General and administrative cost
increased by $1,549,223, or over 100%.
Oil and gas production was 896 Mmcfe in 1997 compared to 207 Mmcfe in 1996, an
increase of over 300%. Of the 689 Mmcfe increase, approximately 285 Mmcfe was
due to successful drilling activities. The remainder, 404 Mmcfe, was due to
production from the properties acquired from Xplor and Lomak. Average oil prices
declined from $18.80 per barrel in 1996 to $17.72 in 1997, a 6% decrease.
Average natural gas prices declined from $2.55 per Mcf to $2.44, a 4% decrease.
Despite the decrease in average product prices, oil and gas revenue of $2.5
million for 1997 increased by $2.0 million over 1996 revenue of $0.5 million,
primarily due to successful drilling and the Acquisition.
Oil and gas production costs in 1997 were $963,822 ($1.08 per Mcfe) compared
with $286,030 in 1996 ($1.38 per Mcfe). This decrease is due mainly to the lower
operating cost of new properties acquired through successful drilling and the
Acquisition. The 1997 production or lifting cost as a percentage of oil and gas
sales decreased to 39%, compared with 53% in 1996.
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<PAGE> 25
During 1997 the Company booked impairment expense of $1.1 million as compared to
the $1.0 million recorded in 1996. The impairment expenses for both 1997 and
1996 relate primarily to the cost, initially capitalized, of acquiring and
drilling Exploratory and Development Wells that were completed but that failed
to establish enough reserve value to justify their carrying value. In such cases
an impairment is recognized to reduce the capitalized cost to the estimated fair
market value of each well, which valuation is on a field by field basis. Costs
of Exploratory Wells that are not completed, but are plugged and abandoned, are
charged directly to dry hole expense.
The exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses, was $504,983 in 1997, compared
to $116,905 in 1996. The increase is due mainly to the Company's drilling of one
Exploratory Well dry hole during the year and increased activity in exploration
joint ventures operated by the Company that resulted in an increase in
geological and geophysical costs.
During 1997, general and administrative expense of $2,923,764 increased
$1,549,223 from $1,374,541 in 1996. This increase was primarily due to the
significant increase in exploration activity and the Acquisition. The 1997
exploration activities led to the creation of 12 new employee positions and the
increased use of third-party engineering services and other professional
consultants. The 1997 amount also includes $252,002 of non-cash compensation
expense related to stock options granted to directors and costs in connection
with the corporate restructuring.
The Company's 1997 interest income of $77,658 increased by $22,230 over 1996 due
primarily to interest received from the investment of cash acquired in the
Acquisition.
Interest expense was $203,213 in 1997, compared to $10,331 in 1996. The $192,882
increase is primarily due to increased borrowings by Venus Development, Inc.
Approximately $81,535 of the interest expense reported by Venus Development,
Inc., represents amortization of deferred financing cost, not a current or
future cash expense. The average balances of interest-bearing debt was
$1,030,000 in 1997, compared to $70,000 in 1996.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995 -
The Company reported a net loss of $2.0 million for 1996 versus a net loss of
$0.7 million for 1995. The Company reported impairment expense of $1 million in
1996 and none in 1995. General and administrative expense increased by $0.63
million.
Oil and gas production was 207 Mmcfe in 1996 compared to 380 Mmcfe in 1995, a
decrease of over 45%. Accordingly, revenues decreased from $0.8 million for 1995
to $0.5 million in 1996, a decrease of $0.3 million, or 38%. Production in 1995
and related revenues include revenue from properties that were sold in early
1996 as well as from properties that were deemed distributed to shareholders
effective July 1, 1996. As a result, these properties reported twelve months
production and related revenue in 1995 but only six months in 1996. The decline
in revenue was lower than the decline in production because of the increase in
average prices. Average oil prices increased from $16.17 per barrel in 1995 to
$18.80 in 1996, a 16% increase. Average natural gas prices increased from $1.43
per Mcf in 1995 to $2.55 in 1996, a 78% increase. The 1996 depletion rate of 14%
as a percentage of sales is comparable to 1995's rate of 16%.
Oil and gas production costs in 1996 were $286,030 ($1.38 per Mcfe) compared
with $479,950 in 1995 ($1.26 per Mcfe). The decrease in total cost was due to
the properties retained by the predecessor entity and properties sold in early
1996. The costs for 1995 include 12 months of operations for these wells, while
1996 reflects operations for six months for the wells retained by the
predecessor entity and one to three months operations for the properties sold
during the first half of 1996. Production cost per Mcfe increased due mainly to
costs incurred on the Company's Oklahoma wells to
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<PAGE> 26
improve production and operating efficiencies. The 1996 lifting cost of oil and
gas sales of 53% relative to sales decreased by 13% from the prior year's cost
of 61% relative to sales. Increased average product prices contributed to the
decrease in cost as a percent of sales.
Exploration (including geological, geophysical and seismic data and analysis and
dry hole costs) expense was $116,905 in 1996 compared to $532,222 in 1995, a
$415,317 decrease from 1995. The amount for 1995 includes dry hole costs of
$264,000. There was no dry hole expense in 1996. The most significant component
of the balance of the remaining $151,000 decrease is the result of the Company
selling part of its participation in an exploration joint venture to a new
participant. This reduced the Company's share of the allocated geological,
geophysical, seismic and other venture expenses.
During 1996, general and administrative expense of $1,374,541 increased $628,698
from $745,843 in 1995. This increase was primarily due to an increase in
overhead to support increased exploration activity and overhead costs related to
corporate restructuring that resulted in an increased use of consultants, such
as attorneys, accountants and engineers. The general and administrative expense
for 1996 also includes $283,430 of compensation expense related to stock options
granted new non-employee directors.
The Company's 1996 interest income of $55,428 decreased by $17,510 over 1995
because for twelve months in 1995, but only six months in 1996, the Company had
notes receivable from certain shareholders. These notes, which totaled $480,685
at December 31, 1995, were retained by the predecessor entity and for accounting
purposes treated as distributed to shareholders on July 1, 1996. As a result,
interest income for 1996 reflects six months of interest from these notes while
1995 reflects twelve months.
Interest and other expenses were $10,331 in 1996, compared to $27,041 in 1995.
The $16,710 decrease was primarily due to a $17,051 worthless inventory write
down. Interest expense in 1996 was $341 higher than in 1995. The average
balances of interest-bearing debt were $70,000 in 1996, compared to $131,000 in
1995. The interest-bearing debt outstanding in 1996 consisted of bank debt that
was subject to a much higher interest rate than the interest-bearing debt
outstanding during 1995, which consisted of notes payable to former
shareholders.
ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying of comprehensive income and its components. This statement
requires a separate statement to report the components of comprehensive income
for each period reported. The provisions of this statement are effective for
fiscal years beginning after December 15, 1997. Management believes that the
Company currently does not have items that would require presentation in a
separate statement of comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes standards
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company is currently evaluating
the impact that SFAS 131 will have on its financial statement disclosures.
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<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At December 31, 1997, the Company had a working capital deficit of $768,939
compared with working capital of $700,275 at December 31, 1996, a decrease of
$1,469,214. The ratio of current assets to current liabilities at December 31,
1997, was .80 to 1 compared with 1.5 to 1 at December 31, 1996.
Net cash used in operating activities during 1997 was $1,276,042, whereas
$406,433 was used during 1996. Cash and equivalents decreased by $621,481
principally due to capital expenditures related to exploration and development
and the cost of administrative services required to support the increased
exploration activities and corporate restructurings. The increase of $1,478,229
in accounts receivable was primarily the result of the timing of revenue
receipts and joint interest receivables. The increase in current liabilities of
$2,406,027 is attributable to the increased level of drilling conducted by the
Company in 1997 and higher revenue payables to nonoperating interest owners as a
result of the increasing number of operated properties.
CAPITAL RESOURCES
To fund its business activities, Venus had previously relied on bank financing,
cash flow from operations, sales of properties and joint ventures with industry
participants. In 1996, the decision was made to sell equity interests and to use
limited recourse financing under a credit facility with Stratum Group Energy
Partners, LP. In 1997, a more conventional line of credit facility was set up
with Wells Fargo Bank (Texas), N.A. In the future, Venus intends to finance its
drilling plans and other operations with cash flow from operations, borrowings
from the two credit facilities, sales of non-strategic properties, and public
and private equity sales.
The prices paid to Venus and other producers in the first three months of 1998
have been considerably below the average price received in 1997. That diminished
revenue could have a material effect on the number of wells drilled by the
Company in 1998. Cash flow from existing properties will not fund management's
1998 drilling plan; therefore, the number of wells drilled by the Company will
depend on a number of external factors, the most important of which is the
availability to the Company of debt and equity capital in public and private
capital markets. In addition, if Venus is unable to generate sufficient cash
flow from operations to service its debt, it may be required to refinance all or
some of its debt, to sell certain assets or to obtain additional debt or equity
financing. There is no assurance that any such additional funding will be
available. Any major property acquisitions are also dependent upon receiving
adequate financing to fund the purchase; therefore, any such transaction will be
subject to the same factors.
While Venus regularly evaluates and discusses possible acquisitions, it has no
present agreements or commitments with regard to any specific such acquisition.
Any acquisition outside of current exploration and development programs would
require additional financing and would be dependent upon financing options
available at that time.
Venus has been successful in the highly capital-intensive oil and gas
exploration business. The capital resources and liquidity needed to run the
business over the last several years have been provided in large part from two
main sources: Cash sales of properties that were the result of Venus's past
exploratory successes and debt and equity financing. There is no assurance that
such sources of capital will be available in the future.
The successes of 1996 and 1997 provide a cash flow stream that is dependent upon
the various factors that generally affect the domestic oil and gas markets;
e.g., price, government regulation and normal oil and gas operational events. Of
course, the current trend of lower oil and gas prices has a negative effect on
cash flow from current production, the lines of credit that are supported by
reserve value, and the availability of the new capital resources needed to
explore and develop the extensive portfolio of projects and prospects that Venus
has under study. Increases in the lines of credit are directly dependent upon
continued successes in drilling productive wells and the prices paid for oil and
natural gas
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<PAGE> 28
production at any given time. Indirectly, those continued successes would help
in any efforts to raise additional capital resources.
STRATUM FACILITY
Effective October 8, 1996, Venus entered into a credit facility (the "Stratum
Facility") with Stratum Energy Group Partners, L.P. ("Stratum"). The Stratum
Facility provides a term loan with a maximum limit of $20 million. The line of
credit limit varies with the value of the borrowing base, which is based on the
value of the properties subject to the underlying deed of trust. The lender's
only recourse is against Venus Development, Inc. ("Venus Development"), a
wholly-owned subsidiary of Venus Exploration, Inc., and the properties securing
the Stratum Facility. The final drawdown can be made no later than October 8,
1998, and its maximum term is 7 years. The right of Venus Development to draw on
the line of credit is subject to numerous collateral tests. The interest rate
charged on outstanding advances is floating prime plus 1%. Prepayment is not
allowed until the earlier of (i) when the full line has been drawn down, or (ii)
October 8, 1999.
As a part of the Stratum Facility, Stratum was granted an overriding royalty
interest equal to 5% of Venus Development's net revenue interest in the
properties subject to the Stratum deed of trust. Stratum can convert its
overriding royalty interest into Venus Common Stock at $3/share, with the
present value of the overriding royalty interest being determined based on a 15%
discount rate. Stratum also has certain restricted warrants that become
exercisable after Venus conducts its next public offering, and the price per
share pursuant to those warrants is 125% of the public offering price. The
conversion rights and the warrants are exercisable only against a pool of Venus
Exploration Common Stock (the "Conversion Share Pool") that are owned by the
shareholders of the former Venus entity that was a party to the Acquisition.
(The Conversion Share Pool contains 589,882 shares of Venus Exploration common
stock, and those shares are held in an escrow account maintained by the Frost
National Bank.) In the event that Stratum exercises its conversion rights or
warrants, no new shares of the Company's Common Stock would be issued to satisfy
those rights or warrants.
HEDGING ACTIVITIES
On certain properties, Venus uses commodity derivative contracts to protect and
to ensure cash flow levels. Those properties currently are limited to those that
are owned by Venus Development and that are subject to the financing facility
provided by Stratum. The Stratum Facility requires that those hedges be used, in
part, because it is arranged in such a way that the lender has no recourse
against the assets of the parent that are not owned by Venus Development. On
December 2, 1996, Venus Development entered into a financial swap, whereby the
counterparty agrees to pay Venus Development the difference between the floating
price and the fixed price for certain volumes of production in future months
(commencing with January 1997 production) if the floating price falls below the
negotiated fixed price of $2.0497 per mmbtu for natural gas or $19.045 per
barrel for oil, respectively. Should the floating price exceed the fixed price
for natural gas or oil, the Company is required to remit the difference to the
counterparty. As of December 31, 1997, quantities hedged are 81,996 Mmbtu's of
natural gas and 28,656 barrels of oil. This financial swap agreement expires
December 31, 2001. As of December 31, 1997, the estimated fair value of the
Company's swap positions was a net receivable of approximately $34,000 based
upon an estimate of what the Company would receive if the contracts were
liquidated. The net effect of Venus's commodity derivative contracts reduced oil
and gas revenues by $41,604 and $1,719 in the years ended December 31, 1997 and
1996. There were no hedges in place in 1995.
WELLS FARGO FACILITY
Effective December 19, 1997, the Company entered into a revolving line of credit
facility (the "Wells Fargo Facility") with Wells Fargo Bank (Texas), N.A.
("Wells Fargo"). The Wells Fargo Facility is a $50 million revolving line of
credit subject to a borrowing base supported by the value of the mortgaged oil
and gas reserves on which Wells Fargo has a first lien. Those reserves include
substantially all of the assets of the Company other than those that are owned
by Venus Development. Draws may be made as either prime rate advances or LIBOR
advances. The borrowing base as of March 18, 1998, was $5,250,000, of which
$2,053,270 had been drawn at that date. The Facility terminates on June 30,
2000.
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<PAGE> 29
Prime rate advances accrue interest at the floating "Prime Rate" quoted by Wells
Fargo. LIBOR advances accrue interest at LIBOR plus 1.75%. The LIBOR rate also
is increased to cover any bank reserve costs, and if there is any increase in
the administration costs of the LIBOR advances due to changes in the law, Wells
Fargo can assess additional charges to cover those additional costs. The
advances received by Venus as of December 31, 1997, and as of March 18, 1998,
were prime rate advances, and the interest rate was 8,5% per annum on both such
dates. Fees payable by Venus under the agreement include a borrowing base
determination fee ($2,500 for each regular redetermination), a facility fee
(3/8% of any increase in the borrowing base), and a commitment fee (a quarterly
payment based on a charge of 3/8% per annum on the average unused borrowing base
for each day during the preceding calendar quarter).
Negative restrictions imposed upon Venus by the Wells Fargo agreement include
Venus's agreement to: not declare a dividend; not enter into any hedging
agreement covering more than 90% of Venus's projected monthly production or for
periods beyond the current calendar year; not amend the Stratum agreements; not
advance Venus Development more than $20,000 per year; not allow gas balancing,
take-or-pay contracts or other similar situations to exist to the extent that
Venus would not be entitled to receive the full value of delivered production;
not merge or consolidate with anyone else unless Venus is the survivor; not
change its control or management; and not allow other liens to be placed on
Venus's properties.
In order to use the Wells Fargo Facility, Venus must maintain Wells Fargo's
first lien on the properties subject to the deed of trust and other usual
covenants. Venus must maintain a 1:1 ratio of (a) the sum of all of its current
assets and the unused amount of the borrowing base, to (b) all of its accounts
payable and other current liabilities. At December 31, 1997, the Company was not
in compliance with the tangible net worth requirement. The Company obtained a
waiver from the lender as of December 31, 1997 which included a reduction in
tangible net worth requirement to $7,500,000. However, because of uncertainty
regarding the Company's ability to remain in compliance with this covenant
through the first quarter of 1998, the outstanding balance has been classified
as a current liability in the December 31, 1997 financial statements.
INFLATION
Although many of Venus's expenses and items of income may be affected by
inflation, inflationary costs have not had a significant effect on its results
of operations. However, the tightness in the drilling rig market is a concern
and may lead to inflationary effects in the near future.
IMPACT OF YEAR 2000
Concern over the year 2000 arises because many computer microprocessors have
been designed, and application software has been written, using two digits,
rather than four, to define the applicable year. Any of Venus's microprocessors
or application software that are time-sensitive may recognize a date of "00" as
the year 1900, rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations; e.g., a temporary
inability to operate machinery, to process transactions, to send invoices, or to
otherwise engage in normal business activities. Venus has conducted a review of
its computer systems to identify any such problems, and it has not identified
any problems that will require the expenditure of material amounts to address.
Venus has developed a plan to conduct tests throughout 1998 to evaluate the
situation.
The Company has received written representations from the accounting firms that
manage the Company's accounting and payroll about any year 2000 risks, and based
on those representations Venus believes that there is no problem with those
firms' computer systems in that regard. Venus has business relations with many
other companies, including various purchasers of production. It has not checked
with those entities, but it believes that even if those entities have any year
2000 problems, those problems will not have a material adverse impact on the
Company's business or finances. However, until that time, Venus cannot give any
assurances regarding the year 2000 effect.
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<PAGE> 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 3, 1997, the Company replaced Arthur Andersen LLP ("AA") with
KPMG Peat Marwick LLP as the Company's independent accountant at the
recommendation of the Board of Directors of the Company.
AA's reports on the financial statements of the Company for the past two years
have not contained an adverse opinion or a disclaimer of uncertainty, audit
scope or accounting principles. During the two most recent fiscal years and the
interim period since the end of the Company's fiscal 1996, there have not been
any disagreements with AA on any matter of accounting principles or practices,
financial statements or disclosure, or auditing or scope of procedure, which
disagreement(s), if not resolved to the satisfaction of AA, would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of Venus's proxy statement for its 1998
Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed with
the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference. The Proxy Statement is expected to be filed
prior to April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Executive
Compensation" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" of Venus's Proxy
Statement, which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.
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<PAGE> 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions "Executive
Compensation -- Director Compensation and Certain Relationships and Related
Party Transactions" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1 to this Annual Report on
Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under
the related instructions or is inapplicable or because the information
is included in the Financial Statements or related Notes.
3. EXHIBITS
2.1* Property Acquisition Agreement dated April 29, 1997, among
Xplor Corporation, The New Venus Exploration, Inc., Lomak
Production I L.P., and Lomak Resources LLC.
2.2* Agreement and Plan of Merger dated June 3, 1997, between
Venus Exploration, Inc., and Xplor Corporation.
2.3* Certificate of Ownership and Merger of Venus Exploration,
Inc., into Xplor Corporation dated June 3, 1997 (including the
change of name of Xplor Corporation to Venus Exploration,
Inc.).
3.1 Articles of Incorporation of Venus Exploration, Inc.
3.2 Bylaws of Venus Exploration, Inc., as amended
4.1" Warrant to purchase Common Stock issued to Kinder
Investments, L.P.
4.1 Warrant to purchase Common Stock issued to Martin A. Bell
4.2 Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
-28-
<PAGE> 32
9. Voting Trust Agreement dated effective March 31, 1997, among
E. L. Ames, Jr., et al.
10.1 Registrant's 1985 Incentive Stock Option Plan(1)
10.1+ Term Loan and Security Master Agreement dated October 8, 1996,
between Venus Development, Inc., and Stratum Group Energy
Partners, L.P.
10.7" Registrant's 1995 Stock Option Plan
10.8" Note and Warrant Agreement with Kinder Investments, L.P.
10.9[ ] 1997 Incentive Plan
10.10 Second Amended and Restated Loan Agreement dated December 19,
1997, between Venus Exploration, Inc., and Wells Fargo Bank
(Texas) N.A.
10.11 Executive Employment Agreement dated June 1, 1996, for E.L.
Ames, Jr.
16.1* Letter from Arthur Andersen LLP regarding change in
certifying account dated June 5, 1997
21. List of Subsidiaries
23.1 Letter from KPMG Peat Marwick LLP regarding incorporation by
reference into S-8.
23.2 Consent from Williamson Petroleum Consultants, Inc., regarding
incorporation by reference.
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Current Report on Form
8-K dated May 21, 1997, and incorporated herein by reference.
+ Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.
" Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, and incorporated
herein by reference.
[ ] Filed as an appendix to the Company's Proxy Statement for a
Special Meeting of Stockholders (in lieu of its Annual
Meeting) held on October 27, 1997, and incorporated herein
by reference.
(1) Filed on Form 4 (File No. 33-1903) declared effective January
8, 1986, and incorporated herein by reference.
-29-
<PAGE> 33
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of San Antonio,
Texas, on the 30th day of March, 1998.
VENUS EXPLORATION, INC.
By: /s/ EUGENE L. AMES, JR.
-----------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
March 30, 1998
/s/ EUGENE L. AMES, JR.
-----------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
March 30, 1998
/s/ JOHN Y. AMES
-----------------------------------
John Y. Ames
President, Director and Chief
Operating Officer
March 27, 1998
/s/ MARTIN A. BELL
-----------------------------------
Martin A. Bell
Director
March 27, 1998
/s/ J. MORTON DAVIS
-----------------------------------
J. Morton Davis
Director
-30-
<PAGE> 34
March 27, 1998
/s/ JAMES W. GORMAN
-----------------------------------
James W. Gorman
Director
March 30, 1998
/s/ JERE W. MCKENNY
-----------------------------------
Jere W. McKenny
Director
March 27, 1998
/s/ JOHN H. PINKERTON
-----------------------------------
John H. Pinkerton
Director
March 30, 1998
/s/ PATRICK A GARCIA
-----------------------------------
Patrick A. Garcia
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
-31-
<PAGE> 35
================================================================================
INDEX TO EXHIBITS
Exhibit No. Item
- ----------- ----
2.1* Property Acquisition Agreement dated April 29, 1997, among
Xplor Corporation, The New Venus Exploration, Inc., Lomak
Production I L.P., and Lomak Resources LLC.
2.2* Agreement and Plan of Merger dated June 3, 1997, between
Venus Exploration, Inc., and Xplor Corporation.
2.3* Certificate of Ownership and Merger of Venus Exploration,
Inc., into Xplor Corporation dated June 3, 1997 (including the
change of name of Xplor Corporation to Venus Exploration,
Inc.).
3.1 Articles of Incorporation of Venus Exploration, Inc.
3.2 Bylaws of Venus Exploration, Inc., as amended
4.1" Warrant to purchase Common Stock issued to Kinder Investments,
L.P.
4.1 Warrant to purchase Common Stock issued to Martin A. Bell
4.2 Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
9. Voting Trust Agreement dated effective March 31, 1997, among
E. L. Ames, Jr., et al.
10.1 Registrant's 1985 Incentive Stock Option Plan
10.1+ Term Loan and Security Master Agreement dated October 8, 1996,
between Venus Development, Inc., and Stratum Group Energy
Partners, L.P.
10.7" Registrant's 1995 Stock Option Plan
10.8" Note and Warrant Agreement with Kinder Investments, L.P.
<PAGE> 36
10.9[ ] 1997 Incentive Plan
10.10 Second Amended and Restated Loan Agreement dated December 19,
1997, between Venus Exploration, Inc., and Wells Fargo Bank
(Texas) N.A.
10.11 Executive Employment Agreement dated June 1, 1996, for E.L.
Ames, Jr.
16.1* Letter from Arthur Andersen LLP regarding change in certifying
account dated June 5, 1997
21. List of Subsidiaries
23.1 Letter from KPMG Peat Marwick LLP regarding incorporation by
reference into S-8.
23.2 Consent from Williamson Petroleum Consultants, Inc., regarding
incorporation by reference.
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Current Report on Form
8-K dated May 21, 1997, and incorporated herein by reference.
+ Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.
" Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference.
[ ] Filed as an appendix to the Company's Proxy Statement for a
Special Meeting of Stockholders (in lieu of its Annual Meeting)
held on October 27, 1997, and incorporated herein by reference.
<PAGE> 37
Item 8. Financial Statements and Supplementary Data
VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for each of the years in the three-year period
ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE> 38
Independent Auditors' Report
The Board of Directors and Shareholders of
Venus Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of Venus
Exploration, Inc. and subsidiaries and predecessor entities, as described in
note 7 to the consolidated financial statements, as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Venus Exploration,
Inc. and subsidiaries and predecessor entities, as described in note 7 to the
financial statements, as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Antonio, Texas
March 26, 1998
F-2
<PAGE> 39
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 682,436 1,303,917
Trade accounts receivable 2,268,498 790,269
Prepaid expenses and other 104,967 24,902
------------- ------------
Total current assets 3,055,901 2,119,088
------------- ------------
Oil and gas properties and equipment, at cost
under the successful efforts method, net 9,100,955 1,679,697
Other property and equipment, net 273,392 102,733
Deferred financing costs, at cost less
accumulated amortization 377,187 336,366
Other assets, at cost less accumulated amortization 123,164 105,171
------------- ------------
$ 12,930,599 4,343,055
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable 3,080,200 1,073,912
Advances from interest owners 17,862 344,901
Other liabilities 226,778 -
Revolving credit agreement 500,000 -
------------- ------------
Total current liabilities 3,824,840 1,418,813
Long-term debt 1,505,329 -
Other long-term liabilities 26,524 -
------------- ------------
Total liabilities 5,356,693 1,418,813
------------- ------------
Convertible redeemable preference shares; nominal
value of $0.077; 247,750 shares issued and
outstanding in 1996 - 4,955,000
Shareholders' equity (deficit):
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding - -
Common stock; par value of $.01; 30,000,000 shares
authorized; 9,736,815 and 3,322,121 shares issued
and outstanding in 1997 and 1996, respectively 97,368 33,221
Additional paid-in capital 15,010,189 1,301,949
Retained earnings (deficit) (7,533,651) (3,365,928)
------------- ------------
Total shareholders' equity (deficit) 7,573,906 (2,030,758)
------------- ------------
Commitments and contingencies
$ 12,930,599 4,343,055
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Oil and gas revenues $ 2,476,040 543,233 798,233
----------- ----------- -----------
Costs of operations:
Production expense 963,822 286,030 479,950
Exploration expenses, including dry holes 504,983 116,905 532,222
Impairment of oil and gas properties 1,051,617 981,178 --
Depreciation, depletion and amortization 1,078,942 76,286 122,659
General and administrative 2,923,764 1,374,541 745,843
----------- ----------- -----------
Total expenses 6,523,128 2,834,940 1,880,674
----------- ----------- -----------
Operating profit (loss) (4,047,088) (2,291,707) (1,082,441)
----------- ----------- -----------
Other income (expense):
Interest expense (203,213) (10,331) (27,041)
Gain on sale of assets 4,920 239,792 340,170
Interest and other income 77,658 55,428 72,938
----------- ----------- -----------
(120,635) 284,889 386,067
----------- ----------- -----------
Net loss $(4,167,723) (2,006,818) (696,374)
=========== =========== ===========
Earnings (loss) per share:
Basic $ (0.57) (0.60)
=========== ===========
Diluted $ (0.57) (0.60)
=========== ===========
Common shares and equivalents outstanding:
Basic 7,270,357 3,322,121
=========== ===========
Diluted 7,270,357 3,322,121
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Venus Venus Total
Oil Exploration, Additional Retained shareholders'
Issued Company Inc. paid-in earnings equity
shares amounts amounts capital (deficit) (deficit)
---------- ------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 3,215 $ 3,215 -- -- 3,006,232 3,009,447
Net loss -- -- -- -- (696,374) (696,374)
Cash distribution -- -- -- -- (72,000) (72,000)
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1995 3,215 3,215 -- -- 2,237,858 2,241,073
Net loss -- -- -- -- (2,006,818) (2,006,818)
Cash distribution -- -- -- -- (35,220) (35,220)
Distributions of assets not
transferred to Venus Energy PLC
and purchase price of properties
transferred (3,215) (3,215) -- -- (3,561,748) (3,564,963)
Stock issued by Venus
Energy PLC 3,322,121 -- 33,221 993,519 -- 1,026,740
Compensation costs for stock
options -- -- -- 283,430 -- 283,430
Warrants to acquire shares
issued under financing
arrangements -- -- -- 25,000 -- 25,000
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1996 3,322,121 -- 33,221 1,301,949 (3,365,928) (2,030,758)
Net loss -- -- -- -- (4,167,723) (4,167,723)
Conversion of preference shares 2,041,674 -- 20,417 4,934,583 -- 4,955,000
Compensation costs for stock options -- -- -- 252,002 -- 252,002
Stock options exercised 298,678 -- 2,987 58,083 -- 61,070
Acquisition of Xplor and Lomak 4,074,342 -- 40,743 8,463,572 -- 8,504,315
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1997 9,736,815 $ -- 97,368 15,010,189 (7,533,651) 7,573,906
========== ======= ====== ========== ========== ==========
</TABLE>
F-5
See accompanying notes to consolidated financial statements.
<PAGE> 42
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ---------- ----------
Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $(4,167,723) (2,006,818) (696,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization
of oil and gas properties 1,078,942 76,286 122,659
Other depreciation and amortization 241,198 59,635 54,860
Impairments, abandoned leases, and
dry hole costs 1,113,335 981,178 243,811
Gain on sales of property and
equipment (4,920) (124,369) (340,170)
Loss (gain) on investment transactions -- (115,423) --
Compensation expense for stock options 252,002 283,430 --
Changes in operating assets and liabilities:
Trade accounts receivable (1,181,821) (332,691) 648,131
Prepaid expenses and other (71,277) 68,138 (337,090)
Trade accounts payable 1,564,483 516,708 (2,174,407)
Advances from interest owners (327,039) 187,493 (277,435)
Other liabilities 226,778
----------- ---------- -----------
Net cash used in
operating activities (1,276,042) (406,433) (2,756,015)
----------- ---------- -----------
Investing Activities:
Capital expenditures (4,394,687) (2,401,351) (403,772)
Cash acquired in business combination 2,920,630 -- --
Net proceeds on sale of investment securities -- 165,423 6,850
Proceeds from sales of property and equipment 97,908 331,620 471,739
----------- ---------- ----------
Net cash provided by (used in)
investing activities (1,376,149) (1,904,308) 74,817
----------- ---------- ----------
Financing Activities:
Net proceeds from issuance of long-term debt
and revolving credit agreement 2,277,824 150,000 --
Principal payments on long-term debt (272,495) (150,000) (122,331)
Distributions -- (2,650,908) (72,000)
Deferred financing costs (35,689) (289,267) --
Proceeds from issuance of stock -- 5,981,740 --
Proceeds from options exercised 61,070 -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 2,030,710 3,041,565 (194,331)
----------- ---------- ----------
Increase (decrease) in cash and equivalents (621,481) 730,824 (2,875,529)
Cash and equivalents, beginning of year 1,303,917 573,093 3,448,622
----------- ---------- ----------
Cash and equivalents, end of year $ 682,436 1,303,917 573,093
=========== ========== ==========
</TABLE>
F-6
See accompanying notes to consolidated financial statements.
<PAGE> 43
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) ORGANIZATION AND BUSINESS COMBINATION
Venus Exploration, Inc. (the Company) is primarily engaged in the business
of exploring for, acquiring, developing and operating on-shore oil and
gas properties in the United States. The Company presently has oil and
gas properties, acreage and production in ten states.
On May 21, 1997, Venus Exploration, Inc. (the Company), then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of the Company's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, the Company
acquired certain oil and gas properties of two wholly-owned affiliates of
Lomak Petroleum, Inc. (together, "Lomak") in exchange for 2,037,171 shares
of the Company's previously authorized and unissued shares of common stock
and warrants to purchase 272,353 additional shares of common stock. At the
same time, Lomak acquired from existing stockholders of the Company 97,008
shares of common stock. As a result of these transactions (collectively,
the "Acquisition") the former stockholders of New Venus acquired, as of the
effective date of the Acquisition, 58% of the Company's outstanding stock
and thus voting control, and Lomak acquired 22%, while the preexisting
stockholders of the Company owned 20%. On June 4, 1997 Xplor changed its
name to Venus Exploration, Inc.
For financial reporting purposes, the transactions described above have
been accounted for as a reverse acquisition whereby New Venus is deemed to
be the acquirer. Accordingly, the historical consolidated financial
statements of the Company and predecessor entities are presented as the
historical consolidated financial statements of the Company and the assets
acquired and liabilities assumed from Xplor and Lomak have been recorded at
fair value as of the date of the combination as required under purchase
accounting. The consolidated financial statements reflect the operations
solely of the Company for the periods prior to May 21, 1997, whereas such
financial statements reflect the operations of the combined entities for
the period subsequent to May 21, 1997.
(Continued)
F-7
<PAGE> 44
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND BUSINESS COMBINATION, CONTINUED
The effect of the combination transactions was primarily the recording of
the assets and liabilities of Xplor and Lomak at their fair value. The
combined amounts for Lomak and Xplor were as follows:
(in thousands)
--------------
Cash $ 2,880
Oil and gas properties 5,613
Trade accounts receivable and other 303
Equity securities and investments 151
Trade accounts payable and other liabilities 443
Selected results of operations (in thousands, except per share data) on a
pro forma basis as if the Acquisition had occurred on January 1, 1996 are
as follows:
<TABLE>
<CAPTION>
(Unaudited)
Years ended December 31,
-------------------------
1997 1996
---------- ---------
<S> <C> <C>
Revenues $ 3,347 3,039
========= =========
Net income (loss) $ (4,133) (1,736)
========= =========
Net earnings (loss) per share
(basic and diluted) $ (0.43) (0.18)
========= =========
Number of shares used in calculation 9,717 9,701
========= =========
</TABLE>
The above pro forma financial information does not necessarily reflect
the results of operations that would have occurred had New Venus, Xplor
and Lomak constituted a single entity during such periods.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the financial statements
of Venus Exploration, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(Continued)
F-8
<PAGE> 45
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(b) Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased and money market
accounts to be cash equivalents.
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for its oil
and gas operations. Under this method, the costs of unproved leases and
exploratory wells are initially capitalized pending the results of
exploration efforts. The costs of unproved properties are assessed
periodically for impairment, on a field-by-field basis, and a loss is
recognized to the extent, if any, that the cost of a property has been
impaired.
Exploration expenses, including geological and geophysical costs, delay
rentals, and dry hole costs are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but are charged to
expense if and when the well is determined to be unsuccessful.
As unproved properties are determined to be productive, the property
acquisition costs and related exploratory drilling costs of successful
wells are transferred to proved properties. Development costs of proved
properties, including producing wells and related facilities and any
development dry holes, are capitalized. Depreciation, depletion, and
amortization of the costs of proved properties are provided by the
unit-of-production method based upon estimates of proved oil and gas
reserves on a field-by-field basis.
Capitalized costs of proved properties are periodically reviewed for
impairment on a field-by-field basis, and, if necessary, an impairment
provision is recognized to reduce the net carrying amount of such
properties to their estimated fair values.
(d) Other Property and Equipment
Depreciation and amortization of transportation equipment and office
furniture, fixtures, equipment, and leasehold improvements are computed
using the straight-line method over the respective estimated useful
lives. Maintenance, repairs and renewals are charged to operations,
except that renewals which extend the life of the property are
capitalized.
(Continued)
F-9
<PAGE> 46
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax effects of temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax laws or rates is recognized in income in the period that includes
the enactment date.
New Venus' predecessor, Venus Oil Company, elected Subchapter S
Corporation status for U.S. federal income tax purposes. Under the
Subchapter S provisions, the stockholders of Venus Oil Company are
liable for any U.S. federal income taxes related to taxable income of
Venus Oil Company. Accordingly, no U.S. federal income taxes related to
the operations of Venus Oil Company are reflected in the accompanying
consolidated financial statements.
(f) Revenue Recognition
The Company records revenue following the entitlement method of
accounting for gas imbalances. As of December 31, 1997 and 1996, there
were no significant imbalances. Three customers accounted for
approximately 22%, 10% and 10% of total consolidated revenues for the
year ended December 31, 1997. Three customers accounted for
approximately 31%, 17% and 10% of total consolidated revenues for the
year ended December 31, 1996. Two customers accounted for approximately
15% each of total revenues for the year ended December 31, 1995.
(g) Deferred Financing Costs
Deferred financing costs at December 31, 1997 and 1996 consist of costs
associated with obtaining the Company's debt agreements (see note 5)
which are amortized over the expected term of the related borrowings.
(h) Other Assets
Other assets include organizational costs which are amortized over five
years, a certificate of deposit and investment in equity securities.
(Continued)
F-10
<PAGE> 47
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(i) Hedging Transactions
The Company enters into commodity derivative contracts for non-trading
purposes as a hedging strategy to manage commodity prices associated
with certain oil and gas sales and to reduce the impact of price
fluctuations. The Company primarily uses price swaps for production on
properties pledged under the loan agreement discussed in note 5.
The Company utilizes the hedge or deferral method of accounting for
commodity derivative financial instruments whereby gains and losses on
these hedging instruments are recognized and recorded as revenues on the
statement of operations when the related natural gas or oil has been
produced, purchased or delivered. As a result, gains and losses on
commodity financial instruments are generally offset by similar changes
in the realized prices of natural gas and crude oil. To qualify as
hedging instruments, these instruments must be highly correlated to
anticipated future sales such that the Company's exposure to the risks
of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines in
the market price of natural gas and crude oil, the commodity financial
instruments may also limit the Company's gain from increases in the
market price of natural gas and crude oil.
On December 2, 1996, the Company entered into a financial swap, as
required under one of the loan agreements discussed in note 5, whereby
the counterparty agrees to pay the Company the difference between the
floating price and the fixed price for certain volumes of production in
future months (commencing with January 1997 production) should the
floating price fall below the negotiated fixed price of $2.0497 per
mmbtu for natural gas or $19.045 per barrel for oil, respectively.
Should the floating price exceed the fixed price for natural gas or oil,
the Company is required to remit the difference to the counterparty. As
of December 31, 1997 quantities hedged are 81,996 mmbtu's of natural gas
and 28,656 barrels of oil. This financial swap agreement expires
December 31, 2001. As of December 31, 1997, the estimated fair value of
the Company's swap positions was a net receivable of approximately
$34,000 based upon an estimate of what the Company would receive if the
contracts were liquidated.
The Company had no such hedging transactions in 1995.
(Continued)
F-11
<PAGE> 48
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) Stock-Based Compensation
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, allows companies to adopt a fair value based
method of accounting for stock-based employee compensation plans or to
continue to use the intrinsic-value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has elected to
account for stock-based compensation under the intrinsic-value method
under the provisions of APB Opinion No. 25 and related interpretations.
Under this method, compensation expense is recognized for stock options
when the exercise price of the options is less than the value attributed
to the stock on the date of grant.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines, and penalties are recorded when it is probable that a
liability has been incurred and that the related amount can be
reasonably estimated.
(m) Fair Values of Financial Instruments
The Company's financial instruments consist primarily of short-term
trade receivables or payables or issued debt instruments with floating
interest rates for which management believes fair value approximates
carrying value. Also see note 2(i).
(n) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Company places its temporary cash
investments in U.S. Government securities and in other high quality
financial instruments. The Company's customer base consists primarily of
independent oil and natural gas producers and purchasers of oil and gas
products.
(Continued)
F-12
<PAGE> 49
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(o) Earnings (loss) per share
Basic net earnings (loss) per common share is computed by dividing net
loss by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed by assuming the issuance
of common shares for all dilutive potential common shares outstanding.
In 1997, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share" which changed the calculation and
financial statement presentation of earnings per share. Prior year
earnings per share amounts have been restated.
The 3,322,121 shares of common stock issued in 1996 by Venus Energy PLC
to capitalize Venus Exploration, Inc. have been treated as outstanding
for all of 1996 for purposes of calculating earnings per share. Earnings
per share amounts for 1995 have not been presented because the
predecessor company is a privately-held subchapter S Corporation.
(p) Reclassifications
Certain amounts for prior periods have been reclassified in the
consolidated financial statements to conform to the current
presentation.
(3) OIL AND GAS PROPERTIES
Oil and gas properties consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Proved properties $ 10,207,906 2,274,830
Unproved property 871,151 300,110
------------- -----------
11,079,057 2,574,940
Less accumulated depreciation,
depletion, and amortization (1,978,102) (895,243)
------------- -----------
$ 9,100,955 1,679,697
============= ===========
</TABLE>
Included in proved properties is the Company's interest in the 1990 Special
Credit Drilling Partnership, Ltd. ("SCDP"). As managing general partner, the
Company receives fees from SCDP for management services, overhead, and the
transportation and marketing of production.
(Continued)
F-13
<PAGE> 50
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) OIL AND GAS PROPERTIES, CONTINUED
The impairment of oil and gas properties recognized in 1997 and 1996
includes a write-down of unproved properties of approximately $0 and
$254,000, respectively, and write-downs of proved properties of
approximately $1,052,000 and $727,000, respectively. Impairment is
recognized only if the carrying amount of a property is greater than its
expected future cash flows. The amount of the impairment is based on the
estimated fair value of the property.
(4) OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Transportation equipment $ 72,573 91,422
Furniture, fixtures and office equipment 452,236 343,378
Geophysical interpretation system 118,516 -
Office leasehold improvements - 36,225
----------- -----------
643,325 471,025
Less accumulated depreciation and
amortization (369,933) (368,292)
----------- -----------
$ 273,392 102,733
=========== ===========
(5) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
Revolving credit due on June 30, 2000 $ 500,000
(classified as a current liability)
Subsidiary term loan due October 8, 2005 1,505,329
-----------
$ 2,005,329
===========
</TABLE>
Revolving Credit
In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement
was restated and amended to increase the credit facility to $50,000,000
subject to borrowing base determined every six months (April 1 and
October 1) by the bank based on the Company's oil and gas reserves which
are used as security for the loan. Interest on related borrowings is
based on either of two methods at the option of the Company: the bank's
prime lending rate or LIBOR plus 1.75%. For balances outstanding at
December 31, 1997 the Company chose the bank's prime lending rate (8.5%
at December 31, 1997).
(Continued)
F-14
<PAGE> 51
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated financial statements
(5) LONG-TERM DEBT
Revolving Credit, continued
A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly and principal payments are required
only when the balance outstanding exceeds or is projected to exceed, prior
to the next borrowing base redetermination date, the borrowing base. Under
the terms of the restated and amended loan agreement, the initial borrowing
base is $2,500,000, and it increases to $5,250,000 upon the Company
obtaining and submitting to the bank certain documents related to a portion
of the properties securing the loan. As of December 31, 1997, the borrowing
base was $2,500,000 and the amount drawn by the Company was $500,000
resulting in an unused borrowing base of $2,000,000.
Under the terms of the credit facility, the Company is required to maintain
specified levels of current ratio and tangible net worth. Among other
matters, the credit facility contains covenants which limit the incurrence
of additional indebtedness and restrict payments of dividends. At December
31, 1997, the Company was not in compliance with the tangible net worth
requirement. The Company obtained a waiver from the lender as of December
31, 1997 which included a reduction in tangible net worth requirement to
$7,500,000. However, because of uncertainty regarding the Company's ability
to remain in compliance with this covenant through the first quarter of
1998, the outstanding balance has been classified as a current liability in
the accompanying financial statements.
During 1996, the Company entered into a line of credit agreement with a
bank under which the Company could borrow up to $325,000. Interest on
amounts borrowed under the line of credit agreement was based on the bank's
prime rate. During 1996, the Company borrowed and repaid $150,000 under the
line of credit agreement.
The line of credit agreement was terminated in October 1996.
Subsidiary Term Loan
In October 1996, Venus Development, Inc. (Development) entered into a term
loan and security agreement with a lender to finance the acquisition and
development of oil and gas properties. Under the agreement, Development
could have borrowed up to approximately $2.6 million to finance the
development of specified oil and gas properties. Such borrowings are
subject to limitations based on the value of the proved reserves of the
properties. The borrowings for the specified properties are to be repaid
over a period not to exceed five years from the date of closing of the
agreement.
(Continued)
F-15
<PAGE> 52
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LONG-TERM DEBT, CONTINUED
Subsidiary Term Loan, continued
In addition, Development may borrow up to approximately $17.4 million to
finance the acquisition and development of new properties, subject to
limitations based on the value of Development's proved reserves
attributable to properties Development has agreed to include as security
for such loan. In addition, all of Development's outstanding capital stock
is pledged as additional security for the borrowings. Development's net
assets, excluding the term loan, totaled approximately $1,569,000 at
December 31, 1997. Borrowings for the acquisition and development of new
properties must be drawn within two years from the date of closing of the
agreement and must be repaid within seven years from the date of the first
drawdown. Development is required to pay a drawdown fee to the lender of
one percent of each drawdown under the agreement. Borrowings under the
agreement bear interest at the prime rate (8.5% at December 31, 1997) plus
one percent. As of December 31, 1997, Development had borrowed $1,505,329
under the agreement. Based on the value of the proved reserves of the
secured properties, approximately $174,000 was available under the
agreement at December 31, 1997 to finance the development of the specified
secured properties.
Payments on borrowings under the agreement are based on 85 or 90 percent of
the net revenue, as defined in the agreement, from the secured properties,
depending on the value of the proved reserves of the secured properties
relative to the outstanding loan balance.
Under the agreement, Development is required to assign an overriding
royalty interest equal to five percent of the Company's net revenue
interest in the secured properties. The lender had the right to convert the
value of its overriding royalty interests into equity interests of Venus
Energy PLC, subject to certain limitations. Development also granted
warrants to the lender to purchase equity interests in Venus Energy PLC,
subject to certain limitations. The estimated fair values of the royalty
interests assigned as of December 31, 1997 and 1996 of $88,718 and $57,500,
respectively, and the estimated fair value of the warrants issued as of
December 31, 1996 of $25,000 have been recorded as deferred financing costs
and are amortized as additional interest over the term of the agreement.
At December 31, 1996, under the terms of the agreement, the lender had
warrants and certain conversion rights with respect to these overriding
royalty interests as described above. During 1997 the agreements creating
these warrants and conversion rights were amended such that all of lender's
conversion rights and warrants are exercisable against a pool of shares
owned by certain of the Company's shareholders. Neither the Company nor
Development has any obligations as of December 31, 1997, with respect to
the lender's conversion rights or warrants.
(Continued)
F-16
<PAGE> 53
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LONG-TERM DEBT, CONTINUED
Subsidiary Term Loan, continued
The lender shall have the right to purchase at competitive market prices
all crude oil or natural gas produced from or allocable to the secured
properties including, without limitation, all of the production
attributable to Development's net revenue interest in the secured
properties subject to the rights of other working interest and royalty
interest owners. The term of the purchase and sale agreement extends seven
years with three additional one-year options.
The loan agreement requires, among other matters, maintenance of a minimum
working capital amount. Development was either in compliance with, or had
obtained waivers with respect to, these covenants as of December 31, 1997.
(6) INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1997 and 1996 due to the losses recorded by the Company. The
Company's predecessor, Venus Oil Company, elected Subchapter S Corporation
status for U.S. federal income tax purposes. Under the Subchapter S
provisions, the stockholders of Venus Oil Company are liable for any U.S.
federal income taxes related to taxable income of Venus Oil Company.
Accordingly, no U.S. federal income taxes related to the operations of
Venus Oil Company are reflected in the accompanying consolidated financial
statements.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Oil and gas and other property and
equipment, principally due to differences
in depreciation and amortization $ -- 922,000
Stock option expense recorded for
financial reporting purposes 198,000 96,000
Net operating loss carryforwards 1,595,000 253,000
----------- ----------
Total gross deferred tax assets 1,793,000 1,271,000
Less valuation allowance (1,697,000) (1,271,000)
----------- ----------
Net deferred tax assets 96,000 --
Deferred tax liabilities:
Deferred financing costs,
principally due to
differences in amortization (53,000) --
Oil and gas and other property
and equipment, principally
due to differences in
depreciation and amortization (43,000) --
----------- ----------
Net deferred tax asset $ -- --
=========== ==========
</TABLE>
(Continued)
F-17
<PAGE> 54
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) INCOME TAXES, CONTINUED
The valuation allowance for deferred tax assets as of January 1, 1997 and
1996 was $1,271,000 and $0, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of $426,000 and $1,271,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. The net deferred
tax asset at December 31, 1997 and 1996 has been offset entirely by a
valuation allowance due to the uncertainty of the ultimate realization of
such benefits.
As of December 31, 1997, the Company had an estimated net operating loss
carryforward for U.S. federal income tax purposes of approximately
$4,311,000 which is available to offset future taxable income, if any,
through 2012. The utilization of the Company's net operating loss
carryforwards may be limited as a result of the transactions referred to in
note 1.
The Company intends to liquidate Venus Energy PLC, an inactive U.K.
subsidiary. Management of the Company believes that there will be no
significant tax obligations in the United Kingdom as a result of such
liquidation.
(7) SHAREHOLDERS' EQUITY
The New Venus Exploration, Inc. ("New Venus") was formed to be the
successor entity to certain oil and gas exploration, development, and
production operations of Venus Energy PLC and Venus Oil Company as
described below. Venus Energy PLC and subsidiaries were organized in 1996
to acquire certain oil and gas exploration, development, and production
operations of Venus Oil Company. Venus Energy PLC and subsidiaries
commenced operations effective July 1, 1996 upon the transfer of certain
oil and gas properties from Venus Oil Company.
All share and per share information related to shares issued to effect the
original organization transactions described herein (the "convertible
shares") have been restated to present their equivalent number of shares of
the Company's common stock.
Venus Energy PLC was incorporated on May 15, 1996 as a public limited
company in the United Kingdom. Upon formation, the shareholders of Venus
Oil Company contributed $26,740 to Venus Energy PLC in exchange for
2,910,077 shares.
(Continued)
F-18
<PAGE> 55
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SHAREHOLDERS' EQUITY, CONTINUED
Venus Exploration, Inc. ("Old Venus") was incorporated in the state of
Texas on May 16, 1996 as a wholly-owned subsidiary of Venus Energy PLC.
Upon formation, Old Venus paid $22,500 to Venus Oil Company for an option
that would allow Old Venus to acquire certain oil and gas properties from
Venus Oil Company for $2,000,000.
Venus Energy PLC raised $4,955,000 from the sale of 247,750 convertible
redeemable preference shares through a private offering to new investors.
Venus Energy PLC contributed substantially all of the proceeds of the
private offering to Old Venus. Effective July 1, 1996, Old Venus exercised
its option to acquire certain oil and gas properties from Venus Oil Company
for $2,000,000. Venus Oil Company then paid $1,000,000 to acquire 412,044
convertible shares of Venus Energy PLC. Venus Energy PLC subsequently
contributed substantially all of the proceeds from the sale of the shares
to Old Venus.
In September 1996, Venus Development, Inc. was incorporated in the State
of Texas as a wholly-owned subsidiary of Old Venus. Certain oil and gas
properties were transferred from Old Venus to Venus Development, Inc.
The oil and gas properties and the stock of Venus Development, Inc. have
been pledged as security for borrowings under one of the debt agreements
described in note 5.
Old Venus acquired oil and gas properties with a net financial statement
carrying amount of $532,820 from Venus Oil Company for $2,022,500 in 1996.
In addition, Old Venus paid Venus Oil Company $111,908 for certain other
assets with a net financial statement carrying amount of $67,704. The
properties and other assets transferred from Venus Oil Company have been
recorded by Old Venus at the net carrying amounts of such properties and
other assets in the financial statements of Venus Oil Company at the time
of transfer. The amounts paid to Venus Oil Company for the properties and
other assets and the remaining net assets of Venus Oil Company which were
not transferred to Venus Energy PLC or its subsidiaries of $1,430,555,
including cash of $481,280, have been recorded as distributions in the 1996
statement of shareholder's equity.
As described in note 1, in a series of related transactions in 1997, the
shareholders of Venus Energy PLC, became the shareholders of New Venus, and
New Venus succeeded to the assets of Old Venus. The shareholders of Venus
Energy PLC exchanged their shares for the outstanding shares of New Venus,
and the assets and liabilities of Old Venus were transferred to the New
Venus. In conjunction with the Acquisition described below the 247,750
convertible redeemable preference shares were converted into 2,041,674
common shares.
(Continued)
F-19
<PAGE> 56
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SHAREHOLDERS' EQUITY, CONTINUED
As described in note 1, on May 21, 1997, the Company, then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of Xplor's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, Xplor acquired
certain oil and gas properties of two wholly-owned affiliates of Lomak
Petroleum, Inc. (together, "Lomak") in exchange for 2,037,171 shares of
Xplor's previously authorized and unissued shares of common stock and
warrants to purchase 272,353 additional shares of common stock. At the same
time, Lomak acquired from an existing stockholder of Xplor 97,008 shares of
common stock. On June 4, 1997 Xplor changed its name to Venus Exploration,
Inc.
(8) RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Company have working interests in
certain properties operated by the Company. In addition, they participate
with the Company in developing certain properties. Management believes
these transactions are conducted on a basis similar to transactions with
third parties.
The Company receives $2,500 per month from Venus Oil Company, which is
owned by certain shareholders of the Company, for overhead reimbursement
of certain administrative costs. Prior to 1997, the Company had a program
whereby certain officers and employees were awarded overriding royalty
interests in certain properties prior to their development. The value of
such interests at the time of award was not significant.
At December 31, 1997, trade accounts payable include $68,762 due to Venus
Oil Company. Included in trade accounts receivable at December 31, 1996 is
$6,848 due from Venus Oil Company.
(9) STOCK OPTIONS
The Company has adopted an incentive plan that authorizes the grant of
awards to employees, consultants, contractors and non-employee directors.
The awards to employees, consultants and contractors can be in the form of
options, stock appreciation rights, stock or cash. The awards to
non-employee directors are limited to grants for shares of the Company's
common stock. The plan is administered by the compensation committee of
the Company's board of directors.
(Continued)
F-20
<PAGE> 57
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) STOCK OPTIONS, CONTINUED
The number of shares of the Company's common stock that is subject to the
incentive plan is 10% of the Company's outstanding shares up to a maximum
of 1,500,000 shares, less the number of shares that were subject to
previous plans of the Company and that are not assumed by the current
incentive plan. As of December 31, 1997, the Company had reserved 653,365
shares for the incentive plan.
As of December 31, 1997 there had been no awards under the 1997 incentive
plan, however, the Company assumed certain outstanding stock options of
Xplor as a result of the Acquisition.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1997 1996
--------------------- --------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
------- -------- ------- ----------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 262,678 $ 0.389 -- --
Options granted -- -- 262,678 .389
Assumed from Xplor 426,000 1.770 -- --
Options exercised (298,678) 0.204 -- --
-------- --------
Options outstanding,
end of period 390,000 1.782 262,678 0.389
======== ========
Options exercisable,
end of period 350,415 1.814 133,914 0.753
======== ========
</TABLE>
(Continued)
F-21
<PAGE> 58
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) STOCK OPTIONS, CONTINUED
The following summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------------
Weighted average
Range of Number remaining contractual Weighted average
exercise price outstanding life exercise price
-------------- ----------- ---- --------------
<S> <C> <C> <C> <C>
$1.25 - $1.3125 120,000 6.19 years $1.30
$1.50 160,000 7.25 years $1.50
$1.875 - $2.125 50,000 6.70 years $2.03
$3.29 60,000 4.92 years $3.29
</TABLE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, under which no compensation expense is recognized when
options are granted with an exercise price equal to the fair value of the
Company's common stock on the date of grant. In addition, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("FAS No. 123") for disclosure purposes in
1996. The Company granted no stock options during 1997 or 1995. Options
issued during 1996 were issued at a strike price below fair market price.
The compensation expense reported by the Company was equal to the expense
that would have been recognized under FAS No. 123.
The Company granted options to certain directors to acquire 221,474 shares
at an exercise price of $0.01 per share. The Company has recognized
compensation expense and a corresponding increase in additional
paid-in-capital of $252,002 in 1997 and $283,430 in 1996 related to the
these options. The Company has also granted options to special counsel to
acquire 41,204 shares. The compensation expense reported by the Company
approximates the expense that would have been recognized under FAS No. 123.
(Continued)
F-22
<PAGE> 59
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) EMPLOYEE BENEFIT PLAN
The Company has a Profit Sharing 401(k) Plan (the Plan). Benefits under the
Plan are based on the participants vested interests in the value of their
respective accounts at the time the benefits become payable as a result of
retirement, separation from service, or other events. Eligible participants
include all Company employees who have reached age 21 and have completed
three months of service with the Company. Employees may elect to contribute
a portion of their base compensation to the Plan. The Company may make
matching contributions on behalf of the participants based on actual
participant contributions. Employer contributions are discretionary. The
Company made contributions to the plan of $7,734, $4,643, and $5,010 for
1997, 1996, and 1995, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain automobiles under noncancelable
operating leases. The following is a schedule of future minimum lease
payments under noncancelable operating leases with initial or remaining
lease terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C> <C>
1998 $ 267,445
1999 263,959
2000 261,040
2001 249,830
2002 255,580
---------------
Total future minimum lease payments $ 1,297,854
===============
</TABLE>
Rental expense under operating leases was $201,057, $101,524, and $102,120
for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company is involved in various claims and legal actions in the ordinary
course of business. Management believes the ultimate disposition of these
matters will not have a material effect on the financial statements.
(Continued)
F-23
<PAGE> 60
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(a) Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs:
Proved $5,640,955 -- --
Unproved 224,650 569,906 144,118
Exploration costs 1,340,081 92,287 311,072
Development costs 2,612,224 1,614,881 241,839
</TABLE>
The proved property acquisition costs for 1997 includes the properties
acquired from Lomak and Xplor.
(b) Results of Operations for Oil and Gas Producing Properties
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Oil and gas revenues $ 2,476,040 543,233 798,233
Production expense (963,822) (286,030) (479,950)
Exploration expenses, including
dry holes (504,983) (116,905) (532,222)
Impairment of oil and gas properties (1,051,617) (981,178) --
Depreciation, depletion
and amortization (1,078,942) (76,286) (122,659)
----------- ----------- -----------
Operating profit (loss) (1,123,324) (917,166) (336,598)
Income tax expense -- -- --
----------- ----------- -----------
Results of operations from
producing activities $(1,123,324) (917,166) (336,598)
=========== =========== ===========
</TABLE>
(Continued)
F-24
<PAGE> 61
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
(c) Reserve Quantity Information
The following table presents the Company's estimate of its proved oil
and gas reserves, all of which are located in the United States. The
Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir
engineers, in conjunction with the Company's internal petroleum
reservoir engineers.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Oil Gas Oil Gas Oil Gas
(mbbl) (mmcf) (mbbl) (mmcf) (mbbl) (mmcf)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND
UNDEVELOPED RESERVES:
Beginning of the year 225 1,460 446 2,326 259 3,874
Revision of previous
estimates (9) (159) (198) (797) 221 (1,372)
Extensions, discoveries and
additions 251 1,838 -- -- -- --
Purchases 591 3,762 -- -- -- --
Production (81) (410) (23) (69) (34) (176)
------ ------ ------ ------ ------ ------
End of year 977 6,491 225 1,460 446 2,326
====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES:
Beginning of the year 107 523 125 356 73 500
====== ====== ====== ====== ====== ======
End of the year 634 5,337 107 523 125 365
====== ====== ====== ====== ====== ======
</TABLE>
(d) Standardized Measure of Discounted Future Net Cash Flows
The Company's standardized measures of discounted future net cash
flows and changes therein as of December 31, 1997, 1996 and 1995 are
provided based on present values of future net revenues from proved
oil and gas reserves estimated by independent petroleum engineers in
conjunction with the Company's internal petroleum reservoir engineers
in accordance with guidelines established by the Securities and
Exchange Commission.
(Continued)
F-25
<PAGE> 62
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
These estimates were computed by applying appropriate current oil and
natural gas prices to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming
continuation of existing economic conditions. Year ended 1997
calculations were made utilizing average prices for oil and natural gas
that existed at December 31, 1997 of $17.56 per barrel and $2.49 per Mcf,
respectively. Income taxes are computed by applying the statutory federal
income tax rate to the net cash inflows relating to proved oil and gas
reserves less the tax bases of the properties involved and giving effect
to net operating loss carryforwards, tax credits and allowances relating
to such properties. The reserve volumes provided by the independent
petroleum engineers are estimates only and should not be construed as
exact quantities. These reserves may or may not be recovered and may
increase or decrease as result of future operations of the Company and
changes in market conditions.
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash inflow $ 33,097 7,955 12,535
Future development costs (2,840) (889) (1,764)
Future production costs (11,421) (2,481) (3,537)
-------- -------- --------
Future net cash flows before
income taxes 18,836 4,585 7,234
10 % annual discount (7,439) (1,633) (2,898)
Discounted income taxes * * *
-------- -------- --------
Standardized measure of
discounted future net
cash flows $ 11,397 2,952 4,336
======== ======== ========
</TABLE>
(*) No income tax expense has been reflected as the operations were
conducted by Venus Oil Company, the New Venus' predecessor which is an S
Corporation, and the Company had operating loss carryforwards from oil and
gas operations and sufficient tax basis in oil and gas properties to offset
the future net cash flows before income taxes.
(Continued)
F-26
<PAGE> 63
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
(e) Principal Sources of Changes in the Standardized Measure of Discounted
Future Net Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Standardized measure of discounted
future net cash flows, beginning
of year $ 2,952 4,336 5,105
Revisions of previous quantity estimates (649) (3,937) (1)
Net changes in prices and production costs (800) 589 181
Changes in estimated future development costs 314 208 691
Development costs incurred during period that
reduced future development costs 494 1,200 132
Purchases 6,115 -- --
Extensions or discoveries 4,188 -- --
Sales of oil and gas produced during period,
net of production costs (1,512) (257) (318)
Accretion of discount 295 434 511
Other (changes in production rates, timing
and other) -- 379 (1,965)
-------- -------- --------
Standardized measure of discounted
future net cash flows, end of year $ 11,397 2,952 4,336
======== ======== ========
</TABLE>
(Continued)
F-27
<PAGE> 64
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 (in thousands, except
per share data) are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1997
Oil and gas revenues $ 135 624 1,174 543 2,476
Operating profit (loss) (1,092) (556) (431) (1,968) (4,047)
Net income (loss) (1,121) (579) (456) (2,012) (4,168)
Earnings (loss) per share -
basic and diluted (0.34) (0.09) (0.05) (0.21) (0.57)
1996
Oil and gas revenues 159 160 110 114 543
Operating profit (loss) (227) (182) (523) (1,360) (2,292)
Net income (loss) (238) 80 (504) (1,345) (2,007)
Earnings (loss) per share -
basic and diluted (0.07) 0.02 (0.15) (.40) (0.60)
</TABLE>
The fourth quarters of 1997 and 1996 include adjustments to reflect the
impairment of oil and gas properties of approximately $620,000 and
$981,000, respectively. Also included in the fourth quarter of 1997 is an
adjustment of approximately $425,000 to record reversals of oil and gas
revenues which had been estimated through the third quarter principally
related to the properties from the Acquisition. Quarterly information
presented above has been restated from the applicable 10-Q's to (a) conform
with presentations utilized in the 1997 year end financial statements
included herein and (b) to present basic and diluted earnings per share in
conformity with FAS No. 128 including the exclusion of the convertible
redeemable preference shares from basic earnings per share for the period
prior to their conversion to common shares. The sum of the quarterly
earnings per share will not necessarily equal earnings per share for the
entire year.
(14) Supplemental Disclosure of Cash Flow Information
The Company paid $203,213, $10,331, and $27,401 for interest in 1997, 1996
and 1995, respectively. The Company assigned overriding royalty interests
to a lender totaling $88,718 and $57,500 for 1997 and 1996, respectively.
In 1997 the Company issued 4,074,342 shares of common stock to acquire the
assets and liabilities of Xplor and Lomak totaling $8,504,315. In
connection with the Acquisition, the convertible redeemable preference
shares outstanding at December 31, 1996 were converted to 2,041,674 common
shares.
F-28
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
EX 3.1
EX 3.2
EX 4.1
EX 4.2
EX 9
EX 10.10
EX 10.11
EX 21
EX 23.1
EX 23.2
EX 27
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
XPLOR CORPORATION
ARTICLE ONE
The name of the Corporation is Xplor Corporation.
ARTICLE TWO
The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE FOUR
The Corporation shall have authority to be exercised by the Board of
Directors, to issue 25,000,000 shares of common voting stock of the par value
of $.01 per share (the "Common Stock") having an aggregate par value of
$250,000 and 10,000,000 shares of preferred stock of the par value of $.01 per
share (the "Preferred Stock") having an aggregate par value of $100,000.
Shares of the Preferred Stock shall be designated as the Board of Directors may
determine and may be issued in series by Board of Directors as hereinafter
provided in paragraph (d) below. The relative rights and preferences of the
share of capital stock of the Corporation shall be as follows:
(a) Each holder of Common Stock shall at eery meeting of
stockholders of the Corporation be entitled to one vote in person or by proxy
for each share of Common Stock held by such holder and each holder of Preferred
Stock with voting rights shall at every meeting of stockholders of the
Corporation be entitled to one vote in person or by proxy for each share of
Preferred Stock with voting rights held by such holder to the extent of such
rights as specified pursuant to paragraph (c) (vii) below.
(b) Subject to the rights, if any, of the holders of the
Preferred Stock, or any series thereof, the holders of the Common Stock are
entitled to the entire voting power, all dividends declared and paid by the
Corporation and all assets of the corporation in the event of any liquidation,
dissolution, or winding up of the Corporation.
<PAGE> 2
(c) The Preferred Stock may be divided into and issued
from time to time in one or more series. All shares of the Preferred Stock
shall be of equal rank and shall be identical, except with respect to the
particulars that may be fixed by the Board of Directors as hereinafter provided
pursuant to authority that is hereby expressly vested in the Board of
Directors; provided, however, that each share of a given series of the
Preferred stock shall be identical in all respects with the other shares of
such series. Before any shares of the Preferred Stock of any particular series
shall be issued, the Board of Directors shall fix and determine, in the manner
provided by law, the following particulars with respect to the share of such
series:
(i) the distinctive designation of such series
and the number of share of Preferred Stock that shall
constitute such series, which number may be increased
(except where otherwise provided by the Board of
Directors in creating such series) or decreased (but
not below the number of shares of such series then
issued) from time to time by the Board of Directors
by resolution;
(ii) the dividend or rate of dividend payable with
respect to shares of Preferred Stock of such series,
the time of payment of any dividend, whether
dividends shall be cumulative and, if so, the
conditions under which and the date from which
dividends shall be accumulated;
(iii) the redemption provisions applicable to the
shares of Preferred Stock of such series, if any, and
if applicable, the time or times when, the price or
prices at which, and the other terms and conditions
under which the shares of Preferred Stock of such
series shall be redeemable;
(iv) the amount payable on shares of Preferred
Stock of such series in the event of any voluntary or
involuntary dissolution, liquidation or winding up of
the affairs of the Corporation, which shall not be
deemed to include the merger or consolidation of the
Corporation or a sale, lease or conveyance of all or
part of the assets of the Corporation;
(v) the purchase, retirement or sinking fund
provisions, if any, for the redemption or purchase of
shares of Preferred Stock of such series;
(vi) the rights, if any of the holders of shares
of Preferred Stock of such series to convert such
shares into or exchange such shares for shares of the
Common Stock or shares of any
<PAGE> 3
other series of the Preferred Stock and the terms and
conditions of such conversion or exchange;
(vii) subject to paragraph (a) above, the extent of
voting rights of the shares of Preferred Stock of
such series of the absence thereof; and
(viii) such other terms limitations, rights and
preferences, if any, of such series as the Board of
Directors may lawfully fix under the laws of the
State of Delaware as in effect at the time of certain
of such series.
ARTICLE FIVE
None of the holders of the shares of any class of stock of the
Corporation shall be entitled as matter of right to purchase, subscribe for or
otherwise acquire any new or additional shares of stock of the Corporation of
any class now or hereafter authorized, or any options or warrants to purchase,
subscribe for or otherwise acquire any such new or additional shares, or any
shares, evidences of indebtedness, or any other securities convertible into or
carrying options or warrants to purchase, subscribe for or otherwise acquire
any new or additional shares other than such (if any) as the Board of Directors
may determine from time to time.
ARTICLE SIX
The number of directors which shall constitute the whole Board of
Directors of the Corporation shall be not less than six (6) nor more than ten
(10) and shall be fixed in the By-Laws of the Corporation from time to time.
ARTICLE SEVEN
The power to fill vacancies on the Board of Directors (whether by
reason or resignation or otherwise) shall be vested solely in the Board of
Directors and vacancies may be filled by a majority of the directors then in
office, although less than a quorum, unless all directorships are vacant, in
which case the stockholders shall fill the then existing vacancies.
ARTICLE EIGHT
Special meetings of the stockholders of the Corporation for any
purpose may be called at any time by the Board of Directors, or by a committee
of the Board of Directors which has been duly designated by the Board of
Directors and whose power and authority, as provided in a resolution of the
Board of Directors or in the By-Laws of the Corporation, include the power to
call such meetings, but such special meetings may not be called by any other
person.
<PAGE> 4
ARTICLE NINE
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind the By-Laws of the Corporation, provided that the Board of
Directors may not amend the By-Laws to increase the number of directors above
ten.
ARTICLE TEN
The election of directors need not be by written ballot unless
required by the By-Laws of the Corporation. Any director may be removed,
either for or without cause, at any time, by the affirmative vote of the
holders of record of at least two-thirds (2/3) of the outstanding shares of
stock entitled to vote, and the vacancy in the Board caused by any such removal
shall be filed as provided herein; provided, that where the holders of any
class or series are entitled to elect one or more directors the provisions of
this section shall apply in respect of removal without cause of a director or
directors so elected, to the vote of the outstanding share of that class or
series.
ARTICLE ELEVEN
The Corporation may indemnify, to the fullest extent permitted by the
General Corporation law of the State of Delaware and as provided in the By-laws
of the Corporation, any and all persons whom it shall have the power to
indemnify from and against any and all expenses, liabilities or other matters.
ARTICLE TWELVE
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
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, 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, said compromise or arrangement and 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.
<PAGE> 5
ARTICLE THIRTEEN
The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in this Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation. Notwithstanding
the preceding sentence, the provisions of this Certificate of Incorporation
relating to the power to remove directors or to fill vacancies on the Board and
amendments to the By-laws of the Corporation may not be amended without the
affirmative vote of the holders of two- thirds of the shares entitled to vote
in the election of directors.
ARTICLE FOURTEEN
Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to provisions contained in the statutes) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or By-Laws. Election of directors need not be by written ballot
unless the By-Laws of the Corporation so provide.
ARTICLE FIFTEEN
The name and mailing address of the incorporator is Charles A. Mele,
380 Madison Avenue, New York, New York 10017.
The undersigned, being the sole incorporator hereinbefore name, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, does make this certificate, hereby declaring and
certifying that this the undersigned's act and deed and the facts herein stated
are true, and accordingly has hereunto set his hand this 20th day of August,
1985.
---------------------------
Charles A. Mele
<PAGE> 6
CERTIFICATE OF AMENDMENT
of the
CERTIFICATE OF INCORPORATION
of
XPLOR CORPORATION
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, the undersigned corporation does hereby certify:
FIRST: The Board of Directors of Xplor Corporation (the
"Corporation"), by unanimous written consent in lieu of a meeting, adopted a
resolution setting forth a proposed amendment to the Certificate of
Incorporation of said Corporation, declaring said amendment to be advisable.
The resolution setting forth the proposed amendment is as follows:
RESOLVED: that Article Sixteen be added to
the Certificate of Incorporation of the Corporation:
ARTICLE SIXTEEN: A director of this corporation
shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director except for liability (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 involved intentional misconduct or a knowing violation
of law, (iii) for a stock repurchase which is illegal under
Section 174 of the General Corporation Law of the State of
Delaware or, (iv) for any transaction from which the director
derived an improper personal benefit.
SECOND: Such amendment was approved by the holders of a majority of
the Corporation's outstanding Common Stock entitled to vote thereon.
<PAGE> 7
THIRD: The aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 141 and 242 of the General Corporation
Law of the State of Delaware.
IN WITNESS WHEREOF, Xplor Corporation has caused its corporate seal to
be hereunto affixed and this certificate to be signed by Andrew Stanhope, its
Vice President, and attested by William C. Kaltnecker, its Secretary, this 4th
day of June, 1987.
XPLOR CORPORATION
By
----------------------------------
Andrew Stanhope,
Vice President
ATTEST:
- ----------------------------------
William C. Kaltnecker, Secretary
(Corporate Seal)
<PAGE> 8
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
XPLOR CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is Xplor Corporation.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out the first sentence of Article Fourth thereof and by
substituting in lieu of said sentence the following new sentence:
"Article FOURTH: The Corporation shall have authority
to be exercised by the Board of Directors, to issue 5,000,000
shares of common voting stock of the par value of $.01 per
share (the "Common Stock") having an aggregate par value of
$50,000 and 1,000,000 shares of preferred stock of the par
value of $.01 per share (the "Preferred Stock") having an
aggregate par value of $10,000."
3. The amendment of the Certificate of Incorporation herein
certified has been duly adopted in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Xplor Corporation has caused its corporate seal to
be hereunto affixed and this certificate to be signed by Andrew Stanhope, its
Vice President, and attested by William C. Kaltnecker, its Secretary, this 8th
day of August, 1990.
XPLOR CORPORATION
By:
------------------------------
Andrew Stanhope,
Vice President
<PAGE> 9
Attest:
- --------------------------------------
William C. Kaltnecker, Secretary
(Corporate Seal)
<PAGE> 10
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
VENUS EXPLORATION, INC.
Venus Exploration, Inc. (the "Corporation" or the "Company"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, hereby certifies and adopts the
following Amendment to its Certificate of Incorporation:
FIRST: The dated of filing of the Corporation's original Certificate
of Incorporation with the Secretary of Sate of the State of Delaware was
September 5, 1985.
SECOND: The Board of Directors of the Corporation, by unanimous
consent of its members filed with the minutes of the Board of Directors,
adopted the following resolution:
FURTHER RESOLVED, that it is desirable for the Company to increase the
number of authorized shares of (i) Common Stock from 15 million to 30
million shares and (ii) Preferred Stock from 1 million to 5 million
shares, and to accomplish the same, it is hereby declared advisable
that the Certificate of Incorporation of the Company be amended by
changing the first two sentences of Article FOURTH to read as follows:
The Corporation shall have the authority to be exercised by the Board
of Directors to issue (i) 30 million shares of common voting stock of
the par value of $0.01 per share (the "Common Stock") having an
aggregate par value of $300,000, (ii) 5 million shares of preferred
stock of the par value of $0.01 per share (the "Preferred Stock")
having an aggregate par value of $50,000. Shares of the Preferred
Stock shall be designated as the Board of Directors may determine and
may be issued in series by the Board of Directors as hereinafter
provided in paragraph (c) below.
THIRD: At a special meeting of the shareholders of the Corporation
held on October 28, 1997, stockholders of the Corporation holding in excess of
a majority of the outstanding shares entitled to vote thereon voted in favor of
the amendment in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
FOURTH: The aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
<PAGE> 11
IN WITNESS WHEREOF, said Venus Exploration, Inc., has caused this
certificate to be signed by John Y. Ames, its President, and attested by Will
C. Jones IV, its Secretary, this 7th day of November, 1997.
VENUS EXPLORATION, INC.
ATTEST:
By: By:
----------------------------- ------------------------------------
Will C. Jones, IV John Y. Ames, President
Secretary
<PAGE> 1
EXHIBIT 3.2
VENUS EXPLORATION, INC.
BY-LAWS
VENUS EXPLORATION, INC.
BY-LAWS
<PAGE> 2
VENUS EXPLORATION, INC.
BY-LAWS
Table of Contents
<TABLE>
<S> <C>
SECTION 1
Stockholders' Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Time and Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.5 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.6 Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.7 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8 Judges of Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.9 List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.1 Number, Term, Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.2 Notice of Nominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.3 Organization Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.4 Stated Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.5 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.6 Business of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.7 Time and Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.8 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.9 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.10 Attendance by Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.11 Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.12 Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.13 Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.14 Resignation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.15 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3
Committees of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1 Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2 Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.3 Powers Reserved to the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.4 Election of Committee Members; Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.5 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.6 Quorum and Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
VENUS EXPLORATION, INC.
BY-LAWS
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 4
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.1 Election and Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.3 Duties of Other Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.4 Term of Office and Vacancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.5 Removal of Elected Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.6 Compensation of Elected Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5
Shares and Transfers of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.3 Transfers of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.4 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.5 Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 6
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.1 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.2 Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.3 Signature of Negotiable Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.4 Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.5 Indemnification of Officers, Directors, Employees, Agents and Fiduciaries; Insurance . . . . 8
SECTION 7
By-Law Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 7.1 By the Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 7.2 By the Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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BY-LAWS
OF
VENUS EXPLORATION, INC.
SECTION 1
Stockholders' Meetings
Section 1.1 Annual Meetings. Annual meetings of stockholders
shall be held each year for the purposes of electing directors and transacting
such other business as may properly come before the meeting.
Section 1.2 Special Meetings. Special meetings of stockholders
for any purpose or purposes may be called at any time by the Board of Directors
(the "Board"), or by a committee of the board which has been duly designated by
the Board and whose powers and authority, as provided in a resolution of the
Board or in these By-Laws, include the power to call such meetings, but such
special meetings may not be called by any other person or persons. Special
meetings shall be held solely for the purpose or purposes specified in the
notice of meeting.
Section 1.3 Time and Place of Meetings. Subject to the
provisions of Section 1.1, each meeting of stockholders shall be held on such
date, at such hour and at such place, either within or without the State of
Delaware, as fixed by the Board from time to time or in the notice of the
meeting or, in the case of an adjourned meeting, as announced at the meeting at
which the adjournment is taken.
Section 1.4 Notice of Meetings. A written notice of each meeting
of stockholders, stating the place, date and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called, shall be given either personally or by mail to each stockholder
entitled to vote at the meeting. Unless otherwise provided by statute, the
notice shall be given not less than ten nor more than 60 days before the date
of the meeting and, if mailed, shall be deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on
the records of the Corporation. No notice need be given to any person with
whom communication is unlawful, nor shall there be any duty to apply for any
permit or license to give notice to any such person. If the time and place of
an adjourned meeting of stockholders are announced at the meeting at which the
adjournment is taken, no notice need be given of the adjourned meeting unless
that adjournment is for more than 30 days or unless, after the adjournment, a
new record date is fixed for the adjourned meeting.
Section 1.5 Waiver of Notice. anything herein to the contrary
notwithstanding, notice of any meeting of stockholders need not be given to any
stockholder who in person or by proxy shall have waived in writing notice of
the meeting, either before or after such meeting, or who shall attend the
meeting in person or by proxy, unless he attends for the express purpose of
objecting, at the beginning of the meeting, to the transacting of any business
because the meeting is not lawfully called or convened.
Section 1.6 Quorum and Manner of Acting. Subject to the
provisions of these By-Laws, the Certificate of Incorporation and any statute
as to the vote that is required for a specified action, the presence in person
or by proxy of the holders of a majority of the outstanding shares of the
corporation entitled to vote at any meeting of stockholders shall constitute a
quorum for the transaction of
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business, and the vote in person or by proxy of the holders of a majority of
the shares constituting such quorum shall be binding on all stockholders of the
Corporation. A majority of the shares present in person or by proxy and
entitled to vote may, regardless of whether or not they constitute a quorum,
adjourn the meeting to another time and place. Any business which might have
been transacted at the original meeting may be transacted at any adjourned
meeting at which a quorum is present.
Section 1.7 Voting.
1.7.1 Stockholders shall be entitled to vote at all
elections of directors to the extent provided in or pursuant to the Certificate
of Incorporation. Stockholders may vote by proxy but no proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period.
1.7.2 Unless otherwise provided in any statute, the
Certificate of Incorporation or these By-Laws, any action which may or is
required to be taken at any annual or special meeting of stockholders 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.
Section 1.8 Judges of Election. The votes at each meeting of
stockholders shall be supervised by not less than two judges who shall decide
all questions respecting the qualification of voters, the validity of the
proxies and the acceptance or rejection of votes. The judges shall be
appointed by the Board but if, for any reason, there are less than two judges
present and acting at any meeting, the chairman of the meeting shall appoint an
additional judge or judges so that there shall always be at least two judges to
act at the meeting.
Section 1.9 List of Stockholders. A complete list of the
stockholders entitled to vote at each meeting of stockholders, arranged in
alphabetical order, and showing the address and number of shares registered in
the name of each stockholder, shall be prepared and made available for
examination during regular business hours by any stockholder for any purpose
germane to the meeting. The list shall be available for such examination at
the place where the meeting is to be held for a period of not less than ten
days prior to the meeting and during the whole time of the meeting.
SECTION 2
Board of Directors
Section 2.1 Number, Term, Vacancies.
2.1.1 The number of directors that will constitute the
whole Board of Directors of the Corporation will be that number set by a vote
of the Board of Directors, subject to the obligations of the various parties to
that Property Acquisition Agreement dated as of April 29, 1997, among Xplor
Corporation, The New Venus Exploration, Inc., Lomak Production I L.P., and
Lomak Resources LLC.
2.1.2 The power to fill vacancies on the Board (whether by
reason of resignation or otherwise) shall be vested solely in the Board and
vacancies may be filled by a majority of the directors then in office, although
less than a quorum, unless all directorships are vacant, in which case the
stockholders shall fill the then existing vacancies. Any director chosen by
the Board to fill a vacancy
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shall hold office only until the next election of directors and until his
successor shall be elected and shall have qualified.
Section 2.2 Notice of Nominations.
2.2.1 A nomination for director shall be accepted, and the
votes cast for a nominee shall be counted by, the judges of election only if
the Secretary of the Corporation has, at least three days prior to the meeting,
been advised by the nominee that he consents to being a nominee and if elected,
intends to serve as a director.
2.2.2 Nominations for the election of directors may be made
by the Board or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered or
mailed by first class United States mail, postage prepaid, to the Secretary of
the Corporation not less than 14 days nor more than 50 days prior to any
meeting of the stockholders called for the election of directors; provided,
however, that if less than 21 days' notice of the meeting is given to
stockholders, such written notice shall be delivered or mailed, as prescribed,
to the Secretary of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to stockholders.
Notice of nominations which are proposed by the board shall be given by the
Chairman on behalf of the Board.
2.2.3 Each notice of nomination mailed, as described in
Section 2.2.2 above, to the Secretary of the Corporation shall set forth (i)
the name, age, business address and, if known, residence address of each
nominee proposed in such notice, (ii) the principal occupation or employment of
each such nominee and (iii) the number of shares of stock of the Corporation
which are beneficially owned by each such nominee.
2.2.4 The chairman of the meeting may, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
Section 2.3 Organization Meetings. As promptly as practicable
after each annual meeting of stockholders, an organization meeting of the Board
shall be held for the purpose of organization, election of officers and the
transaction of any other business.
Section 2.4 Stated Meetings. The Board may provide for stated
meetings of the Board.
Section 2.5 Special Meetings. Special meetings of the Board may
be called from time to time by any three directors, by the chief executive
officer, or by the chief financial officer of the Corporation in concert with
two directors.
Section 2.6 Business of Meetings. Except as otherwise expressly
provided in these By-Laws, any and all business may be transacted at any
meeting of the Board; provided, however, that the business transacted at a
special meeting shall be limited to the purpose or purposes specified in the
notice of that meeting.
Section 2.7 Time and Place of Meetings. Subject to the
provisions of Section 2.3, each meeting of the Board shall be held on such
date, at such hour and in such place as fixed by the Board or in the notice of
the meeting or, in the case of an adjourned meeting, as announced at the
meeting at which the adjournment is taken.
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Section 2.8 Notice of Meetings. No notice need be given of any
organization or stated meeting of the Board for which the date, hour and place
have been fixed by the Board. Notice of the date, hour and place of all other
organization and stated meetings, and of all special meetings, shall be given
to each director personally, or by telephone, telegraph or similar electronic
transmission or by mail. If by mail, the notice shall be deposited in the
United States mail, postage prepaid, addressed to the director at his residence
or usual place of business as the same appears on the books of the Corporation
not later than four days before the meeting. If given by telegraph, the notice
shall be directed to the director at his residence or usual place of business
as the same appears on the books of the Corporation not later than at any time
during the day before the meeting. If given personally or by telephone, the
notice shall be given not later than the day before the meeting.
Section 2.9 Waiver of Notice. Anything herein to the contrary
notwithstanding, notice of any meeting of the Board need not be given to any
director who shall have waived in writing notice of the meeting, either before
or after the meeting, or who shall attend such meeting, unless he 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 2.10 Attendance by Telephone. Directors may participate
in meetings of the Board by means of conference telephone or similar
communications equipment by which all directors participating in the meeting
can hear one another and participate, and such participation shall constitute
presence in person at the meeting.
Section 2.11 Quorum and Manner of Acting. A majority of the total
number of directors at the time provided for pursuant to Section 2.1 shall
constitute a quorum for the transaction of business at any meeting of the Board
and, except as otherwise provided in these By-Laws, in the Certificate of
Incorporation or by statute, the act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. A
majority of the directors present at any meeting, regardless of whether or not
they constitute a quorum, may adjourn the meeting to another time or place.
Any business which might have been transacted at the original meeting may be
transacted at any adjourned meeting at which a quorum is present.
Section 2.12 Action Without a Meeting. Any action which could be
taken at a meeting of the Board may be taken without a meeting if all of the
directors consent to the action in a writing filed with the minutes of the
Board.
Section 2.13 Compensation of Directors. Each director of the
Corporation who is not a salaried officer or employee of the Corporation, or of
a subsidiary of the Corporation, may receive compensation for serving as a
director and for serving as a member of any Committee of the Board, and may
also receive fees for attendance at any meetings of the Board or any Committee
of the Board, and the Board may from time to time fix the amount and method of
payment of such compensation and fees. The Board may also, by vote of a
majority of disinterested directors, provide for and pay fair compensation to
directors rendering services to the Corporation not ordinarily rendered by
directors as such.
Section 2.14 Resignation of Directors. Any director may resign at
any time upon written notice to the Corporation. The resignation shall become
effective at the time specified in the notice and, unless otherwise provided in
the notice, acceptance of the resignation shall not be necessary to make it
effective.
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Section 2.15 Removal of Directors. Any director may be removed,
either for or without cause, by the affirmative vote of the holders of record
of at least two-thirds (2/3) the outstanding shares of stock entitled to vote,
and the vacancy in the Board caused by such removal shall be filled as provided
in the Certificate of Incorporation; provided, that where the holders of any
class or series are entitled to elect one or more directors the provisions of
this section shall apply, in respect of removal without cause of a director or
directors so elected, to the vote of the outstanding shares of that class or
series.
SECTION 3
Committees of the Board of Directors
Section 3.1 Executive Committee. By resolution adopted by an
affirmative vote of the majority of the whole Board, the Board may appoint an
Executive Committee consisting of the chief executive officer of the
corporation, ex officio as a non-voting member if he is not otherwise a
director, and two or more other directors, and, if deemed desirable, one or
more directors as alternate members who may replace any absentee or
disqualified member at any meeting of the Executive Committee. If so
appointed, the Executive Committee shall, when the Board is not in session,
have all the power and authority of the Board in the management of the business
and affairs of the Corporation not reserved to the Board by Section 3.3. The
Executive Committee shall keep a record of its acts and proceedings and shall
report the same from time to time to the Board.
Section 3.2 Other Committees. By resolution adopted by an
affirmative vote of the majority of the whole Board, the Board may from time to
time appoint such other Committees of the Board, consisting of one or more
directors and, if deemed desirable, one or more directors who shall act as
alternate members and who may replace any absentee or disqualified member at
any meeting of the Committee, and may delegate to each such Committee any of
the powers and authority of the Board in the management of the business and
affairs of the Corporation not reserved to the Board pursuant to Section 3.3.
Each such Committee shall keep a record of its acts and proceedings.
Section 3.3 Powers Reserved to the Board. No Committee of the
Board shall take any action to amend the Certificate of Incorporation or these
By-Laws, adopt any agreement to merge or consolidate the Corporation, declare
any dividend or recommend to the stockholders of a sale, lease or exchange of
all or substantially all of the assets and property of the Corporation, a
dissolution of the Corporation or a revocation of a dissolution of the
Corporation; nor shall any Committee of the Board take any action which is
required in these By-Laws, in the Certificate of Incorporation or by statute to
be taken by a vote of a specified proportion of the whole Board.
Section 3.4 Election of Committee Members; Vacancies. So far as
practicable, members of the Committees of the Board and their alternates (if
any) shall be appointed at each organization meeting of the Board and, unless
sooner discharged by an affirmative vote of the majority of the whole Board,
shall hold office until the next organization meeting of the Board and until
their respective successors are appointed. In the absence of disqualification
of any member of a Committee of the Board, the member or members (including
alternates) present at any meeting of the Committee and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another director to act at the meeting in place of any absent or disqualified
member. Vacancies in Committees of the board created by death, resignation or
removal may be filled by an affirmative vote of a majority of the whole Board.
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Section 3.5 Meetings. Each Committee of the Board may provide
for stated meetings of such Committee. Special meetings of each Committee may
be called by any two members of the Committee. The provisions of Section 2
regarding the business, time and place, notice and waivers of notice of
meetings, attendance at meetings and action without a meeting shall apply to
each Committee of the Board, except that the references in such provisions to
the directors and the Board shall be deemed respectively to be references to
the members of the Committees and to the Committee.
Section 3.6 Quorum and Manner of Acting. A majority of the
members of a Committee of the Board shall constitute a quorum for the
transaction of business at meetings of the Committee, and the act of a majority
of the members present at any meeting at which a quorum is present shall be the
act of the Committee. A majority of the members present at any meeting,
regardless of whether or not they constitute a quorum, may adjourn the meeting
to another time or place. Any business which might have been transacted at the
original meeting may be transacted at any adjourned meeting at which a quorum
is present.
SECTION 4
Officers
Section 4.1 Election and Appointment. The elected officers of
the Corporation shall consist of a Chairman, a President, one or more Vice
Presidents, a Treasurer, a Secretary and such other elected officers as shall
from time to time be designated by the Board. The Board shall designate from
among such elected officers a chief executive officer and a chief financial
officer of the Corporation and may from time to time make, or provide for,
other designations it deems appropriate. The Board may also appoint, or
provide for the appointment of, such other officers and agents as may from time
to time appear necessary or advisable in the conduct of the affairs of the
Corporation. Any number of offices may be held by the same person, except no
person may at the same time be both the chief executive and the chief financial
officer.
Section 4.2 Duties of Chief Executive Officer. In the absence of
the Chairman, the chief executive officer of the corporation shall preside at
all meetings of stockholders and at all meetings of the Board and the Executive
Committee and, except to the extent otherwise provided in these By-Laws or by
the Board, shall have general authority to execute any and all documents in the
name of the Corporation and to supervise and control all of the business and
affairs of the Corporation. In the absence of the chief executive officer, his
duties shall be performed and his powers may be exercised by the chief
financial officer or by such other officer in writing or (failing such
designation) by the Executive Committee or the Board.
Section 4.3 Duties of Other Officers. The other officers of the
Corporation shall have such powers and duties not inconsistent with these
By-Laws as may from time to time be conferred upon them in or pursuant to
resolutions of the Board, and shall have such additional powers and duties not
inconsistent with such resolutions as may from time to time be assigned to them
by any competent superior officer. The Board shall assign to one or more of
the officers of the corporation the duty to record the proceedings of the
meetings of the stockholders and the Board in a book to be kept for that
purpose.
Section 4.4 Term of Office and Vacancy. So far as practicable,
the elected officers shall be elected at each organization meeting of the
Board, and shall hold office until the next organization meeting of the Board
and until their respective successors are elected. If a vacancy should occur
in any office, the Board may elect a successor for the remainder of the term of
that office. Appointed
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officers shall hold office at the pleasure of the Board. Any officer may
resign by written notice to the Corporation.
Section 4.5 Removal of Elected Officers. Elected officers may be
removed at any time, either for or without cause, by the affirmative vote of a
majority of the whole Board at a meeting called for that purpose.
Section 4.6 Compensation of Elected Officers. The compensation
of all elected officers of the Corporation shall be fixed from time to time by
the Board.
SECTION 5
Shares and Transfers of Shares
Section 5.1 Certificates. Every stockholder shall be entitled to
a certificate signed by the Chairman or the President or a Vice President and
by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, certifying the class and number of shares owned by him in the
Corporation; provided, that, where such certificate is countersigned by a
Transfer Agent or Registrar, the signature of any such Chairman, President,
Vice President Treasurer, Assistant Treasurer, Secretary or Assistant Secretary
may be facsimile. In case any officer or officers who shall have signed or
whose facsimile signature or signatures shall have been used on any such
certificate or certificates shall cease to be such officer or officers, whether
because of death, resignation or otherwise, before such certificate or
certificates shall have been issued by the Corporation, such certificate or
certificates may be issued by the Corporation with the same effect as if he or
they were such officer or officers at the date of issue.
Section 5.2 Transfer Agents and Registrars. the Board may, in
its discretion, appoint one or more responsible banks or trust companies from
time to time, to act as Transfer Agents and Registrars of shares of the
Corporation; and, when such appointments shall have been made, no certificate
for shares of the Corporation shall be valid until countersigned by one of such
Transfer Agents and registered by one of such Registrars.
Section 5.3 Transfers of Shares. Shares of the Corporation may
be transferred by delivery of the certificates therefor, accompanied either by
an assignment in writing on the back of the certificates or by written power of
attorney to sell, assign and transfer the same, signed by the record holder
thereof; but no transfer shall affect the right of the Corporation to pay any
dividend upon the shares to the holder of record thereof, or to treat the
holder of record as the holder in fact thereof for all purposes, and no
transfer shall be valid, except between the parties thereto, until such
transfer shall have been made upon the books of the Corporation.
Section 5.4 Lost Certificates. In case any certificate for
shares of the Corporation shall be lost, stolen or destroyed, the Board, in its
discretion, or any Transfer Agent thereunto duly authorized by the Board, may
authorize the issue of a substitute certificate in place of the certificate so
lost, stolen or destroyed, and may cause such substitute certificate to be
countersigned by the appropriate Registrar (if any); provided, that, in each
such case, the applicant for a substituted certificate shall furnish to the
Corporation and to such of its Transfer Agents and Registrars as may require
the same, evidence to their satisfaction, in their discretion, if the loss,
theft or destruction of such certificate and of the ownership thereof, and also
such security or indemnity as may then be required.
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Section 5.5 Record Dates. 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 entitled to receive payment of any
dividend or other distribution or allotment or any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of shares
or for the purpose of any other lawful action, the Board may fix, in advance,
a record date which shall be not more than sixty nor less than ten days before
the date of any meeting of stockholders, and not more than sixty days prior to
any other action. In such case, those stockholders, and only those
stockholders, who are stockholders of record on the date fixed by the Board
shall, notwithstanding any subsequent transfer of shares on the books of the
Corporation, be entitled to notice of and to vote at such meeting of
stockholders, or any adjournment thereof, or entitled to receive payment of
such dividend or other distribution or allotment of rights, or entitled to
exercise rights in respect of any such change, conversion or exchange of shares
or to participate in any such other lawful action.
SECTION 6
Miscellaneous
Section 6.1 Fiscal Year. The fiscal year of the Corporation
shall be fixed by the Board.
Section 6.2 Surety Bonds. The chief financial officer, the
treasurer, each Assistant Treasurer, and such other officers and agents of the
Corporation as the Board may from time to time direct shall be bonded at the
expense of the Corporation for the faithful performance of their duties in such
amounts and by such surety companies as the Board may from time to time
determine.
Section 6.3 Signature of Negotiable Instruments. All bills,
notes, checks or other instruments for the payment of money shall be signed or
countersigned in such manner as from time to time may be prescribed by
resolution of the Board.
Section 6.4 Auditor. The Board shall appoint an Auditor to
discharge the duties provided for herein. Among other duties, it shall be the
duty of the Auditor so appointed to make periodic audits of the books and
accounts of the Corporation. After the close of the fiscal year and in
accordance with applicable law, the stockholders shall be furnished with
consolidated financial statements of the Corporation and its consolidated
subsidiaries, as at the end of such fiscal year, duly certified by such
Auditor, subject to such notes or comments as the Auditor shall deem necessary
or desirable for the information of the stockholders.
Section 6.5 Indemnification of Officers, Directors, Employees,
Agents and Fiduciaries; Insurance.
(a) The Corporation shall indemnify, in accordance with
and to the full extent permitted by the laws of the State of Delaware
as in effect at the time of the adoption of this Section 6.5 or as
such laws may be amended from time to time, to the full extent
permitted by such laws, any person (and their heirs and legal
representatives or any such person) made or threatened to be made a
party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that such person is or was a director, officer,
employee, agent, or fiduciary of the Corporation or any constituent
corporation absorbed in a consolidation or merger, or serves as such
with another corporation, or with a partnership, joint venture, trust
or other enterprise at the request of the Corporation or any such
constituent corporation.
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(b) By action of the Board, notwithstanding any interest
of the directors in such action, the Corporation may purchase and
maintain insurance in such amounts as the Board deems appropriate on
behalf of any person who is or was a director, officer, employee,
agent or fiduciary of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee, agent or
fiduciary of another 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 shall have the power to
indemnify him against such liability under the provisions of this
Section.
SECTION 7
By-Law Amendments
Section 7.1 By the Stockholders. These By-Laws may be amended by
the stockholders at a meeting called for the purpose in any manner not
inconsistent with any provision of law or the Certificate of Incorporation.
Notwithstanding the preceding sentence, amendment of these By-Laws so as to
increase the number of directors above twelve shall require the affirmative
vote of eighty (80%) percent of the stockholders entitled to vote in an
election of directors.
Section 7.2 By the Directors. These By-Laws may be amended by
the affirmative vote of a majority of the whole Board in any manner not
inconsistent with any provision of law or the Certificate of Incorporation.
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EXHIBIT 4.1
************************************************************************
STOCK PURCHASE WARRANT
To Purchase Common Stock of
XPLOR CORPORATION
************************************************************************
<PAGE> 2
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF
1933 (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS (THE "STATE ACTS") AND
SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED
(WHETHER OR NOT FOR CONSIDERATION) BY THE HOLDER EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT OR (ii) UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE
OPINION OF COUNSEL OR SUBMISSION TO THE COMPANY OF SUCH EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL TO THE COMPANY, IN EACH SUCH CASE, TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND THE STATE ACTS.
Void after 5:00 p.m. New York Time, on October 23, 2000.
Warrant to Purchase 10,000 Shares of Common Stock.
WARRANT TO PURCHASE COMMON STOCK
OF
XPLOR CORPORATION
This is to Certify That, FOR VALUE RECEIVED, Martin A. Bell or
assigns ("Holder"), is entitled to purchase, subject to the provisions of this
Warrant, from XPLOR CORPORATION, a Delaware corporation ("Company"), Ten
Thousand (10,000) fully paid, validly issued and nonassessable shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock") at a price of
$2.00 per share at any time or from time to time during the period from October
23, 1995 to October 23, 2000, but not later than 5:00 p.m. New York City Time,
on October 23, 2000. The number of shares of Common Stock to be received upon
the exercise of this Warrant and the price to be paid for each share of Common
Stock may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Shares" and the
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price".
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in
part at any time or from time to time on or after October 23, 1995 and until
October 23, 2000 (the "Exercise Period"), subject to the provisions of Section
(j)(2) hereof; provided, however, that (i) if either such day is a day on which
banking institutions in the State of New York are authorized by law to close,
then on the next succeeding day which shall not be such a day, and (ii) in the
event of
<PAGE> 3
any merger, consolidation or sale of substantially all the assets of the
Company as an entirety, resulting in any distribution to the Company's
stockholders, prior to October 23, 2000, the Holder shall have the right to
exercise this Warrant commencing at such time through October 23, 2000 into the
kind and amount of shares of stock and other securities and property (including
cash) receivable by a holder of the number of shares of Common Stock into which
this Warrant might have been exercisable immediately prior thereto. This
Warrant may be exercised by presentation and surrender hereof to the Company at
its principal office, or at the office of its stock transfer agent, if any,
with the Purchase Form annexed hereto duly executed and accompanied by payment
of the Exercise Price for the number of Warrant Shares specified in such form.
As soon as practicable after each such exercise of the Warrants, but not later
than seven (7) days from the date of such exercise, the Company shall issue and
deliver to the Holder a certificate or certificate for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the rights of the Holder thereof to purchase the balance of
the Warrant Shares purchasable thereunder. Upon receipt by the Company of this
Warrant at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise, the Holder shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be physically delivered to the Holder.
(2) At any time during the Exercise Period, the Holder
may, at its option, exchange this Warrant, in whole or in part (a "Warrant
Exchange"), into the number of Warrant Shares determined in accordance with
this Section (a)(2), by surrendering this Warrant at the principal office of
the Company or at the office of its stock transfer agent, accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the shares issuable upon such Warrant Exchange and,
if applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within seven (7) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of
the Total Number and the existing Exercise Price by (B) the current market
value of a share of Common Stock. Current market value shall have the meaning
set forth Section (c) below, except that for purposes hereof, the date of
exercise, as used in such Section (c), shall mean the Exchange Date.
(b) RESERVATION AND LISTING OF SHARES. The Company shall
at all times reserve for issuance and/or delivery upon exercise of this Warrant
such number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of the Warrants.
<PAGE> 4
(c) FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(1) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the Nasdaq system,
the current market value shall be the last reported sale price
of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or
if no such sale is made on such day, the average closing bid
and asked prices for such day on such exchange or system; or
(2) If the Common Stock is not so listed or
admitted to unlisted trading privileges, the current market
value shall be the mean of the last reported bid and asked
prices reported by the National Quotation Bureau, Inc. on the
last business day prior to the date of the exercise of this
Warrant; or
(3) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked
prices are not so reported, the current market value shall be
an amount, not less than book value thereof as at the end of
the most recent fiscal year of the Company ending prior to the
date of the exercise of the Warrant, determined in such
reasonable manner as may be prescribed by the Board of
Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT.
This Warrant is exchangeable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company or at the office of its
stock transfer agent, if any, for other warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable hereunder. Upon surrender of this Warrant
to the Company at its principal office or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be cancelled. This Warrant may
be divided or combined with other warrants which carry the same rights upon
presentation hereof at the principal office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by
the Holder hereof. The term "Warrant" as used herein includes any Warrants
into which this Warrant may be divided or exchanged. Upon receipt by the
Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be
at any time enforceable by anyone.
<PAGE> 5
(e) RIGHTS OF THE HOLDER. The Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the Company,
either at law or equity, and the rights of the Holder are limited to those
expressed in the Warrant and are not enforceable against the Company except to
the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in
effect at any time and the number and kind of securities purchasable upon the
exercise of the Warrants shall be subject to adjustment from time to time upon
the happening of certain events as follows:
(1) In case the Company shall (i) declare a
dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective
date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined
by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common
Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such action. Such
adjustment shall be made successively whenever any event
listed above shall occur.
(2) In case the Company shall fix a record date
for the issuance of rights or warrants to all holders of its
Common Stock entitling them to subscribe for or purchase
shares of Common Stock (or securities convertible into Common
Stock) at a price (the "Subscription Price") (or having a
conversion price per share) less than the current market price
of the Common Stock (as defined in Subsection (8) below) on
the record date mentioned below, or less than the Exercise
Price on such record date the Exercise Price shall be adjusted
so that the same shall equal the lower of (i) the price
determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date
mentioned below and the number of additional
<PAGE> 6
shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so
offered) would purchase at such current market price per share
of the Common Stock, and the denominator of which shall be the
sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the
convertible securities so offered are convertible) or (ii) in
the event the Subscription Price is equal to or higher than
the current market price but is less than the Exercise Price,
the price determined by multiplying the Exercise Price in
effect immediately prior to the date of issuance by a
fraction, the numerator of which shall be the sum of the
number of shares outstanding on the record date mentioned
below and the number of additional shares of Common Stock
which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion
price of the convertible securities so offered) would purchase
at the Exercise Price in effect immediately prior to the date
of such issuance, and the denominator of which shall be the
sum of the number of shares of Common Stock outstanding on the
record date mentioned below and the number of additional
shares of Common Stock offered for subscription or purchase
(or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively
whenever such rights or warrants are issued and shall become
effective immediately after the record date for the
determination of shareholders entitled to receive such rights
or warrants; and to the extent that shares of Common Stock are
not delivered (or securities convertible into Common Stock are
not delivered) after the expiration of such rights or warrants
the Exercise Price shall be readjusted to the Exercise Price
which would then be in effect had the adjustments made upon
the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock
(or securities convertible into Common Stock) actually
delivered.
(3) In case the Company shall hereafter
distribute to the holders of its Common Stock evidences of its
indebtedness or assets (excluding cash dividends or
distributions and dividends or distributions referred to in
Subsection (1) above) or subscription rights or warrants
(excluding those referred to in Subsection (2) above), then in
each such case the Exercise Price in effect thereafter shall
be determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of
which shall be the total number of shares of Common Stock
outstanding multiplied by the current market price per share
of Common Stock (as defined in Subsection (8) below), less the
fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so
distributed or of such rights or warrants, and the denominator
of which shall be the total number of shares of Common Stock
outstanding multiplied by such current market price per share
of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall
be made whenever any such distribution is made and shall
become effective immediately after the record date for the
determination of shareholders entitled to receive such
distribution.
(4) In case the Company shall issue shares of its
Common Stock [excluding shares issued (i) in any of the
transactions described in Subsection (1) above, (ii) upon
exercise of options granted to the Company's employees or
directors under a plan or plans adopted by the Company's Board
of Directors, if such shares would otherwise be included in
this Subsection (4), (but only to the extent that the
aggregate number of shares excluded hereby and issued after
the date hereof, shall not exceed 5% of the Company's Common
Stock outstanding at the time of any issuance), (iii) upon
exercise of options and warrants outstanding at October 23,
1995, and this Warrant (iv) to shareholders of any corporation
which merges into the Company in proportion to their stock
holdings of such
<PAGE> 7
corporation immediately prior to such merger, upon such
merger, or (v) issued in a bona fide public offering pursuant
to a firm commitment underwriting, but only if no adjustment
is required pursuant to any other specific subsection of this
Section (f) (without regard to Subsection (9) below) with
respect to the transaction giving rise to such rights] for a
consideration per share (the "Offering Price") less than the
current market price per share [as defined in Subsection (8)
below] on the date the Company fixes the offering price of
such additional shares or less than the Exercise Price, the
Exercise Price shall be adjusted immediately thereafter so
that it shall equal the lower of (i) the price determined by
multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares
and the number of shares of Common Stock which the aggregate
consideration received [determined as provided in Subsection
(7) below] for the issuance of such additional shares would
purchase at such current market price per share of Common
Stock, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately after the
issuance of such additional shares or (ii) in the event the
Offering Price is equal to or higher than the current market
price per share but less than the Exercise Price, the price
determined by multiplying the Exercise Price in effect
immediately prior to the date of issuance by a fraction, the
numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such
additional shares and the number of shares of Common Stock
which the aggregate consideration received [determined as
provided in subsection (7) below] for the issuance of such
additional shares would purchase at the Exercise Price in
effect immediately prior to the date of such issuance, and the
denominator of which shall be the number of shares of Common
Stock outstanding immediately after the issuance of such
additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(5) In case the Company shall issue any
securities convertible into or exchangeable for its Common
Stock [excluding securities issued in transactions described
in Subsections (2) and (3) above] for a consideration per
share of Common Stock (the "Conversion Price") initially
deliverable upon conversion or exchange of such securities
[determined as provided in Subsection (7) below] less than the
current market price per share [as defined in Subsection (8)
below] in effect immediately prior to the issuance of such
securities, or less than the Exercise Price, the Exercise
Price shall be adjusted immediately thereafter so that it
shall equal the lower of (i) the price determined by
multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities and the
number of shares of Common Stock which the aggregate
consideration received [determined as provided in Subsection
(7) below] for such securities would purchase at such current
market price per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock
outstanding
<PAGE> 8
immediately prior to such issuance and the maximum number of
shares of Common Stock of the Company deliverable upon
conversion of or in exchange for such securities at the
initial conversion or exchange price or rate or (ii) in the
event the Conversion Price is equal to or higher than the
current market price per share but less than the Exercise
Price, the price determined by multiplying the Exercise Price
in effect immediately prior to the date of issuance by a
fraction, the numerator of which shall be the sum of the
number of shares outstanding immediately prior to the issuance
of such securities and the number of shares of Common Stock
which the aggregate consideration received [determined as
provided in subsection (7) below] for such securities would
purchase at the Exercise Price in effect immediately prior to
the date of such issuance, and the denominator of which shall
be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities and the
maximum number of shares of Common Stock of the Company
deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or
rate. Such adjustment shall be made successively whenever
such an issuance is made.
(6) Whenever the Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to Subsections
(1), (2), (3), (4) and (5) above, the number of Shares
purchasable upon exercise of this Warrant shall simultaneously
be adjusted by multiplying the number of Shares initially
issuable upon exercise of this Warrant by the Exercise Price
in effect on the date hereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(7) For purposes of any computation respecting
consideration received pursuant to Subsections (4) and (5)
above, the following shall apply:
(A) in the case of the issuance of
shares of Common Stock for cash, the consideration
shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company
for any underwriting of the issue or otherwise in
connection therewith;
(B) in the case of the issuance of
shares of Common Stock for a consideration in whole
or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board of
Directors of the Company (irrespective of the
accounting treatment thereof), whose determination
shall be conclusive; and
(C) in the case of the issuance of
securities convertible into or exchangeable for
shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the
consideration received by the Company for the
issuance of such securities plus the additional
minimum consideration, if any, to be received by the
Company upon the conversion
<PAGE> 9
or exchange thereof [the consideration in each case
to be determined in the same manner as provided in
clauses (A) and (B) of this Subsection (7)].
(8) For the purpose of any computation under
Subsections (2), (3), (4) and (5) above, the current market
price per share of Common Stock at any date shall be deemed to
be the lower of (i) the average of the daily closing prices
for 30 consecutive business days before such date or (ii) the
closing price on the business day immediately preceding such
date. The closing price for each day shall be the last sale
price regular way or, in case no such reported sale takes
place on such day, the average of the last reported bid and
asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is
admitted to trading or listed, or if not listed or admitted to
trading on such exchange, the average of the highest reported
bid and lowest reported asked prices as reported by Nasdaq, or
other similar organization if Nasdaq is no longer reporting
such information, or if not so available, the fair market
price as determined by the Board of Directors.
(9) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least five cents ($0.05) in such price;
provided, however, that any adjustments which by reason of
this Subsection (9) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations
under this Section (f) shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be.
Anything in this Section (f) to the contrary notwithstanding,
the Company shall be entitled, but shall not be required, to
make such changes in the Exercise Price, in addition to those
required by this Section (f), as it shall determine, in its
sole discretion, to be advisable in order that any dividend or
distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities
convertible into Common Stock (including Warrants).
(10) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly but no later than
10 days after any request for such an adjustment by the
Holder, cause a notice setting forth the adjusted Exercise
Price and adjusted number of Shares issuable upon exercise of
each Warrant, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to
the Holders at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. In the event the
Company does not provide the Holder with such notice and
information within 10 days of a request by the Holder, then
notwithstanding the provisions of this Section (f), the
Exercise Price shall be immediately adjusted to equal the
lowest Offering Price, Subscription Price or Conversion Price,
as applicable, since the date of this Warrant, and the number
of shares issuable upon exercise of this Warrant shall be
adjusted accordingly. The Company may retain
<PAGE> 10
a firm of independent certified public accountants selected by
the Board of Directors (who may be the regular accountants
employed by the Company) to make any computation required by
this Section (f), and a certificate signed by such firm shall
be conclusive evidence of the correctness of such adjustment.
(11) In the event that at any time, as a result of
an adjustment made pursuant to Subsection (1) above, the
Holder of this Warrant thereafter shall become entitled to
receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon
exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Subsections (1) to (9), inclusive above.
(12) Irrespective of any adjustments in the
Exercise Price or the number or kind of shares purchasable
upon exercise of this Warrant, Warrants theretofore or
thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar
Warrants initially issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price
shall be adjusted as required by the provisions of the foregoing Section, the
Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted Exercise Price determined as herein
provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason
for and the manner of computing such adjustment. Each such officer's
certificate shall be made available at all reasonable times for inspection by
the holder or any holder of a Warrant executed and delivered pursuant to
Section (a) and the Company shall, forthwith after each such adjustment, mail a
copy by certified mail of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant
shall be outstanding, (i) if the Company shall pay any dividend or make any
distribution upon the Common Stock or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any share of any
class or any other rights or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, sale, lease or transfer
of all or substantially all of the property and assets of the Company to
another corporation, or voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be effected, then in any such case, the Company
shall cause to be mailed by certified mail to the Holder, at least fifteen days
prior the date specified in (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding
up
<PAGE> 11
is to take place and the date, if any is to be fixed, as of which the holders
of Common Stock or other securities shall receive cash or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case
of any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company, or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the class issuable upon
exercise of this Warrant) or in case of any sale, lease or conveyance to
another corporation of the property of the Company as an entirety, the Company
shall, as a condition precedent to such transaction, cause effective provisions
to be made so that the Holder shall have the right thereafter by exercising
this Warrant at any time prior to the expiration of the Warrant, to purchase
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, capital reorganization and other change,
consolidation, merger, sale or conveyance by a holder of the number of shares
of Common Stock which might have been purchased upon exercise of this Warrant
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Any such provision shall include provision for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. The foregoing provisions of this Section (i)
shall similarly apply to successive reclassifications, capital reorganizations
and changes of shares of Common Stock and to successive consolidations,
mergers, sales or conveyances. In the event that in connection with any such
capital reorganization or reclassification, consolidation, merger, sale or
conveyance, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for a security of the
Company other than Common Stock, any such issue shall be treated as an issue of
Common Stock covered by the provisions of Subsection (1) of Section (f) hereof.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this
Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively
referred to herein as "holders") by written notice at least
four weeks prior to the filing of any new registration
statement or post-effective amendment thereto under the
Securities Act of 1933 (the "Act") covering securities of the
Company which the Company proposes to sell solely for cash
(other than a registration statement on Form S-4, S-8 or other
form which does not include substantially the same information
as would be required in a form for the general registration of
securities) and will for a period of six years from the date
hereof upon the request of any such holder, include in any
such registration statement such information as may be
required to permit a public offering of the Warrant Shares.
The Company shall supply prospectuses and other documents as
the Holder may request in order to facilitate the public sale
or other disposition of the Warrant Shares, qualify the
Warrant Shares for sale in such states as any such holder
designates and do any and all other acts and things which may
be
<PAGE> 12
necessary or desirable to enable such Holders to consummate
the public sale or other disposition of the Warrant Shares,
and furnish indemnification in the manner as set forth in
Subsection (3)(C) of this Section (j). Such holders shall
furnish information and indemnification as set forth in
Subsection (3)(C) of this Section (j), except that the maximum
amount which may be recovered from the Holder shall be limited
to the amount of proceeds received by the Holder from the sale
of the Warrant Shares.
(2) If any majority holder (as defined in
Subsection (4) of this Section (j) below) shall give notice to
the Company at any time during the five year period commencing
on the date hereof to the effect that such holder contemplates
(i) the transfer of all or any part of his or its Warrant
Shares, or (ii) the exercise and/or conversion of all or any
part of his or its Warrants and the transfer of all or any
part of the Warrant Shares under such circumstances that a
public offering (within the meaning of the Act) of Warrant
Shares will be involved, and desires to register under the
Act, the Warrant Shares, then the Company shall, within two
weeks after receipt of such notice, file a registration
statement pursuant to the Act, to the end that the Warrant
Shares may be sold under the Act as promptly as practicable
thereafter and the Company will use its best efforts to cause
such registration to become effective and continue to be
effective (current) (including the taking of such steps as are
necessary to obtain the removal of any stop order) until the
holder has advised that all of the Warrant Shares have been
sold; provided that such holder shall furnish the Company with
appropriate information (relating to the intentions of such
holders) in connection therewith as the Company shall
reasonably request in writing. In the event the registration
statement is not declared effective under the Act prior to
October 23, 2000, the Company shall extend the expiration date
of the Warrants to a date not less than 90 days after the
effective date of such registration statement. The holder
may, at its option, request the registration of the Warrant
Shares in a registration statement made by the Company as
contemplated by Subsection (1) of this Section (j) or in
connection with a request made pursuant to Subsection (2) of
this Section (j) prior to the acquisition of the Warrant
Shares upon exercise of the Warrants and even though the
holder has not given notice of exercise of the Warrants. If
the Company determines to include securities to be sold by it
in any registration statement originally requested pursuant to
this Subsection (2) of this Section (j), such registration
shall instead be deemed to have been a registration under
Subsection (1) of this Section (j) and not under Subsection
(2) of this Subsection (j). The holder may thereafter at its
option, exercise the Warrants at any time or from time to time
subsequent to the effectiveness under the Act of the
registration statement in which the Warrant Shares were
included.
(3) The following provision of this Section (j)
shall also be applicable:
(A) Within ten days after receiving any
such notice pursuant to Subsection (2) of this
Section (j), the Company shall give notice to the
other holders of Warrants and Warrant Shares,
advising that the Company
<PAGE> 13
is proceeding with such registration statement and
offering to include therein Warrant Shares of such
other holders, provided that they shall furnish the
Company with such appropriate information (relating
to the intentions of such holders) in connection
therewith as the Company shall reasonably request in
writing. Following the effective date of such
registration, the Company shall upon the request of
any owner of Warrants and/or Warrant Shares forthwith
supply such a number of prospectuses meeting the
requirements of the Act, as shall be requested by
such owner to permit such holder to make a public
offering of all Warrant Shares from time to time
offered or sold to such holder, provided that such
holder shall from time to time furnish the Company
with such appropriate information (relating to the
intentions of such holder) in connection therewith as
the Company shall request in writing. The Company
shall also use its best efforts to qualify the
Warrant Shares for sale in such states as such
majority holder shall designate.
(B) The Company shall bear the entire
cost and expense of any registration of securities
initiated by it under Subsection (1) of this Section
(j) notwithstanding that Warrant Shares subject to
this Warrant may be included in any such
registration. The Company shall also comply with one
request for registration made by the majority holder
pursuant to Subsection (2) of this Section (j) at its
own expense and without charge to any holder of any
Warrants and/or Warrant Shares; and the Company shall
comply with one additional request made by the
majority holder pursuant to Subsection (2) of this
Section (j) (and not deemed to be pursuant to
Subsection (1) of this Section (j)) at the sole
expense of such majority holder. Any holder whose
Warrant Shares are included in any such registration
statement pursuant to this Section (j) shall,
however, bear the fees of his own counsel and any
registration fees, transfer taxes or underwriting
discounts or commissions applicable to the Warrant
Shares sold by him pursuant thereto.
(C) The Company shall indemnify and hold
harmless each such holder and each underwriter,
within the meaning of the Act, who may purchase from
or sell for any such holder any Warrants and/or
Warrant Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material
fact contained in the Registration Statement or any
post-effective amendment thereto or any registration
statement under the Act or any prospectus included
therein required to be filed or furnished by reason
of this Section (j) or caused by any omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein not misleading, except insofar
as such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon
information furnished or required to be furnished in
writing to the
<PAGE> 14
Company by such holder or underwriter expressly for
use therein, which indemnification shall include each
person, if any, who controls any such underwriter
within the meaning of such Act provided, however,
that the Company will not be liable in any such case
to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or
alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in
conformity with written information furnished by such
Holder or any other Holder, specifically for use in
the preparation thereof.
(D) Neither the giving of any notice by
any such majority holder nor the making of any
request for prospectuses shall impose any upon such
majority holder or owner making such request any
obligation to sell any Warrants and/or Warrant
Shares, or exercise any Warrants.
(4) The term "majority holder" as used in this
Section (j) shall include any owner or combination of owners
of Warrants or Warrant Shares in any combination if the
holdings of the aggregate amount of:
(i) the Warrants held by him or among
them, plus
(ii) the Warrants which he or they would
be holding if the Warrants for the Warrant Shares
owned by him or among them had not been exercised,
would constitute a majority of the Warrants originally issued.
<PAGE> 15
The Company's agreements with respect to Warrants or Warrant
Shares in this Section (j) shall continue in effect regardless of the exercise
and surrender of this Warrant.
XPLOR CORPORATION
By:
[SEAL]
Dated: August 7, 1997
Attest:
- -----------------------------
Secretary
<PAGE> 16
PURCHASE FORM
Dated_____________,
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing __________ shares of Common Stock
and hereby makes payment of __________in payment of the actual exercise price
thereof.
----------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------
Signature
-------------------------------------
ASSIGNMENT FORM
FOR VALUE RECEIVED, ___________________________________ hereby
sells, assigns and transfers unto
Name
------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------
the right to purchase Common Stock represented by this Warrant to the extent of
_______ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint ________________ Attorney, to transfer the
same on the books of the Company with full power of substitution in the
premises.
Date ,
--------------
Signature
-------------------------
<PAGE> 1
EXHIBIT 4.2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
OR THE SECURITIES LAWS OF ANY STATE, PURSUANT TO ONE OR MORE
EXEMPTIONS THEREFROM. THIS WARRANT MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR OTHERWISE DISPOSED OF WITHOUT REGISTRATION UNDER SUCH LAWS
OR PURSUANT TO EXEMPTIONS THEREUNDER.
Void after 5:00 p.m. New York Time, on October 23, 2000
Warrant to Purchase ____________ Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
XPLOR CORPORATION
This is to Certify That, FOR VALUE RECEIVED,
________________________________ , or assigns ("Holder"), is entitled to
purchase, subject to the provisions of this Warrant, from Xplor Corporation, a
Delaware corporation ("Company"), __________________ fully paid, validly issued
and nonassessable shares of Common Stock, par value $0.01 per share, of the
Company ("Common Stock") at a price of $3.00 per share at any time or from time
to time during the period from the date hereof to October 23, 2000 but not
later than 5:00 p.m. New York City Time, on October 23, 2000. The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid fro each share of Common Stock may be adjusted from time to
time as hereinafter set forth. The shares of Common Stock deliverable upon
such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Shares" and the exercise price of a share of Common
Stock in effect at any time and as adjusted from time to time is hereinafter
sometimes referred to as the "Exercise Price".
(a) EXERCISE OF WARRANT. This Warrant may be exercised
in whole or in part at any time or from time to time on or after the date
hereof and until October 23, 2000 (the "Exercise Period"); provided, however,
that if either such day is a day on which banking institutions in the State of
New York are authorized by law to close, then this Warrant may be exercised, in
whole or in part, on the next succeeding day which shall not be such a day.
This Warrant may be exercised by presentation and surrender hereof to the
Company at its principal office, or at the office of its stock transfer agent,
if any, with the Purchase Form annexed hereto duly executed and accompanied by
payment of the Exercise Price for the number of Warrant Shares specified in
such form. As soon as practicable after each such exercise of this Warrant,
but not later than seven (7) days from the date of such exercise, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares issuable upon such exercise, registered in the name of the
Holder or its designee. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the Warrant Shares purchasable thereunder. Upon receipt by the
Company of this Warrant at its office, or by the stock transfer agent of the
Company at its office, in proper form for exercise, the Holder
<PAGE> 2
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
the Company shall then be closed or that certificates representing such shares
of Common Stock shall not then be physically delivered to the Holder.
(b) TRANSFER RESTRICTION LEGEND. Each certificate
representing Warrant Shares initially issued upon exercise of this Warrant,
unless at the time of exercise such Warrant Shares are registered under the
Securities Act, shall bear the following legend (and any additional legend
required by any securities exchange on which the Warrant Shares may at the time
be listed) on the fact thereof:
"The securities represented hereby have not been registered under the
Securities Act of 1933, and the transfer of such securities is subject
to the restrictions set forth in the Warrant pursuant to which such
securities have been issued, a copy of which is available for
inspection at the principal executive offices of Xplor Corporation,
and no transfer of such securities shall be valid or effective unless
and until the terms and conditions of said Warrant shall have been
complied with."
Any certificate issued at any time upon transfer of, or in exchange for or
replacement of, any certificate bearing such legend (except a new certificate
issued upon completion of a public distribution of the securities represented
thereby pursuant to a registration under the Securities Act) shall also bear
such legend unless, in the opinion of counsel for the Company, or such other
counsel as shall be acceptable to the Company, in each case addressed and
delivered to the Company, the securities represented thereby need no longer be
subject to the restrictions contained in this Warrant. The provisions of this
Warrant shall be binding upon all subsequent holders of certificates bearing
the above legend and shall also be applicable to all subsequent holders of this
Warrant.
(c) RESTRICTIONS ON TRANSFER.
(1) General Restrictions. Notwithstanding any
provisions contained in this Warrant to the contrary, this Warrant and the
related Warrant Shares bearing the legend as provided in Section (b) of this
Warrant shall not be transferable except upon the conditions specified in this
Section (c), which conditions are intended, among other things, to insure
compliance with the provisions of the Securities Act in respect of the transfer
of this Warrant or of such Warrant Shares. The registered holder of this
Warrant agrees that it will neither (i) transfer this Warrant prior to delivery
to the Company of the opinion of counsel referred to in, and to the effect
described in, Section (c)(2), or until registration hereof under the Securities
Act, nor (ii) transfer such Warrant Shares prior to delivery to the Company of
the opinion of counsel referred to in, and to the effect described in, Section
(c)(2), or until registration of such Warrant Shares under the Securities Act
has become effective.
(2) Statement of Intention to Transfer: Opinion of
Counsel. The registered holder of this Warrant, by its acceptance hereof,
agrees that prior to any transfer
<PAGE> 3
of this Warrant or any transfer of the related Warrant Shares bearing the
legend as provided in Section (b) of this Warrant, said holder will deliver to
the Company a statement setting forth either said holder's intention with
respect to the disposition of this Warrant or of any Warrant Shares (whichever
is involved in such transfer), in either such case, together with a signed copy
of the opinion of said holder's counsel as shall be acceptable to the Company,
as to the necessity or non-necessity for registration under the Securities Act
in connection with such transfer. Each such opinion shall either be addressed
to the Company or state that the Company may rely thereon. The following
provisions shall then apply:
i. If, in the opinion of said holder's counsel, the
proposed transfer of this Warrant or the proposed transfer of
such Warrant Shares may be effected without registration under
the Securities Act of this Warrant or such Warrant Shares, as
the case may be, then the registered holder of this Warrant
shall be entitled to transfer this Warrant or to transfer such
Warrant Shares in accordance with the statement of intention
delivered by said holder to the Company.
ii. If, in the opinion of said counsel, either the
proposed transfer of this Warrant or such Warrant Shares may
not be effected without registration under the Securities Act
of this Warrant or such Warrant Shares, as the case may be,
the registered holder of this Warrant shall not be entitled to
transfer this Warrant or such Warrant Shares, as the case may
be, until such registration is effective.
(d) RESERVATION OF SHARES. The Company shall at all
times reserve for issuance and/or delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of the Warrants.
(e) FRACTIONAL SHARES. No fractional shares or
script representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the Nasdaq National
Market, the current market value shall be the last reported
sale price of the Common Stock on such exchange or market on
the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, the average
closing bid and asked prices for such day on such exchange or
market; or
<PAGE> 4
(2) If the Common Stock is not so listed or
admitted to unlisted trading privileges, but is traded on the
Nasdaq SmallCap Market, the current Market Value shall be the
average of the closing bid and asked prices for such day on
such market and if the Common Stock is not so traded, the
current market value shall be the mean of the last reported
bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the
exercise of this Warrant; or
(3) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked
prices are not so reported, the current market value shall be
an amount, not less than book value thereof as at the end of
the most recent fiscal year of the Company ending prior to the
date of the exercise of the Warrant, determined in such
reasonable manner as may be prescribed by the Board of
Directors of the Company.
(f) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT.
This Warrant is exchangeable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company or at the office of its
stock transfer agent, if any, for other warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable hereunder. This Warrant is not transferable
other than by will or pursuant to the laws of descent and distribution and
except as provided under Subsection (c) hereof. Upon surrender of this Warrant
to the Company at its principal office or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other warrants which carry the same rights upon
presentation hereof at the principal office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by
the Holder hereof. The term "Warrant" as used herein includes any Warrants
into which this Warrant may be divided or exchanged. Upon receipt by the
Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be
at any time enforceable by anyone.
(g) RIGHTS OF THE HOLDER. The Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the Company,
either at law or equity, and the rights of the Holder are limited to those
expressed int eh Warrant and are not enforceable against the Company except to
the extent set forth herein.
<PAGE> 5
(h) ANTI-DILUTION PROVISIONS. The Exercise Price
in effect at any time and the number and kind of securities purchasable upon
the exercise of the Warrants shall be subject to adjustment from time to time
upon the happening of certain events as follows:
(1) In case the Company shall (i) declare a
dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective
date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined
by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common
Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such action. Such
adjustment shall be made immediately prior to such action.
Such adjustment shall be made successively whenever any event
listed above shall occur.
(2) Whenever the Exercise Price payable upon
exercise of each Warrant is adjusted pursuant to Subsection
(1) above, the number of Shares purchasable upon exercise of
this Warrant shall simultaneously be adjusted by multiplying
the number of Shares initially issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as
adjusted.
(3) In the event that at any time, as a result of
an adjustment made pursuant to Subsection (1) above, the
Holder of this Warrant thereafter shall become entitled to
receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon
exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Subsection (1) above.
(i) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this
Warrant of the Warrant Shares or any then holder of Warrants
or Warrant Shares (such person being collectively referred to
herein as "holder") by written notice at least two weeks prior
to the filing of any registration statement or post-effective
amendment thereto under the Securities
<PAGE> 6
Act of 1933 covering securities of the Company and will for
the period until October 23, 2001, upon the request of any
such holder, include in any such registration statement such
information as may be required to permit a public offering of
the Warrant Shares. In connection with its filing of any
registration statement or post-effective amendment thereto,
the Company shall supply prospectuses and other documents as
the Holder may request in order to facilitate the public sale
or other disposition of the Warrant Shares, qualify the
Warrant Share for sale in such states as any such holder
designates and do any and all other acts and things which may
be necessary or desirable to enable such Holders to consummate
the public sale or other disposition of the Warrant Shares.
(2) If any registration pursuant to Subsection 1 of
this Section (i) shall be underwritten in whole or in part,
the Company may require that the Warrant Shares requested for
inclusion pursuant to Subsection 1 of this Section (i) be
included int eh underwriting on the same terms and conditions
as the securities otherwise being sold through the
underwriters. In the event that in the good faith judgment of
the managing underwriter of such public offering the inclusion
of all of the Warrant Shares covered by a request for
registration would reduce the number of shares to be offered
by the Company or interfere with the successful marketing of
the shares of stock offered by the Company, the number of
Warrant Shares otherwise to be included in the underwritten
public offering may be reduced pro rata (by number of shares)
among the holders thereof requesting such registration or
excluded in their entirety if so required by the underwriter.
To the extent only a portion of the Warrant Shares is included
in the underwritten public offering, those Warrant Shares
which are thus excluded from the underwritten public offering
shall be withheld from the market by the holders thereof for a
period, not to exceed 120 days, which the managing underwriter
reasonably determines is necessary in order to effect the
underwritten public offering.
The obligation of the Company under Subsection 2 of this
Section (i) shall be limited to two registration statements.
(3) The Company shall bear the entire cost and
expense of any registration of securities initiated by it
under Subsection (1) of this Section (i) notwithstanding that
Warrant Shares may be included in any such registration. Any
holder whose Warrant Shares are included in any such
registration statement pursuant to this Section (i) shall,
however, bear the fees of his own counsel and any
registration fees, transfer taxes or underwriting discounts
or commissions applicable to the Warrant Shares sold by him
pursuant thereto.
<PAGE> 7
XPLOR CORPORATION
[SEAL] By:
-------------------------------------
Name:
Dated: May , 1997 Title:
Attest:
- ----------------------------
Name:
Title:
<PAGE> 8
PURCHASE FORM
Dated ____________________________, 1998.
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing ___________ share of Common Stock and
hereby makes payment of _________________ in payment of the actual exercise
price thereof.
-------------------------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------
Signature
-------------------------------------
<PAGE> 9
ASSIGNMENT FORM
FOR VALUE RECEIVED, __________________________________ hereby
sells, assigns and transfers unto
Name
------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------
the right to purchase Common Stock represented by this Warrant to the extent of
____________shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint __________________ as attorney, to transfer
the same on the books of the Company with full power of substitution in the
premises.
Date , 1998.
----------------------------
Signature
------------------------------------
<PAGE> 1
EXHIBIT 9
Voting Trust Agreement
This voting trust agreement is made effective March 23, 1997, and
replaces and supercedes that Voting Trust Agreement dated June 11, 1996,
between all of then-current shareholders of Venus Energy PLC, a U.K. public
limited company having its U.S. office at 700 N. St. Mary's Street, Suite 1900,
San Antonio, Bexar County, Texas 78205, called the "Shareholders", and E. L.
Ames, Jr., called the "Trustee". This agreement is among shareholders of The
New Venus Exploration, Inc.
The names and addresses of the shareholders and the number of shares
owned by each are as follows:
<TABLE>
<CAPTION>
Name Address Number of
Shares Held
<S> <C> <C>
E. L. Ames, Jr. 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 37,333
Ellen R. Y. Ames 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 141,758
John Y. Ames 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 54,903
Elizabeth A. Jones 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 31,838
E. L. Ames III 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 31,838
Stephen J. Ames 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 31,838
Patrick A. Garcia 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 18,123
Gloria Barrett 700 N. St. Mary's,
Suite 1900,
San Antonio, TX 5,495
</TABLE>
Recitals
A. Each of the Shareholders represents that he or she is the owner of
the number of shares of capital stock of The New Venus
<PAGE> 2
Exploration, Inc., called the "Company", set forth opposite his or her name
above.
B. In order to provide for the smooth and efficient operation of the
Company, to prevent conflicts, and to avoid deadlocks, the Shareholders deem it
to be in the best interest of the Company and all of its shareholders that this
agreement be executed.
For these reasons, the Shareholders, in consideration of their mutual
promises, agree with each other and with the Trustee, and the Trustee agrees
with the Shareholders, as follows:
Section One. Transfer of Stock to Trustee. Each Shareholder will
deposit the number of shares of capital stock set forth opposite his or her
name above and the certificates representing those shares, together with
sufficient instruments executed for their transfer to the Trustee, with the
Trustee, and will receive in exchange trust certificates. On the making of
that deposit, all shares represented by the stock certificates so deposited
will be transferred on the books of the Company to the name of the Trustee, who
is authorized and empowered to cause such transfers to be made, and also to
cause any further transfers to be made that may become necessary due to a
change in the identity of any trustee or trustees as provided here.
Section Two. Trustee's Control Over Stock. During the period this
agreement remains in force, the Trustee will possess legal title to the shares
deposited and will be entitled to exercise all rights whatsoever, including the
right to vote in person or by proxy, in respect of any and all deposited
shares. Each holder of a trust certificate issued by the Trustee will be
entitled to receive payments equal to any and all dividends collected by the
Trustee with respect to shares of stock deposited by the holder of that trust
certificate.
Section Three. Voting Trust Certificate. Upon deposit by any
Shareholder of a certificate or certificates for shares of stock under this
agreement, accompanied by instruments of transfer, the Trustee will deliver or
cause to be delivered to the Shareholder, a voting trust certificate or
certificates for the same number of shares of stock as may be represented by
the certificate or certificates deposited.
2
<PAGE> 3
The voting trust certificates will be in substantially the following
form:
Voting Trust Certificate
VENUS ENERGY PLC
No. __________ __________ Shares
This certifies that __________ has deposited __________ shares of the
capital stock of The New Venus Exploration, Inc., with the undersigned, as
Trustee, under a voting trust agreement dated March 23, 1997, between the
holders of capital stock of The New Venus Exploration, Inc., and E. L. Ames,
Jr., and his successors, as Trustee. This certificate and the interest
represented is transferable only on the books of the Trustee and only on its
presentation and surrender to the Trustee. The holder of this certificate
takes it subject to all the terms and conditions of the voting trust agreement
and becomes a party to such agreement and is entitled to its benefits.
Executed by the undersigned as Trustee on __________ [date].
---------------------
E. L. Ames, Jr.,
Trustee
Section Four. Additional Stock. After this agreement has taken
effect, the Trustee may, from time to time, receive any additional fully paid
shares of the capital stock of the Company on the same terms and conditions as
are set forth in this agreement. In respect of all shares so received, the
Trustee will issue and deliver certificates substantially in the form set out
above, entitling the holder to all the rights specified above.
Section Five. Dividends. All dividends that may accrue on the
deposited stock must be distributed pro rata among the holders of the voting
trust certificates in the proportion they are entitled.
Section Six. Sale of Stock and Certificates by Shareholders. During
the period from the date of this agreement until the second anniversary of the
first day the Company's shares are freely tradeable on a recognized stock
exchange or market pursuant to the Company's initial public offering, but not
later than July 1, 2000, the Shareholders agree, and the Trustee accepts this
trust only on the condition, that the Shareholders will not sell their
equitable interests in their respective shares in a manner that would remove
those shares from the effect of this agreement. However, the voting trust
certificates may be sold, pledged or mortgaged, but every assignee or
transferee of a voting trust certificate issued under this agreement will, by
the acceptance of such certificate,
3
<PAGE> 4
become a party to this agreement, with the same effect as though an original
subscriber to the agreement, and the Trustee will continue to have all rights
granted to it pursuant to this agreement. Irrespective of the foregoing, the
Shareholders acknowledge that all the shares of the Company are presently
restricted shares and are not freely tradeable or transferable. Only when the
Trustee has been supplied with such evidence as he may require, in his sole
discretion, that a transfer of any of the shares or certificates may be made
under, and in accordance with, the rules and laws of the all applicable
governments and agencies, including, without limitation, the U.S. federal and
state securities laws and regulations, will any request for a new such voting
certificate be considered. If that evidence has not been supplied and accepted
by the Trustee for any reason, no Shareholder will request a new certificate,
nor will the Trustee be under any duty to deliver same.
Section Seven. Rights of Trustee. During the period this agreement
remains in effect, the Trustee will possess and will be entitled to exercise,
in person or by proxy, all rights and powers of absolute ownership in respect
of all the stock of the Company deposited with him, including the right to vote
on, to take part in, and consent to, any corporate or shareholders' election or
action of any kind whatsoever, and to receive dividends and distributions on
the stock. The Trustee's right to vote will include the right to vote for the
election of directors and in favor of, or in opposition to, any resolution or
proposed action of any character whatsoever that may require the consent of
shareholders.
Section Eight. Successor Trustee. In the event that E. L.
Ames, Jr., is no longer capable of serving as Trustee or no longer desires to
serve as Trustee, John Y. Ames, E. L. Ames III and Elizabeth Ames Jones, shall
be requested to serve as Co-Trustees, and if they accept, they shall serve as
dependent co-trustees; i.e., actions by the Trustee under this Agreement will
require each of their signatures to be effective.
Section Nine. Termination of Voting Trust. On the earlier of (i) the
second anniversary of the first day that the Company's shares were freely
tradeable on a recognized stock exchange or market pursuant to the Company's
initial public offering, but not later than July 1, 2000, or (ii) the second
anniversary of the closing (if it occurs) of the transaction currently being
considered by the Company with Xplor Corporation and two affiliates of Lomak
Petroleum, Inc. with regard to a business combination of those entities, the
Trustee will distribute the stock of the Company held by it to the holders of
the voting trust certificates in proportion to their respective holdings on
surrender of their certificates to the Trustee, and this agreement will
terminate. Notwithstanding the foregoing to the contrary, the Trustee is
hereby given the right to terminate, at its sole discretion, this
4
<PAGE> 5
agreement at any time prior to those dates, in which case it shall distribute
the stock as specified above.
Section Ten. Sale or Purchase of Shares or Certificates by Trustee.
Nothing contained in this agreement will deprive the Trustee, in its individual
capacity, of the privilege to be enjoyed by all other depositors of selling or
otherwise disposing of voting trust certificates as they see fit, or of
purchasing additional certificates, or of purchasing additional stock and
selling it.
Section Eleven. Compensation of Trustee. The Trustee (or Co-Trustees)
will not be entitled to any compensation for its services as such.
Section Twelve. Resignation of Trustee. Any trustee may resign at any
time by delivering to the Shareholders its written resignation, to take effect
thirty (30) days after the delivery of the resignation. The term "Trustee" as
used in this agreement applies to any properly appointed successor Trustee or
Co-Trustee.
Section Thirteen. Trustee's Liability for Negligence. In voting the
shares of stock held by it or doing any other act with respect to the control
or management of the Company as holder of the deposited stock, the Trustee will
exercise its best judgment in the interest of the Company, to the end that its
affairs be properly managed. No trustee will be liable for any error of
judgment or mistake of law or fact or for any error or omission whatsoever save
only its willful misconduct or gross negligence.
Section Fourteen. Amendment of Voting Trust. This agreement may be
amended or terminated at any time by an instrument in writing executed and
acknowledged by the owners and holders of trust certificates representing over
50% of the shares of stock deposited under this agreement.
Section Fifteen. Acceptance of Trust by Trustee. The Trustee accepts
this trust subject to all of its terms and conditions and agrees that it will
exercise its powers and perform its duties as set forth in this agreement.
Nothing contained in this agreement will be construed to prevent any Trustee
from resigning and discharging itself from the trust.
Section Sixteen. Counterparts. This agreement may be signed in
multiple counterparts, and each party being bound upon its execution of same
regardless of whether all other parties execute same. All copies shall be
considered as one document.
Executed on March 23, 1997, at 700 N. St. Mary's Street, Suite 1900,
San Antonio, Bexar County, Texas.
- ------------------------- -----------------------------
E. L. Ames, Jr. E. L. Ames, III
5
<PAGE> 6
- ------------------------- -----------------------------
Ellen R. Y. Ames Stephen J. Ames
- ------------------------- -----------------------------
John Y. Ames Patrick A. Garcia
- ------------------------- -----------------------------
Elizabeth A. Jones Gloria Barrett
6
<PAGE> 1
EXHIBIT 10.10
SECOND AMENDED AND RESTATED
LOAN AGREEMENT
BY AND BETWEEN
VENUS EXPLORATION, INC.
AND
WELLS FARGO BANK (TEXAS) N.A.
DATED AS OF DECEMBER 19, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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ARTICLE 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Specific Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3 UCC Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4 Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.5 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.6 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 2. THE COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5 Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.6 Manner and Application of Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.7 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.8 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.9 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.10 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 3. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.1 Bank Lien in Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Proceeds Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 4. CERTAIN REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.1 Corporate Existence and Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.3 Power and Authorization; Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.4 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.6 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.7 Title to Properties; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.8 First Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.9 Compliance with Laws and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.11 Use of Proceeds; Margin Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.12 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.13 Purpose of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.14 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.15 Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.16 Burdensome Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
i
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<TABLE>
<S> <C>
4.17 Relationship with Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.18 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.19 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.20 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.21 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.22 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.23 Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.24 Stratum Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 5. CONDITIONS PRECEDENT TO ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.1 Conditions Precedent to Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.2 Each Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.3 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 6. CERTAIN COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Maintenance of Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3 Maintenance of Bank Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Compliance with Laws and Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.5 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.8 Payment and Prepayment of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.9 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.10 Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.12 Acquisitions, Mergers and Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.13 Loans, Advances and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.14 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.15 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.16 Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.17 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.18 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.19 Issuance of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.20 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.22 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.23 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.24 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.25 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.26 Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.27 Preservation of Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.28 Reserve Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.29 Title Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.30 Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.31 Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.32 Stratum Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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<TABLE>
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ARTICLE 7. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.1 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.2 Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Performance by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4 Bank Not in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.5 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.6 Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7 Expenditures by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.8 Delegation of Duties and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 8. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.1 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.2 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.6 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.8 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.9 Multiple Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.10 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.11 Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.12 NO ORAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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<PAGE> 5
List of Schedules
4.2 Subsidiaries
4.21 Environmental Laws
4.22 Gas Imbalances
4.23 Hedging Agreements
6.9 Other Debt
6.12 Acquisitions, Mergers and Dispositions
List of Exhibits
2.1 Borrower Note
5.1(1) Opinion of Counsel
5.2(a) Application for Advance
8.4(b) Provisions of Arbitration Program of Bank
<PAGE> 6
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT is made and entered
into effective as of December 19, 1997, by and between VENUS EXPLORATION, INC.,
a Delaware corporation formerly known as XPLOR CORPORATION, a Delaware
corporation ("Borrower"), and WELLS FARGO BANK (TEXAS) N.A., a national banking
association ("Bank").
W I T N E S S E T H:
WHEREAS, The New Venus Exploration, Inc., a Texas corporation
("New Venus") and Bank entered into that certain Loan Agreement dated May 13,
1997 (the "Original Loan Agreement") pursuant to which, among other things, on
the terms and conditions set forth therein Bank made available to New Venus a
credit facility in an amount of up to $20,000,000; and
WHEREAS, New Venus, Borrower, Lomak Production I, L.P. and
Lomak Resources, L.L.C. have entered into that certain Property Acquisition
Agreement dated April 29, 1997, pursuant to which, among other things, New
Venus transferred and conveyed to Borrower substantially all of its assets
subject to certain liabilities, in exchange for 5,626,473 shares of Borrower's
common stock and certain other securities of Borrower; and
WHEREAS, the transactions contemplated by the Property
Acquisition Agreement were consummated on May 21, 1997, and pursuant thereto
Borrower agreed to and did assume all of the outstanding obligations of New
Venus under the Original Loan Agreement; and
WHEREAS, pursuant to a Certificate of Ownership and Merger
dated June 3, 1997, (the "Certificate of Ownership") Venus Exploration, Inc., a
Delaware corporation and a wholly owned subsidiary, merged with and into its
parent, Xplor Corporation; and
WHEREAS, pursuant to the Certificate of Ownership, the
Certificate of Incorporation of Xplor Corporation became the Certificate of
Incorporation of the surviving corporation except that Article One thereof was
amended to reflect that the name of the surviving corporation is "Venus
Exploration, Inc."; and
WHEREAS, Bank and Borrower entered into that certain Amended and
Restated Loan Agreement effective June 5, 1997 (the "Amended and Restated Loan
Agreement") pursuant to which Borrower obtained a revolving line of credit upon
the terms and conditions set forth therein; and
WHEREAS, Bank and Borrower desire to amend and restate the Amended and
Restated Loan Agreement in its entirety on the terms and conditions set forth
herein.
NOW, THEREFORE, for and in consideration of the monies advanced by
Bank and the mutual covenants and agreements herein contained, and each
intending to be legally bound hereby, the Parties hereby stipulate and agree as
follows:
<PAGE> 7
ARTICLE 1. DEFINITIONS
1.1 Specific Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
Advances shall mean sums loaned or credited to Borrower by
Bank pursuant to the terms of this Agreement and includes any Prime Rate
Advance or LIBOR Advance made pursuant to Section 2.1.
Affiliate shall mean any Person directly or indirectly
Controlling, or under a common Control with, Borrower or any Subsidiary and any
"affiliate" of Borrower within the meaning of the regulations promulgated
pursuant to the Securities Act of 1933, as amended.
Agreement shall mean this Second Amended and Restated Loan
Agreement, including all Schedules and Exhibits hereto, as the same may from
time to time be amended, supplemented or otherwise modified.
Applicable Law shall mean all applicable provisions of all
constitutions, statutes, rules, regulations, and orders of all applicable
Tribunals, and all orders, judgments, and decrees of all courts, administrative
law judges, and arbitrators.
Applicable Rate shall mean either the Prime Rate or the
Effective LIBOR Rate, as the case may be or as the context requires.
Bank shall have the meaning set forth in the introduction to
this Agreement.
Bank Lien shall mean the Liens granted in favor of Bank in the
Collateral pursuant to the Loan Documents.
Borrower shall have the meaning set forth in the introduction
to this Agreement.
Borrowing Base shall mean the amount of indebtedness which can
be adequately supported by the value of oil and gas reserves attributable to
the Collateral, which value shall be determined by Bank, in the exercise of its
sole discretion, in accordance with Bank's customary practices and standards
for oil and gas loans, all as more particularly set forth in Section 2.2.
Business Day shall mean every day which is a commercial
banking business day in Houston, Harris County, Texas.
Capital Expenditures shall mean all payments for any fixed
assets or improvements or for replacements, substitutions or additions thereto,
that have a useful life of more than one year and which are required to be
capitalized under GAAP.
Cash Flow shall mean for any period the net income from
operations of a Person, after provision for currently due Taxes paid with
respect thereto, plus depreciation, depletion and amortization expense.
2
<PAGE> 8
Closing shall mean the closing of the transactions
contemplated hereby on the Closing Date which shall be held in the offices of
Brown, Parker & Leahy, L.L.P., 1200 Smith Street, Suite 3600, Houston, Texas
77002, commencing at 10:00 a.m., Houston, Texas time or at such other time and
place as the Parties may agree.
Closing Date shall mean, as to the Second Amended and Restated
Loan Agreement, December 19, 1997.
Collateral shall mean any property or assets of any Person in
which Bank has or hereafter acquires a Bank Lien to secure the Obligations as
further described in the Security Instruments.
Commitment shall mean the obligation of Bank to make Advances
pursuant to Section 2.1 in the aggregate principal amount at any time
outstanding up to, but not exceeding $50,000,000 and as such amount may be
redetermined from time to time pursuant to Section 2.2 or terminated pursuant
to Section 7.2.
Commitment Termination Date shall mean 11:00 a.m. Houston,
Texas time on June 30, 2000, or such earlier date as the Commitment terminates
pursuant to the terms of this Agreement.
Compensation shall mean, with respect to any Person, all
payments and accruals commonly considered to be compensation, including,
without limitation, all wages, salary, deferred payment arrangements, bonus
payments and accruals, profit sharing arrangements, payment in respect of stock
option or phantom stock option or similar arrangements, stock appreciation
rights or similar rights, incentive payments, pension or employment benefit
contributions or similar payments, made to or accrued for the account of such
Person or otherwise for the direct or indirect benefit of such Person.
Control shall mean the possession, directly or indirectly, of
the power to direct or cause direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
Current Financials shall mean the pro forma Financial
Statements of Borrower and its Subsidiaries, for the fiscal year ended
December 31, 1996.
Current Ratio shall mean the ratio of the sum of all assets of
Borrower which are classified as current assets on the balance sheet of
Borrower in accordance with GAAP, plus an amount equal to the unused
availability under the Borrowing Base; to all accounts payable and other
current liabilities of Borrower required to be accrued on the balance sheet of
Borrower in accordance with GAAP.
Debt of any Person shall mean (a) all obligations, contingent
or otherwise, which in accordance with GAAP should be classified upon such
Person's balance sheet as liabilities, but in any event including liabilities
secured by any Lien existing on property owned or acquired by such Person or a
Subsidiary thereof (whether or not the liability secured thereby shall have
been assumed) and obligations under any leases which have been (or, in
accordance with GAAP, should be) capitalized for financial reporting purposes,
other than usual and customary oil and gas leases; and
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(b) all guarantees, endorsements, and other contingent obligations of such
Person with respect to the obligations of other Persons of the type described
in (a) preceding, including, but not limited to, any obligations to acquire any
of such obligations, to purchase, sell, or furnish property or services
primarily for the purpose of enabling such other Person to make payment of any
of such obligations, and/or to otherwise assure the owner of any of such
obligations against loss with respect thereto.
Debtor Relief Laws shall mean the Bankruptcy Code of the
United States of America, as amended from time to time, and all other
applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership, insolvency, reorganization or similar debtor relief Laws from
time to time in effect affecting the Rights of creditors generally.
$ and Dollars shall mean the lawful currency of the United
States of America.
Effective LIBOR Rate shall mean the rate of interest on all
LIBOR Advances at the rate of LIBOR plus 1.75%.
Environmental Laws shall mean all federal, state and local
environmental laws, and any rule or regulation promulgated thereunder and any
order, standard, interim regulation, moratorium, policy or guideline of or
pertaining to any federal, state or local government, department or agency,
including, but not limited to, the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended ("CERCLA"); and the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"); the Clean Water
Act; the Clear Air Act; the Toxic Substance Control Act; the Occupational
Safety and Health Act; Federal Insecticide, Fungicide and Rodenticide, Marine
Protection, Research and Sanctuaries Act; National Environmental Policy Act;
Noise Control Act; Safe Drinking Water Act; the Resource Conservation and
Recovery Act ("RCRA"), as amended; the Hazardous Materials Transportation Act;
Refuse Act; the Uranium Mill Tailings Radiation Control Act; and the Atomic
Energy Act and regulations of the Nuclear Regulatory Agency, and all state and
local counterpart or related statutes, laws, regulations, and orders and
treaties of the United States.
ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default shall have the meaning set forth in Article
7.
Eurodollar Business Day means a Business Day on which Dollars
are traded in the London interbank Eurodollar market.
Financial Statements shall mean balance sheets, statements of
operations and stockholders' equity and statements of Cash Flow, prepared in
comparative form with respect to the corresponding period of the preceding
fiscal year and in accordance with GAAP.
Hazardous Substance shall mean those substances defined in 42
U.S.C. Section 9601(14) or any related or applicable state or local statute,
law, regulation or ordinance, petroleum (including crude oil or any fraction
thereof), any form of natural or synthetic gas, sludge, as defined in 42 U.S.C.
Section 69.03(26A), radioactive substances, hazardous waste, as defined in 42
U.S.C. Section 96.03(5), and solid waste, as defined in 42 U.S.C. Section
96.03(27), and other wastes.
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Hedging Agreements shall mean any commodity or interest rate
swap cap, floor, collar, forward agreement or other exchange or rate protection
agreements or any option with respect to any such transaction.
Highest Lawful Rate shall mean the maximum rate (or, if the
context so permits, an amount calculated at such rate) of interest which, at
the time in question, would not cause the interest charged to exceed the
maximum amount which Bank would be allowed to contract for, charge, take,
reserve or receive under applicable Law after taking into account, to the
extent required by applicable Law, any and all relevant payments or charges
under the Loan Documents.
Hydrocarbon Interests shall mean all rights, titles, interests
and estates of Borrower in and to oil and gas leases, oil, gas and mineral
leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests,
overriding royalty and royalty interests, net profit interests and production
payment interests, including any reserved or residual interest of whatever
nature.
Hydrocarbons shall mean oil, gas, casinghead gas, drip
gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons,
gaseous hydrocarbons and all products refined or separated therefrom and, if
applicable under a valid lease, all other minerals.
Inchoate Lien means any Lien for Taxes not yet due and
payable, mechanic's lien and materialman's lien for services or materials for
which payment is not yet due or which is being contested in good faith by
appropriate proceedings, provided that a reserve has been established therefor,
in accordance with GAAP, a landlord's Lien for rental not yet due and payable
and other similar Liens.
Initial Reserve Report shall mean the report of New Venus
dated April 1, 1997 that is a compilation of reports prepared by Hite, Powers &
Associates with respect to the oil and gas reserves of Borrower that reflects
Borrower's net interest therein, a copy of which has been delivered to Bank.
Interest Expense shall mean all accrued interest paid or
applicable by Borrower during any applicable period.
Interest Payment Date means (a) with respect to any Prime Rate
Advance, the last day of each month while such Advance is outstanding and the
date such Advance is repaid in full or converted to another type of Advance
pursuant to the terms of this Agreement and (b) (i) with respect to any LIBOR
Advance with an Interest Period of less than six months, the last day of each
Interest Period for such Advance and the date such Advance is repaid in full or
converted to another type of Advance pursuant to the terms of this Agreement,
and (ii) for any LIBOR Advance with a six- month Interest Period, the day which
is three months following the first day of such Interest Period.
Interest Period means, with respect to any LIBOR Advance, the
period used for the computation of interest commencing on the date such Advance
is made or deemed made, continued or effected by conversion, and concluding on
the date one, two, three or six months thereafter, in each case at the
Borrower's option, with any subsequent Interest Period commencing on the last
day of the immediately preceding Interest Period and concluding on the last day
of such subsequent Interest Period; provided. however, that:
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(i) no Interest Period may extend beyond
the Commitment Termination Date for the Note;
(ii) any Interest Period for a LIBOR
Advance which would otherwise end on a day which is
not a Eurodollar Business Day shall be extended to
the next succeeding Eurodollar Business Day unless
such Eurodollar Business Day falls in another
calendar month, in which case such Interest Period
shall end on the next preceding Eurodollar Business
Day; and
(iii) any Interest Period for a LIBOR
Advance which begins on the last Eurodollar Business
Day of the calendar month (or on a day for which
there is no numerically corresponding day in the
calendar month at the end of such Interest Period)
shall end on the last Eurodollar Business Day of the
calendar month in which it would have ended if there
were a numerically corresponding day in such calendar
month.
IRC shall mean the Internal Revenue Code of 1986, and the
rules and regulations promulgated thereunder, all as amended and supplemented
from time to time.
Land Disposal Site shall mean any site, property, facility or
location used directly or indirectly for land disposal, as defined in 42 U.S.C.
Section 6924(k), landfill, dump, surface impoundment, containment area or
device for Hazardous Substances, whether such sites or locations possess duly
issued government permits.
Laws shall mean all applicable statutes, laws, ordinances,
regulations, orders, writs, injunctions or decrees of any state, commonwealth,
nation, country, territory, possession, county, parish, municipality or
Tribunal.
LIBOR means, at all times during the respective Interest
Period for each LIBOR Advance, a rate per annum as determined by Bank (rounded
upwards, if necessary to the nearest whole multiple of 1/16 of 1%) at which
deposits in Dollars in immediately available and freely transferable funds
would be offered by Bank to leading banks in the London interbank Eurodollar
market at approximately 11:00 a.m. London time two Eurodollar Business Days
before the first day of the respective Interest Period for a period equal to
such Interest Period and in amounts substantially equal to the amount of the
LIBOR Advance. Each determination of LIBOR made by Bank in accordance with
this paragraph shall be presumed correct in the absence of manifest error.
LIBOR Advance means any Advance which, pursuant to Section
2.1, is accruing interest at a rate per annum based upon LIBOR.
Lien shall mean any valid and enforceable mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, security interest,
lien (statutory or other), preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any mechanic's lien, materialman's lien, conditional sale
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agreement, title retention agreement, any lease, which under applicable Law is
deemed to create a lien, security interest or the equivalent), and any
financing statement filed under the Uniform Commercial Code or comparable Law
of any jurisdiction by or under the authority of the Person stated to be the
Debtor under such financing statement, which financing statement is sufficient
to create and perfect a Lien, security interest, or the equivalent.
Loan Documents shall mean this Agreement, the Note, the
Security Instruments and any and all notes, guaranties and other agreements,
documents and instruments ever delivered pursuant to the terms of this
Agreement, as hereafter renewed, amended or supplemented from time to time, and
any and all future renewals and extensions of, or amendments or supplements to,
all or any part of the foregoing.
Material Adverse Effect shall mean any set of circumstances or
event which (a) could have any adverse effect whatsoever upon the validity or
enforceability of any Loan Document; (b) is or could reasonably be expected to
become material and adverse to the financial condition or business operations
of Borrower; (c) does or could reasonably be expected to impair Borrower's
ability to fulfill its obligations under the terms and conditions of the Loan
Documents; or (d) causes an Event of Default.
Mortgage shall mean the Mortgage, Deed of Trust, Assignment of
Production, Security Agreement and Financing Statement executed by Borrower and
delivered to Bank pursuant to Section 5.1(c), as the same may from time to time
be amended, modified or supplemented.
Net Income shall mean, for any period, the net income of
Borrower for such period determined in accordance with GAAP.
Net Proceeds from Production shall mean the amounts
attributable to Borrower's interest in proceeds from the sale of Hydrocarbons
from the Oil and Gas Properties covered by the Mortgages after deduction of (a)
royalties; (b) pipeline, severance and windfall profit taxes chargeable against
such production; (c) overriding royalties; (d) other interests in and measured
by production burdening said properties; and (e) that portion of operating and
marketing costs which are allocable to Borrower's interests in said Oil and Gas
Properties allowed under the applicable joint operating agreement, if any.
Note shall mean the promissory note executed by Borrower and
payable to the order of Bank pursuant to Section 2.1, and all promissory notes
which renew, rearrange or replace such promissory note.
Obligation shall mean all present and future indebtedness,
obligations and liabilities, and all renewals and extensions thereof, or any
part thereof, now or hereafter owed to Bank by Borrower, including, without
limitation, those arising from, by virtue of, or pursuant to any Loan Document,
together with all interest accruing thereon and costs, expenses and attorneys'
fees incurred in the enforcement or collection thereof, whether such
indebtedness, obligations and liabilities are direct, indirect, fixed,
contingent, liquidated, unliquidated, joint, several or joint and several or
were, prior to acquisition thereof by Bank, owed to some other Person.
Oil and Gas Properties shall mean Hydrocarbon Interests; the
properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization,
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<PAGE> 13
pooling agreements and declarations of pooled units and the units created
thereby (including without limitation all units created under orders,
regulations and rules of any governmental body or agency having jurisdiction)
which may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable
to the Hydrocarbon Interests, the lands covered thereby and all oil in tanks
and all net rents, issues, profits, proceeds, products, revenues and other
incomes from or attributable to the Hydrocarbon Interests; all tenements,
hereditament, appurtenances and Properties in anywise appertaining, belonging,
affixed or incidental to the Hydrocarbon Interests, Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding
drilling rigs, automotive equipment or other personal property which may be on
such premises for the purpose of drilling a well or for other similar temporary
uses) and including any and all oil wells, gas wells, injection wells or other
wells, buildings, structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing.
Parties shall mean Borrower and Bank.
Party shall mean either Borrower or Bank.
PBGC shall mean the Pension Benefit Guaranty Corporation, or
any successor thereof, established pursuant to ERISA.
Permitted Liens shall mean (a) the Liens in favor of Bank
securing the Obligations; (b) Inchoate Liens; (c) pledges or deposits made to
secure payment of worker's compensation, or to participate in any fund in
connection with worker's compensation, unemployment insurance, pensions or
other social security programs; (d) good-faith pledges or deposits made to
secure performance of bids, tenders, contracts (other than for the repayment of
borrowed money) or leases, not in excess of 10% of the aggregate amount due
thereunder, or to secure statutory obligations, surety or appeal bonds or
indemnity, performance, or other similar bonds in the ordinary course of
business; (e) Liens in favor of Stratum under the Stratum Documents; (f)
purchase money Liens securing Debt of Borrower not to exceed $500,000 in the
aggregate; (g) minor defects in title which do not secure the payment of money
and otherwise have no Material Adverse Effect on the value or operation of Oil
and Gas Properties, and easements, rights-of-way, servitudes, permits, surface
leases and other similar rights in respect of surface operations, and easements
for pipelines, streets, alleys, highways, telephone lines, power lines,
railways, and other easements and rights-of-way, on, over or in respect of any
of the properties of Borrower (or its Subsidiaries, as applicable) that are
customarily granted in the oil and gas industry; so long as, with respect to
any of the minor defects in title, the same are minor defects which are
customary and usual in the oil and gas industry and which are customarily
accepted by a reasonably prudent operator dealing with its properties; (h)
production sales contracts, gas balancing agreements, and joint operating
agreements entered into in the ordinary course of business and which do not
involve any advance payments for production
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<PAGE> 14
to be produced at a later date; provided, that the amount of all gas imbalances
known to any authorized officer of Borrower shall have been disclosed or
otherwise taken into account in the Reserve Report delivered to Bank hereunder;
(i) Liens for Taxes or other assessments not yet due or not yet delinquent, or,
if delinquent, that are being contested in good faith in the normal course of
business by appropriate action for which adequate reserves have been
established; and (j) all rights to consent by, required notices to, filings
with, or other actions by, Tribunals in connection with the sale or conveyance
of oil and gas leases or interests therein if Borrower (or its Subsidiaries, if
applicable) is entitled to such consent, the same are customarily obtained
subsequent to the sale or conveyance, and the appropriate Person is proceeding
diligently to obtain the consent, notice or filing.
Person shall mean any individual, firm, corporation, trust,
association, partnership, joint venture, Tribunal or other entity.
Potential Default shall mean the occurrence of any event
which, with notice or lapse of time or both, could become an Event of Default
hereunder, and potential default means the occurrence of any event which, with
notice or lapse of time or both, could become an event of default under the
agreement, document or instrument in question.
Prime Rate means that rate of interest established from time
to time by Bank as its prime rate of interest, after taking into account such
factors as Bank may from time to time, in its sole discretion, deem
appropriate, it being understood, however, that Bank may from time to time make
various loans at rates of interest having no relationship to such Prime Rate of
interest.
Prime Rate Advance means any Advance which, pursuant to
Section 2.1, is accruing interest at a fluctuating rate per annum equal to the
Prime Rate.
Proceeds Account shall have the meaning set forth in Section
3.2.
Property shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
Regulation D shall mean Regulation D of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Part 204.
Regulation G shall mean Regulation G of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Part 207.
Regulation T shall mean Regulation T of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Part 220.
Regulation U shall mean Regulation U of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Part 221.
Regulation X shall mean Regulation X of the Board of Governors
of the Federal Reserve System 12 C.F.R., Part 224.
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Release shall have the meaning set forth in 42 U.S.C. Section
9601(22) and shall mean the presence or disposal, as defined in 42 U.S.C.
Section 6903(c) of Hazardous Substances, including pesticides and fertilizers,
on the Property or at any site, property, facility or location.
Reserve Percentage means, on any day, that percentage
(expressed as a decimal fraction) that is in effect on such day, as provided by
the Board of Governors of the Federal Reserve System (or any successor
governmental body) applied for determining the reserve requirements (including,
without limitation, basic, supplemental, marginal and emergency reserves) under
Regulation D with respect to "Eurocurrency liabilities" as currently defined in
Regulation D, or under any similar or successor regulation with respect to
Eurocurrency liabilities or Eurocurrency funding. Each determination by Bank
of the LIBOR Reserve Percentage shall, in the absence of manifest error, be
conclusive and binding.
Rights shall mean rights, remedies, powers and privileges.
Security Instruments shall mean the Mortgages and all
financing statements, notices and other documents executed in connection
therewith.
Solvent shall mean, with respect to any Person on a particular
date, that on such date (a) fair value of the property of such Person is
greater than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person; (b) the present fair and salable value
of the assets of such Person is not less than the amount that will be required
to pay the probable liabilities of such Person on its Debts as they become
absolute and matured; (c) such Person is able to realize upon its assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business; (d) such Person
does not intend to, and does not believe that it will, incur Debts or
liabilities beyond such Person's ability to pay as such Debts and liabilities
mature; and (e) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount which, in
light of all the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual and mature
liability.
Stratum shall mean collectively, Stratum Group, L.P., a
Delaware limited partnership and Stratum Group Energy Partners, L.P., a
Delaware limited partnership.
Stratum Documents shall mean collectively, any and all
documents, as amended on May 21, 1997, executed by Venus Development or Venus
Energy and delivered to or in favor of Stratum, including, but not limited to,
that certain Term Loan and Security Master Agreement dated October 8, 1996;
that certain Crude Oil Purchase and Sale Option Master Agreement; that certain
Natural Gas Purchase and Sale Option Master Agreement; the Term Notes dated
October 8, 1996 in the aggregate principal amount of $20,000,000 executed by
Venus Development and payable to Stratum; and any and all documents,
instruments and other contracts executed in connection with any of the
foregoing.
Subsidiary shall mean, on the date in question, any Person of
which an aggregate of 50% or more of the stock of any class or classes (or
equivalent interests) of which is owned of record
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or beneficially, directly or indirectly, by Borrower and/or any of its
Subsidiaries, if Borrower (a) is ordinarily, in the absence of contingencies,
entitled to vote for the election of a majority of directors (or individuals
performing similar functions) of such Person, even though the Right to so vote
has been suspended by the happening of such a contingency; or (b) is entitled,
as such holder, to vote for the election of a majority of the directors (or
individuals performing similar functions) of such Person, whether or not the
Right so to vote exists by reason of the happening of any contingency.
Tangible Net Worth shall mean stockholder's equity minus the
sum of (a) any surplus resulting from the write-up of assets; plus (b) good
will, including any amounts, however designated, representing the excess of the
purchase price paid for the assets or stock acquired over the book value
assigned thereto; plus (c) patents, trademarks, service marks, trade names and
copyrights; and plus (d) other intangible assets.
Tanks shall mean all above ground and underground storage
tanks, as defined in 42 U.S.C. Section 6991(l), whether in use or not at all
above ground and underground storage tanks used currently for the storage of
hazardous substances or any petroleum product, including heating oil, gasoline,
or diesel fuel.
Taxes shall mean all taxes, assessments, 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.
Tribunal shall mean any court or governmental department,
commission, board, bureau, agency or instrumentality of any state,
commonwealth, nation, territory, possession, county, parish or municipality,
whether now or hereafter constituted and/or existing.
UCC shall mean the Uniform Commercial Code as enacted in the
State of Texas or other applicable jurisdiction, as amended.
Venus Development shall mean Venus Development, Inc., a Texas
corporation, a Subsidiary of Borrower.
1.2 Accounting Terms. As used herein, the term GAAP
shall mean generally accepted accounting principles, applied on a consistent
basis, (a) as set forth in Opinions of the Accounting Principles Board of the
American Institute of Certified Public Accountants ("AICPA") and/or in
statements of the Financial Accounting Standards Board which are applicable in
the circumstances as of the date in question; and (b) where not inconsistent
with such opinions and statements, as set forth in other AICPA publications and
guidelines and/or which otherwise arise by custom for the particular industry;
and the requisite that such principles be applied on a consistent basis means
that the accounting principles in a current period are comparable in all
material respects to those applied in a preceding period. All accounting and
financial terms used in any of the Loan Documents and the compliance with each
covenant contained in the Loan Documents which relates to financial matters
shall be determined in accordance with GAAP, except to the extent that a
deviation therefrom is expressly stated in such Loan Documents.
1.3 UCC Terms. Except as otherwise defined herein, all
terms with their initial letter capitalized that are defined in the UCC shall
have the meanings as defined in the UCC.
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1.4 Other Terms. Other terms may be defined elsewhere in
the text of this Agreement and shall have the meaning indicated throughout this
Agreement.
1.5 Use of Defined Terms. All terms defined in this
Agreement shall have their defined meanings when used in any other Loan
Document.
1.6 Other Definitional Provisions.
(a) The words "hereof," "herein" and "hereunder," and
words of similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
(b) Terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
ARTICLE 2. THE COMMITMENT
2.1 Commitment. Subject to the terms and conditions of
this Agreement, Bank agrees to make one or more Advances to Borrower from time
to time prior to the Commitment Termination Date, provided that the aggregate
amount of all Advances at any time outstanding shall not exceed the lesser of
(i) the Borrowing Base in effect from time to time; or (ii) the amount of the
Commitment. Subject to the foregoing limitations and other terms of this
Agreement, Borrower may borrow, repay and reborrow under the Commitment. The
Obligation to repay the Advances made to Borrower pursuant to the Commitment
shall be evidenced by Borrower's Note in the form of Exhibit 2.1 hereto,
payable to the order of Bank.
Within the limits of this Section 2.1, Borrower may borrow, repay and
reborrow hereunder, according to the terms hereof, each Advance being evidenced
by the Note under which such Advance is requested; provided, however, that (i)
subject to the provisions of the Credit Sweep Service described in Section 2.5
hereof, each Prime Rate Advance shall be in a minimum amount of $50,000 or an
integral multiple thereof and each LIBOR Advance shall be in a minimum amount
of $250,000; (ii) the aggregate outstanding principal amount of Advances shall
not at any time exceed the Borrowing Base then in effect; and (iii) no more
than eight (8) LIBOR Advances may be outstanding at any time.
Each request by Borrower for an Advance under this Section 2.1 may be
made by Borrower's delivery (which may be by telephone and immediately
confirmed by telecopy facsimile transmission) to Bank of a request for advance
(the "Request for Advance") signed by an executive officer of Borrower in the
form of Exhibit "5.2" attached hereto. The Request for Advance for Prime Rate
Advances shall be submitted to Bank by at least 12:00 noon, Central Time, on
the desired advance date, and for LIBOR Advances shall be submitted to Bank by
at least 12:00 noon, Central Time, three Business Days prior to the desired
advance date. Subject to the terms and conditions of this Agreement, Borrower
may select a subsequent Interest Period to begin on the last day of the
immediately preceding Interest Period for any LIBOR Advance and may convert
such LIBOR Advance to a Prime Rate Advance. Subject to the terms and
conditions of this Agreement, Borrower may also convert a Prime Rate Advance to
a LIBOR Advance.
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2.2 Borrowing Base.
(a) On or before February 15 and August 15 of each year
Borrower shall furnish to Bank (i) a report in form and substance satisfactory
to Bank, of a petroleum engineer satisfactory to Bank, which report shall be
dated as of January 1, as prepared by an independent third party petroleum
engineering firm acceptable to Bank, and July 1, as prepared by Borrower, of
such year and shall set forth the proven oil and gas reserves of Borrower, as
of such date; (ii) any updated production history of the proven oil and gas
reserves of Borrower; (iii) the discounted net present value (at a rate
reasonably acceptable to Bank); (iv) the net general overhead and
administrative expenses and the lease operating expenses attributable to the
Oil and Gas Properties of Borrower for the prior twelve month period; and (v)
such other information as to the operations of Borrower as Bank shall
reasonably request. Together with each of the reports to be furnished pursuant
to this Section 2.2(a) Borrower shall furnish to Bank such additional data and
information concerning pricing, quantities or volume of production from or
attributable to the Oil and Gas Properties with respect thereto as Bank may
reasonably request.
(b) After receipt of all of the information required by
Section 2.2(a), Bank may redetermine the amount of the Borrowing Base in
accordance with the customary practices of Bank for oil and gas loans to be
effective as of April 1 and October 1 of such year. In connection with the
initial Redetermination of the Borrowing Base as set forth herein, Borrower
agrees to pay to Bank an Engineering Fee in the amount of $2,500. Thereafter,
upon delivery to Bank of the information required by 2.2(a), Borrower shall pay
to Bank an Engineering Fee in the amount of $2,500. Until the next
determination of the amount of the Borrowing Base by Bank, the amount of the
Borrowing Base as of the Closing Date shall be deemed to be $2,500,000 upon
Bank obtaining duly perfected Bank Liens on the Oil and Gas Properties of
Borrower set forth on Schedule 2.2(b)(i) hereto and thereafter increased to
$5,250,000 upon Bank obtaining duly perfected Bank Liens on the Oil and Gas
Properties of Borrower set forth on Schedule 2.2(b)(ii) hereto. Borrower shall
have forty-five (45) days from the execution and delivery by Borrower of
Mortgages in favor of Bank on the Oil and Gas Properties described in the
foregoing Schedules to confirm, to the reasonable satisfaction of Bank, either
by receipt of legal opinions or other method acceptable to Bank that the
Mortgages have been duly recorded and constitute perfected first Bank Liens on
the Oil and Gas Properties of Borrower described therein. Thereafter, until
each new determination of Borrowing Base is made by Bank, the amount of the
Borrowing Base shall be deemed to be the Borrowing Base last deemed or
calculated, as the case may be. In addition to the foregoing, Bank or Borrower
may initiate a redetermination of the Borrowing Base at any other time as it so
elects, provided, however, that Borrower may initiate only two (2) such
unscheduled redeterminations during any consecutive twelve (12) month period by
specifying in writing to Bank the date on which Borrower will furnish the
information required by Section 2.2(a) and the date on which it desires such
redetermination to occur. Bank shall have at least forty-five (45) days after
the delivery of the information required by Section 2.2(a) to make any
unscheduled redetermination of the Borrowing Base requested by Borrower. Bank
may, at any time and at its expense, initiate an unscheduled redetermination of
the Borrowing Base by specifying in writing to Borrower the date by which
Borrower is to furnish the information required by Section 2.2(a) (excluding
the information required by Section 2.2(a)(i)) and the projected date on which
such redetermination is to occur. Failure of Borrower to timely furnish such
information required by Section 2.2(a) shall not preclude Bank's right to
redetermine the Borrowing Base based on information previously furnished to
Bank. Bank shall promptly notify in writing Borrower of the new Borrowing
Base. Any redetermination of the Borrowing Base shall not be effective until
written notice is sent to Borrower.
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(c) In the event the aggregate unpaid principal amount of
all Advances, shall, at any time, be in excess of the amount of the Borrowing
Base in effect at such time, then Borrower shall, within thirty (30) days of
such event, at the option of Borrower, either (i) subject to the Bank Lien, by
instruments satisfactory in form and substance to Bank, provide additional
collateral with value in amounts satisfactory to Bank in accordance with the
customary practices of Bank for oil and gas loans, in order to increase the
Borrowing Base by an amount at least equal to such excess; or (ii) prepay the
outstanding principal of the Note in an aggregate amount at least equal to such
excess; or (iii) subject to the approval of Bank, pay to Bank up to one hundred
percent (100%) of the Net Proceeds from Production until the aggregate unpaid
principal amount of all Advances, is equal to or less than the Borrowing Base
then in effect.
2.3 Repayment. Accrued interest on the Advances shall be
due and payable monthly commencing on June 30th and continuing on the last day
of each day of each month thereafter until all Advances are paid in full. All
principal and unpaid interest thereon shall be due and payable on the
Commitment Termination Date. All payments received on the Advances shall be
applied first to accrued interest and then to principal.
2.4 Interest.
(a) Each Prime Rate Advance shall bear interest on the
unpaid principal amount thereof until payment in full at the Prime Rate, but in
no event to exceed the Highest Lawful Rate. Any change in the interest rate
accruing on an Advance resulting from a change in the Prime Rate shall become
effective as of the opening of business on the day on which such change in the
Prime Rate shall occur. Each LIBOR Advance shall bear interest on the unpaid
principal amount thereof until payment in full at the Effective LIBOR Rate, but
in no event to exceed the Highest Lawful Rate.
(b) Notwithstanding the foregoing, if at any time the
Applicable Rate exceeds the Highest Lawful Rate, any subsequent reductions in
the Applicable Rate shall not reduce the rate of interest hereunder below the
Highest Lawful Rate until the total amount of interest accrued approximately
equals (but does not exceed) the amount of interest which would have accrued if
the Applicable Rate had at all times been in effect. In the event that at
maturity (whether stated or by acceleration) or at final payment of the Note,
the total amount of interest paid or accrued on the Note is less than the
amount of interest which would have accrued if the Applicable Rate had at all
times been in effect with respect thereto, then at such time Borrower shall pay
to Bank an amount equal to the difference between (i) the lesser of the amount
of interest which would have accrued if the Applicable Rate had at all times
been in effect and the amount of interest which would have accrued if the
Highest Lawful Rate had at all times been in effect; and (ii) the amount of
interest actually accrued on the Note.
(c) Notwithstanding the foregoing, all past-due principal
of and interest on the Note shall bear interest at a rate per annum from day to
day equal to the lesser of (i) the Highest Lawful Rate in effect from day to
day; or (ii) the Prime Rate plus 5% (the "Default Rate"), from maturity
(whether stated or by acceleration) until paid.
(d) Interest shall be calculated (i) (A) for Prime Rate
Advances, on the basis of a 360-day year; and (B) for LIBOR Advances, on the
basis of a year of 360 days; and (ii) for the actual number of days elapsed,
including the first day, but excluding the last day. Interest shall be
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due and payable on each Interest Payment Date and on the Commitment Termination
Date on the Note.
2.5 Voluntary Prepayments. Borrower shall be entitled
to prepay the Prime Rate Advances from time to time and at any time, in whole
or in part, without penalty; provided that unless Borrower and Bank otherwise
agree in writing (a) all accrued interest and any and all fees and other sums
then due and payable to Bank under the Loan Documents shall be paid; (b) a
prepayment shall be applied to installments of principal of the Advances in
inverse order of maturity; (c) any partial prepayment must be at least $100,000
and must be an integral multiple of $25,000; and (d) and Borrower may prepay
any Prime Rate Advance in connection with the Credit Sweep Service provided by
Bank to Borrower as described on Exhibit 2.5 hereof. Borrower must have given
Bank one (1) Business Day prior written notice of the intention to prepay any
part of the Prime Rate Advances; and a LIBOR Advance may only be paid on the
last day of the Interest Period therefor.
2.6 Manner and Application of Payments and Prepayments.
Each payment or prepayment of interest or principal on the Advances must be
paid at Bank's principal office in Houston, Texas, in funds which are or will
be available for immediate use by Bank by 12:00 noon Central Time on the day
such payment or prepayment is due or made. In any case, where a payment of
principal of or interest on the Advances is due on a day which is not a
Business Day, Borrower shall be entitled to delay such payment until the next
succeeding Business Day, but interest shall continue to accrue at the rate then
effective under the Note until the payment is in fact made.
2.7 Mandatory Prepayments. Subject to the provisions of
Section 2.2(c), if, at any time, the sum of the outstanding principal balance
under the Note exceeds the Borrowing Base, or if at any time the Borrower has
knowledge that the sum of the outstanding principal balance under the Note
exceeds the Borrowing Base, then Borrower shall forthwith prepay the amount of
such excess for application towards reduction of the outstanding principal
balance of the Note. Such prepayment shall be with no premium or penalty, and
shall be made together with the payment of accrued interest on the amount
prepaid.
2.8 Capital Adequacy. If either (i) the introduction of
or any change in or in the interpretation of any Law or regulation; or (ii)
compliance by Bank with any guideline or request from any central bank or other
Tribunal (whether or not having the force of Law) affects or would affect the
amount of capital required or expected to be maintained by Bank or any
corporation controlling Bank and Bank determines that the amount of such
capital is increased by or based upon the existence of Bank's obligations and
commitments hereunder and other obligations and commitments of this type, then,
upon demand by Bank, Borrower shall immediately pay to Bank, from time to time
as specified by Bank, additional amounts sufficient to compensate Bank in the
light of such circumstances, to the extent that Bank reasonably determines that
such increase in capital to be allocable to the existence of Bank's obligations
and commitments hereunder. A certificate as to such amounts submitted to
Borrower by Bank, shall, in the absence of manifest error, be conclusive and
binding for all purposes.
2.9 Facility Fee. At Closing, Borrower shall pay to Bank
a Facility Fee equal to three-eighths percent (3/8%) of the increased Borrowing
Base. Thereafter, Borrower shall pay to Bank a Facility Fee equal to three-
eighths percent (3/8%) of any increase in the Borrowing Base as redetermined
from time to time. Notwithstanding the foregoing, if the Borrowing Base is
reduced
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and thereafter subsequently increased, no Facility Fee will be due until the
Borrowing Base exceeds the largest amount previously granted to Borrower and in
such event the Facility Fee will only be applicable to the increase over such
highest amount. For example, if the Borrowing Base is reduced to $4,000,000
and subsequently increased to $5,000,000, no Facility Fee is due. If the
Borrowing Base is increased to $6,000,000, a Facility Fee is due based on the
difference between the highest Borrowing Base, i.e., $5,250,000 and $6,000,000.
2.10 Commitment Fee. From the date hereof until the
Commitment Termination Date, Borrower shall pay to Bank a commitment fee, as it
accrues on the tenth (10th) day of each July, October, January, and April equal
to three-eighths percent (3/8%) per annum (calculated on the basis of actual
days elapsed, but computed as if each calendar year consisted of 360 days) on
the daily average difference, during the preceding calendar quarter or portion
thereof preceding such payment date, between Borrowing Base in effect for such
calendar quarter and the principal amount outstanding under the Note.
2.11 Use of Proceeds. Borrower may use the proceeds of
the Advances to refinance Debt in favor of Stratum under the Stratum Documents;
finance future acquisitions, working capital and other general corporate
purposes.
2.12 Special Provisions Regarding LIBOR Advances.
(a) Illegality. Notwithstanding any other provisions of
this Agreement or the Note, if at any time Bank shall determine in good faith
that any change in Applicable Law or in the interpretation thereof makes it
unlawful for Bank to make or continue to maintain any LIBOR Advance, Bank shall
promptly give notice thereof to Borrower and the obligation to make, continue
or effect by conversion any LIBOR Advance under this Agreement shall be
suspended until Bank shall notify Borrower that the circumstances causing such
suspension no longer exist. Borrower may request that the principal amount of
any affected LIBOR Advance begin to accrue interest as a Prime Rate Advance,
subject to all of the terms and conditions of this Agreement.
(b) Unavailability of Deposits or Inability to Ascertain
LIBOR. Notwithstanding any other provision of this Agreement or the Note to
the contrary, if prior to the commencement of any Interest Period Bank shall
determine (i) that deposits in the amount of any LIBOR Advance are not
available to Bank or (ii) by reason of circumstances affecting the London
interbank Eurodollar market, adequate and reasonable means do not exist for
ascertaining the LIBOR, then Bank shall promptly give notice thereof to
Borrower and the obligation of Bank to make, continue or effect by conversion
any such LIBOR Advance in such amount and for such Interest Period shall
terminate until deposits in such amount and for the Interest Period selected by
Borrower shall again be readily available to Bank and adequate and reasonable
means exist for ascertaining the LIBOR. Upon the giving of such notice,
Borrower may elect to either (i) pay or prepay, as the case may be, such
affected LIBOR Advance or (ii) convert such affected LIBOR Advance to another
type of Advance available hereunder, subject to all of the terms and conditions
of this Agreement.
(c) Funding Indemnity. In the event Bank shall incur any
actual loss, cost, expense or premium (including, without limitation, any loss
of profit and any loss, cost, expense or premium incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by Bank to fund
or maintain any LIBOR Advance or the relending or reinvesting of such deposits
or amounts paid or prepaid to Bank) as a result of: (i) any payment of a LIBOR
Advance on a date
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other than the last day of the then applicable Interest Period; (ii) any
failure by Borrower to borrow, continue, or effect by conversion any LIBOR
Advance on the date specified in a notice given pursuant to Section 2.1; or
(iii) the occurrence of any Event of Default; then, upon the demand of Bank,
Borrower shall pay to Bank, for the benefit of Bank, such amount as will
reimburse Bank for such loss, cost or expense. If Bank makes a claim for
reimbursement on behalf of Bank, it shall provide to Borrower a certificate
setting forth the amount of such loss, cost or expense in reasonable detail and
such certificate shall be presumed correct as to the amount thereof in the
absence of manifest error.
(d) Discretion of Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, Bank shall be
entitled to fund and maintain its funding of all or any part of the LIBOR
Advances in any manner Bank sees fit, it being understood however, that for the
purposes of this Agreement all determinations hereunder shall be made as if
Bank had actually funded and maintained each LIBOR Advance during each Interest
Period for such Advance through the purchase of deposits having maturity
corresponding to such Interest Period and bearing an interest rate equal to the
LIBOR for such Interest Period.
(e) LIBOR Reserve Costs. Borrower agrees to pay Bank
additional interest on the outstanding principal amount of each LIBOR Advance
from the date such LIBOR Advance is made until such LIBOR Advance is paid in
full or converted to another type of Advance at an interest rate per annum
equal, at all times during such Interest Period, to (i) the rate obtained by
dividing (A) Bank's LIBOR for such Interest Period by (B) a percentage
(expressed as a decimal) equal to 100% minus the Reserve Percentage of Bank for
such Interest Period minus (ii) Bank's LIBOR for such Interest Period, but in
no event to exceed the Highest Lawful Rate. Bank shall notify Borrower of the
interest due pursuant to this Section 2.13, which notice shall be presumed
correct in the absence of manifest error.
(f) Taxes and Increased Costs. With respect to any LIBOR
Advance, if Bank shall determine in good faith that any change in Applicable
Law (including, without limitation, Regulation D) or any new Applicable Law, or
any interpretation of any of the foregoing by any Tribunal charged with the
administration thereof or any central bank or other fiscal, monetary or other
authority having jurisdiction over Bank (whether or not having the force of
Law) shall:
(i) impose, modify or deem applicable any
assessment rate, reserve, special deposit or similar requirements
against letters of credit issued by, or assets held by, or deposits in
or for the account of, or loans by, or any other acquisition of funds
or disbursements by Bank;
(ii) subject Bank, any LIBOR Advance or their
respective Note to any tax, duty, charge, stamp tax, fee, deduction or
withholding in respect of this Agreement, any LIBOR Advance or the
Note, except such taxes as may be measured by the overall net income
of Bank and imposed by the jurisdiction, or any political subdivision
or taxing authority thereof, in which Bank's principal executive
office is located;
(iii) change the basis of taxation of payments of
principal and interest due from Borrower to Bank hereunder or under
their respective Note (other than by a change in basis of taxation of
the net income of Bank); or
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(iv) impose on Bank any penalty with respect to
the foregoing or any other condition regarding this Agreement, its
disbursement, any fixed rate Advance or their respective Note;
and Bank shall determine that the result of any of the foregoing is to increase
the cost (whether by incurring a cost or adding to a cost) to Bank for making
or maintaining any LIBOR Advance or to reduce the amount of principal or
interest received by Bank, then Borrower shall pay to Bank, from time to time
as specified by Bank, such additional amounts as Bank shall determine are
sufficient to compensate and indemnify Bank for such increased cost or reduced
amount. Bank shall promptly give Borrower notice of any condition described in
this section that gives Bank a right to compensation under this section. If
Bank makes such a claim for compensation, it shall provide to Borrower a
certificate setting forth, in reasonable detail, such increased cost or reduced
amount as a result of any event mentioned herein and such certificate shall be
presumed correct.
ARTICLE 3. COLLATERAL
3.1 Bank Lien in Collateral. The full and complete
payment and performance of the Obligation shall be secured under the Security
Instruments by first and prior Bank Liens in, to and on all of Borrower's
respective Rights, titles and interests in and to (but none of Borrower's
obligations with respect to) the following items and types of property (the
"Collateral"), all as more particularly set forth and described in the Security
Instruments:
(a) All present and future Rights, titles and interests
that Borrower may now have or hereafter acquire in and to the Oil and Gas
Properties, including, but not limited to, oil and gas and/or oil, gas and
mineral leases and interests, royalty and overriding royalty interests,
production payment and net profits interests, mineral fee interests, and Rights
therein, including, without limitation, all reversionary or carried interests
relating to the foregoing, together with all present and future Rights, titles
and interests in and to all present and future unitization, communitization and
pooling agreements (and all properties covered and units created thereby),
whether arising by contract or operation of Law, which now or hereafter include
all or any part of the foregoing and together with all lands now or hereafter
subject to any of the foregoing, and all tenements, hereditaments,
appurtenances, and properties in anywise appertaining, belonging, affixed or
incidental to any of the foregoing.
(b) All present and future Hydrocarbon Interests now or
hereafter accruing to or produced from mineral interests described in (a)
preceding and to which Borrower now or hereafter may be entitled as a result of
ownership thereof.
(c) Whether now owned or hereafter acquired, all present
and future Rights, titles and interests of Borrower, (including without
limitation, the Rights to receive payments due thereunder) in and to any and
all gas sales contracts, oil, gas or other condensates or other products sales
contracts now or hereafter existing in connection with the Collateral described
hereinabove.
3.2 Security Instruments. The Bank Liens in the
Collateral shall be further evidenced and governed by the Security Instruments.
3.3 Proceeds Account. The Security Instruments contain
an assignment by Borrower to Bank of all production of Borrower's Hydrocarbons
and all proceeds attributable thereto
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properly allocable to the Oil and Gas Properties of Borrower. Borrower and
Bank hereby agree to open an account with Bank into which all such proceeds
from the production of Hydrocarbons shall be deposited (the "Proceeds
Account"). Borrower hereby grants to Bank, subject to the prior assignment in
favor of Bank of Borrower's production and its proceeds, a security interest in
that portion of the Proceeds Account attributable to the Hydrocarbon Interests.
Notwithstanding the foregoing, Borrower may, until Bank shall give notice to
the contrary, have access to all such proceeds in the Proceeds Account. Upon
the occurrence of an Event of Default, Bank may apply any and all balances
attributable to Borrower in the Proceeds Account to the Obligations.
ARTICLE 4. CERTAIN REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Bank that:
4.1 Corporate Existence and Business. Borrower is (a) a
corporation duly organized, validly existing and in good standing under the
Laws of its jurisdiction of incorporation; (b) is duly qualified to transact
business as a foreign corporation in each other jurisdiction where the nature
or extent of its business and properties require the same; and (c) possesses
all requisite authority, power, licenses, permits and franchises to conduct its
business as presently conducted.
4.2 Subsidiaries. Borrower has no subsidiaries other
than the Subsidiaries set forth on Schedule 4.2. Each Subsidiary (a) is a
corporation duly organized, validly existing and in good standing under the
Laws of its jurisdiction of incorporation; (b) is duly qualified to transact
business as a foreign corporation in each jurisdiction where the nature or
extent of its business and properties require the same; and (c) possesses all
requisite authority, power, licenses, permits and franchises to conduct its
business as presently conducted. Except as set forth on Schedule 4.2, no
Subsidiary has used or transacted business under any other corporate name or
trade name in the five year period preceding the date hereof.
4.3 Power and Authorization; Enforceability. Borrower
and each Subsidiary have full power, authority and legal right to execute,
deliver and perform the Loan Documents, and to borrow under this Agreement on
the terms and conditions hereof, and to grant the Bank Liens and to take such
action as may be necessary to complete the transactions contemplated by the
Loan Documents, and Borrower and each Subsidiary have taken all necessary
corporate and legal action to authorize the borrowing on the terms and
conditions of this Agreement and the grant of the Bank Liens and to authorize
the execution, delivery and performance of the Loan Documents on the terms and
conditions hereof and thereof. Each of the Loan Documents has been duly
authorized, executed and delivered by Borrower and each Subsidiary and
constitutes a legal, valid and binding obligation of the party executing same,
enforceable against such party in accordance with its terms.
4.4 Consents. No consent of any other Person and no
consent, license, permit, approval or authorization of, exemption by, or
registration or declaration with, any Tribunal is required in connection with
the execution, delivery, performance, validity or enforceability of any of the
Loan Documents.
4.5 Financial Statements. The Current Financials were
prepared in accordance with GAAP and fairly present the consolidated financial
condition and the results of operations of Borrower and its Subsidiaries as of,
and for the fiscal year ended on, the date thereof. There were no material
liabilities, direct or indirect, fixed or contingent, of Borrower or any
Subsidiary as of the
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date or dates of the Current Financials which are not reflected therein or in
the notes thereto. There has been no material adverse change in the financial
condition of Borrower or any Subsidiary from that shown in the Current
Financials between such date or dates and the date hereof, nor has Borrower or
any Subsidiary incurred any material liability, direct or indirect, fixed or
contingent, other than in the ordinary course of business.
4.6 Tax Returns. Borrower and its Subsidiaries have
filed all United States tax returns and all state and foreign tax returns
required to be filed by them and have paid, or made provisions for the payment
of, all Taxes which have become due pursuant to said returns or pursuant to any
assessments received by Borrower or any Subsidiary except such Taxes, if any,
as are being contested in good faith and as to which adequate reserves have
been provided in accordance with GAAP, and such returns properly reflect the
United States income tax, foreign tax and/or state taxes of Borrower or any
Subsidiary for the periods covered thereby.
4.7 Title to Properties; Liens. Borrower has good and
defensible title to its respective material (individually or in the aggregate)
Oil and Gas Properties, free and clear of all Liens except Permitted Liens. On
the date of this Agreement, after giving full effect to the Permitted Liens,
Borrower owns the net interests in production attributable to the wells and
units evaluated in the Initial Reserve Report or the most recent Reserve Report
furnished to Bank pursuant to Section 6.27 and the ownership of such Oil and
Gas Properties shall not in any material respect obligate Borrower to bear the
costs and expenses relating to the maintenance, development and operations of
each such Property in any amount in excess of the working interest of each Oil
and Gas Property set forth in the Initial Reserve Report or the most recent
Reserve Report furnished to Bank pursuant to Section 6.28. All information
contained in the Initial Reserve Report or the most recent Reserve Report
provided to Bank (whichever is most recent) is true and correct in all material
respects.
4.8 First Lien. Upon filing of the Mortgages with the
Clerk of the County or Parish where the property thereby covered is located and
financing statements with the Secretary of States of Texas and other
appropriate Tribunal where the Mortgages are filed, the Security Instruments
will constitute legal, valid and continuing perfected first liens on the
Collateral as security for the Obligation, free and clear of all other Liens,
except for Permitted Liens.
4.9 Compliance with Laws and Documents. Neither Borrower
nor any Subsidiary is now, nor will the execution, delivery, or the performance
of and compliance with the terms of the Loan Documents cause Borrower or any
Subsidiary to be, in violation of (a) any Laws now in effect; (b) the terms of
any agreement, contract, document, or instrument to which Borrower or any
Subsidiary is a party or by which it or any of its assets is bound; or (c)
Borrower's or any Subsidiary's Articles or Certificate of Incorporation or
Bylaws. Borrower has not violated any requirement of any Tribunal or failed to
obtain any license, permit, franchise or other governmental authorization
necessary for the ownership and operation of the Oil and Gas Properties or the
conduct of its business. The Oil and Gas Properties (and properties unitized
therewith) have been maintained, operated and developed in a good and worker
like manner and in conformity with all applicable Laws and all rules,
regulations and orders of all duly constituted Tribunals having jurisdiction
and in conformity with the provisions of all leases, subleases or other
contracts comprising a part of the Hydrocarbon Interests and other contracts
and agreements forming a part of the Oil and Gas Properties; specifically in
this connection, (i) after the Closing Date, no Oil and Gas Property is subject
to having allowable production reduced below the full and regular allowable
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(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the Closing
Date; and (ii) none of the wells comprising a part of the Oil and Gas
Properties (or properties unitized therewith) are deviated from the vertical
more than the maximum permitted by applicable Laws and regulations, rules and
orders of any Tribunal having appropriate jurisdiction, and such wells are, in
fact, bottomed under and are producing from, and the wellbores are wholly
within, the Oil and Gas Properties (or in the case of wells located on
properties unitized therewith, such unitized properties).
4.10 Litigation. There is no action, suit or proceeding
pending or, to the knowledge of Borrower threatened, against Borrower or any
Subsidiary before any court, governmental department, administrative agency or
instrumentality which, if such action, suit or proceeding were adversely
determined, would materially adversely affect the financial position or the
results of operations of Borrower or any Subsidiary or its business or the
ability of Borrower or any Subsidiary to perform their respective obligations
under the Loan Documents.
4.11 Use of Proceeds; Margin Securities. Neither Borrower
nor any Subsidiary is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing
or carrying "Margin Stock" (within the meaning of Regulations G, T, U, or X)
and no part of the proceeds of any extension of credit under this Agreement
will be used to purchase or carry any such Margin Stock or extend credit to
others for the purpose of purchasing or carrying Margin Stock. Neither
Borrower nor any Person acting on its behalf has taken any action that might
cause the transactions contemplated by this Agreement or the Note to violate
Regulations G, T, U, or X or to violate the Securities Exchange Act of 1934, as
amended.
4.12 Employee Benefit Plans. Neither Borrower nor any
Subsidiary has (a) incurred an accumulated funding deficiency in an amount
sufficient to have a Material Adverse Effect under any employee benefit plan
(as defined in the IRC and ERISA); (b) incurred material liability to PBGC in
connection with any benefit plan; (c) withdrawn in whole or in part from
participation in a multiemployer pension plan (as defined in ERISA); or (d)
committed, permitted or suffered any "prohibited transaction" or "reportable
event" (as defined in ERISA).
4.13 Purpose of Advances. The proceeds of the Advances
are not and will not be used directly or indirectly (a) for the purpose of
purchasing or carrying, or for the purpose of extending credit to others for
the purpose of purchasing or carrying, any "margin stock" as that term is
defined in Regulation U; or (b) for any purpose which violates Regulation X.
4.14 No Default. No Event of Default or Potential
Default has occurred.
4.15 Government Regulation. Neither Borrower, any
Affiliate of Borrower nor any subsidiary is subject to regulation under the
Public Utility Holding Company Act of 1935, the Federal Power Act, the
Investment Company Act of 1940, the Interstate Commerce Act (as any of the
preceding acts have been amended) or any other Law which regulates the
incurring by any Person of Debt, including, without limitation, Laws relating
to common or contract carriers or the sale of electricity, gas, steam, water or
other public utility service.
4.16 Burdensome Provisions. Except for the obligations of
Borrower under the Stratum Documents, neither Borrower nor any Subsidiary is a
party to any agreement or instrument containing any burdensome or uncustomary
provisions, or subject to any charter or other corporate
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restrictions or to any judgment, order, writ, injunction, decree, award, rule
or regulation, which will or could cause a Material Adverse Effect.
4.17 Relationship with Bank. No Person having "control"
of Borrower or any Subsidiary is an "executive officer," "director" or "person
who directly or indirectly or in concert with one or more persons, owns,
controls or has the power to vote more than 10% of any class of voting
securities" (as such terms are defined in the Financial Institutions Regulatory
and Interest Rate Control Act of 1978 and the regulations thereunder, as
amended) of Bank or any bank with which Bank maintains correspondent accounts.
4.18 Principal Office. The principal place of business,
the chief executive office and the place at which the books and records of
Borrower and each Subsidiary are kept is 1250 Northeast Loop 410, Suite 1000,
San Antonio, Texas 78209.
4.19 Full Disclosure. Neither the Loan Documents nor any
other agreement, document, certificate or statement furnished to Bank by or on
behalf of Borrower or any Subsidiary in connection with the transactions
contemplated in any of the Loan Documents contains any untrue statement of
material fact or omits to state a material fact necessary in order to make
statements contained herein or therein not misleading. There are no
significant material facts or conditions relating to the making of Advances,
any of the Collateral and/or the financial condition and business of Borrower
or any Subsidiary which could, collectively or individually, cause a Material
Adverse Effect, and which have not been fully disclosed, in writing, to Bank.
All writings heretofore or hereafter exhibited or delivered to Bank by or on
behalf of Borrower are and will be genuine and in all respects what they
purport to be.
4.20 Solvency. After giving effect to the initial Advance
and the other transactions contemplated by the Loan Documents, Borrower will be
Solvent as of and on the Closing Date and on the date of each subsequent
Advance.
4.21 Environmental Laws. To the best knowledge and belief
of Borrower, except as described on Schedule 4.21:
(a) no Oil and Gas 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 Law or the terms
of a valid permit, license, certificate, or approval of the relevant Tribunal,
no Release of Hazardous Substances by Borrower or from, affecting, or related
to any Oil and Gas Property of Borrower or adjacent to any Oil and Gas Property
of Borrower has occurred in concentrations or locations that require any
remedial action under Environmental Laws;
(d) no Notice under any Environmental Laws has been
received by Borrower which could reasonably be expected to have a Material
Adverse Effect;
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(e) neither Borrower nor any Oil and Gas Property of
Borrower is subject to any remedial obligations with respect to any
Environmental Law; and
(f) Borrower has taken prudent steps to ensure that its
Oil and Gas Properties are and will continue to be in compliance with all
Environmental Laws.
4.22 Gas Imbalances. Except as set forth on Schedule
4.22, on a net basis there are no gas imbalances, take or pay or other
prepayments with respect to Borrower's Oil and Gas Properties which would
require Borrower or any Subsidiary to deliver Hydrocarbons produced from
Borrower's Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor.
4.23 Hedging Agreements. Schedule 4.23 sets forth a true
and complete list of all Hedging Agreements (including commodity price swap
agreements, forward agreements or contracts of sale which provide for
prepayment for deferred shipment or delivery of oil, gas or other commodities)
of Borrower, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements relating thereto (including any
margin declared or supplied) and the counter party to each such agreement).
4.24 Stratum Documents. The Stratum Documents are in full
force and effect; are the legal, valid and binding obligations of Venus
Development and are non recourse to Borrower or any other Person.
ARTICLE 5. CONDITIONS PRECEDENT TO ADVANCES
5.1 Conditions Precedent to Advances. Bank will not be
obligated to make any Advance until Bank receives the following:
(a) Loan Agreement. This Loan Agreement executed and
delivered by Borrower and Bank.
(b) Note. The Note executed by Borrower, payable to the
order of Bank.
(c) Mortgages. The Mortgages, executed by Borrower in a
form reasonably satisfactory to Bank and its counsel with respect to the
properties therein described, which are part of the Collateral, and such other
agreements, documents and instruments as may be necessary and appropriate, in
form and substance reasonably satisfactory to Bank, executed and delivered by
Borrower, as mortgagor or assignor, in favor of Bank, in order to create and
perfect the Bank Liens in and to all Collateral described therein.
(d) Insurance. Evidence of insurance coverage in such
amounts, against such risks, and with such insurers as required by Section 6.6,
together with the policies (containing a standard mortgagee clause, if
appropriate) or certificates evidencing such insurance.
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(e) Corporate Documents. A copy of the Articles or
Certificate of Incorporation (or similar document) and all amendments thereto,
of Borrower and each Subsidiary accompanied by certificates that such copy is
correct and complete, one issued by the appropriate Tribunal of the
jurisdiction of incorporation of Borrower and each Subsidiary within thirty
(30) days of the Closing Date, and one dated the Closing Date, executed by the
President and the Secretary of Borrower and each Subsidiary, respectively.
(f) Bylaws. A copy of the Bylaws, and all amendments
thereto, of Borrower and each Subsidiary, accompanied by a certificate that
such copy is correct and complete, executed by the President and the Secretary
of Borrower and each Subsidiary, respectively.
(g) Good Standing. Certificates of the appropriate
Tribunals of such jurisdictions as Bank may request, each dated within thirty
(30) days of the Closing Date, to the effect that Borrower and each Subsidiary
is in good standing with respect to the payment of franchise and similar Taxes
and is duly qualified to transact business in such jurisdictions.
(h) Incumbency. A certificate of incumbency of all
officers of Borrower and each Subsidiary who will be authorized to execute or
attest to any of the Loan Documents on behalf of Borrower and each Subsidiary,
executed by the President and the Secretary of Borrower and each Subsidiary,
respectively.
(i) Corporate Authorization. A copy of resolutions
approving the Loan Documents and authorizing the transactions contemplated
therein, duly adopted by the Board of Directors of Borrower and each
Subsidiary, accompanied by a certificate of the Secretary of Borrower and each
Subsidiary that such copy is a true and correct copy of resolutions duly
adopted by the Board of Directors of Borrower and each Subsidiary, and that
such resolutions constitute all the resolutions 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 Closing Date.
(j) Title Matters. Satisfactory current title
information covering such matters as Bank may request, demonstrating that
Borrower has good and defensible title to each of the Oil and Gas Properties
free and clear of all Liens, except Permitted Liens.
(k) Opinion of Counsel. The opinion of the law firm of
Haynes & Boone, L.L.P., counsel to Borrower and the Subsidiaries, substantially
in the form of Exhibit 5.1(k) attached hereto and otherwise satisfactory in
form and substance to Bank and its counsel.
(l) Representations and Warranties. The representations
and warranties contained in Article 4 hereof shall be true and correct in all
material respects on and as of the date of the making of the initial Advance
with the same effect as if made on and as of such date, and no Event of Default
or Potential Default shall be in existence on the date of the making of the
initial Advance or would occur as a result of the initial Advance and there
shall have been delivered to Bank a certificate executed by the President of
Borrower to the foregoing effect.
(m) Material Adverse Change. There shall not have been,
in the sole, but reasonable judgment of Bank, any material adverse change in
the financial condition, business or operations of Borrower or any Subsidiary.
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(n) Engineering Fee. Bank shall have received the
Initial Engineering Fee as required pursuant to Section 2.2(b).
(o) Facility Fee. Bank shall have received the Facility
Fee as required pursuant to Section 2.9
(p) Other. Such other documents and instruments as Bank
and its counsel may reasonably request.
5.2 Each Advance. In addition to the conditions
precedent stated elsewhere herein, Bank will not be obligated to make any
Advance hereunder unless:
(a) Within one (1) Business Day prior to the date
requested for such Advance, Borrower and each Subsidiary shall have delivered
to Bank a written application therefor in the form of Exhibit 5.2(a), and each
statement or certification made in such application for Advance must be true
and correct in all respects on the date the requested Advance is to be made.
(b) If requested by Bank, Borrower or any Subsidiary
shall have delivered to Bank evidence reasonably satisfactory to Bank
substantiating any of the matters contained in this Agreement which are
necessary to enable Borrower to qualify for such Advance.
(c) The representations and warranties contained in
Article 4 hereof shall be true and correct on and as of the date of the making
of the Advance with the same effect as if made on and as of such date, and no
Event of Default or Potential Default shall be in existence on the date of the
making of the Advance or would occur as a result of the Advance, and there
shall have been delivered to Bank a certificate executed by the President of
Borrower or any Subsidiary to the foregoing effect.
(d) There shall not have been, in the sole, but
reasonable judgment of Bank, any material adverse change in the financial
condition, business or operations of Borrower or any Subsidiary.
5.3 Waiver. Bank may, at its option, make any Advance
(including the initial Advance) without Bank having received all items to be
delivered as a condition precedent thereto, but such action by Bank shall not
be deemed to be a waiver of the requirement that each such item be delivered as
a condition precedent to any subsequent Advance unless Bank specifically waives
each such item in writing.
ARTICLE 6. CERTAIN COVENANTS
So long as Bank is committed to make Advances hereunder, and
thereafter until payment and performance in full of the Obligation, unless
Borrower or any Subsidiary receives a prior written indication from Bank,
Borrower and each Subsidiary covenants and agrees with Bank as follows:
6.1 Financial Statements. Borrower shall furnish, or
cause to be furnished, the following to Bank:
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(a) Within one hundred (100) days after the last day of
each fiscal year of Borrower or any Subsidiary, consolidated and consolidating
audited Financial Statements showing the financial condition and result of
operations of Borrower or any Subsidiary (including Venus Development) as of,
and for the year ended on, such last day, accompanied by the opinion, without
qualification, of a firm of independent certified public accountants acceptable
to Bank, based on an audit using GAAP, that the Financial Statements were
prepared in accordance with GAAP and present fairly the financial condition and
results of operations of Borrower or any Subsidiary.
(b) Within sixty (60) days after the last day of each
fiscal quarter of Borrower or any Subsidiary, Financial Statements showing the
financial condition and result of operations of Borrower or any Subsidiary
(including Venus Development) as of, and for the period from the beginning of
the current fiscal year to such last day, prepared in accordance with GAAP and
certified by the chief financial officer of Borrower or each Subsidiary that
such Financial Statements present fairly the financial conditions and results
of operations of Borrower and each Subsidiary.
(c) Concurrently with the delivery of the Financial
Statements referred to in paragraph (a) above, a certificate of the independent
public accountants who certified such statements to the effect that, in making
the examination necessary for the audit of such Financial Statements, they
obtained no knowledge of any Event of Default or Potential Default or, if they
shall have obtained knowledge of any Event of Default or Potential Default,
specifying the same.
(d) Concurrently with delivery of the Financial
Statements referred to in paragraphs (a) and (b) above, a certificate or
certificates of the chief financial officer of Borrower and each Subsidiary
stating that Borrower and each Subsidiary have observed and performed each and
every covenant and agreement of Borrower and each Subsidiary contained in the
Loan Documents and that no Event of Default or Potential Default has occurred
during the period covered by such Financial Statements or is in existence on
the date of such certificate or, if an Event of Default or Potential Default
has occurred or is in existence, specifying the same.
(e) Concurrently with the delivery of the Financial
Statements referred to in paragraphs (a) and (b) above, a computation of the
financial covenants as required in Sections 6.16 and 6.17 as of the date of
such Financial Statements.
(f) Promptly upon the mailing thereof to the shareholders
of Borrower generally, copies of all financial statements, reports and proxy
statements so mailed.
(g) Promptly upon the filing thereof, copies of all
registration statements (other than the exhibits thereto and any registration
statements on form S-8 or its equivalent) and reports on forms 10-K, 10-Q and
8-K or their equivalent) which Borrower or any of its Affiliates shall have
filed with the Securities and Exchange Commission.
6.2 Maintenance of Corporate Existence. Borrower and
each Subsidiary shall at all times maintain its corporate existence and
authority to transact business and good standing in its jurisdiction of
incorporation and in all other jurisdictions where required to do so by
applicable law and maintain all licenses, permits and franchises necessary or
appropriate for its business.
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6.3 Maintenance of Bank Liens. Borrower and each
Subsidiary shall:
(a) Not relocate its principal place of business, chief
executive office or place where any of Borrower's or each Subsidiary's books
and records related to accounts are kept, or otherwise relocate any of the
other Collateral to another county, parish or state unless (i) Borrower or any
Subsidiary gives Bank thirty (30) days' prior written notice of such proposed
relocation (such notice to include, without limitation, the name of the county
or parish and state into which such relocation is to be made); and (ii) except
where the relocation is to a jurisdiction in which existing financing
statements or other required filings have previously been made to perfect the
Bank Liens in the Collateral, and Borrower or any Subsidiary execute and
deliver all such additional documents and perform all additional acts that
Bank, in its sole discretion, may request in order to continue or maintain the
existence and priority of the Bank Liens in such Collateral; and
(b) Perform such acts and duly authorize, execute,
acknowledge, deliver, file and record such additional assignments, security
agreements, deeds of trust, mortgages and other agreements, documents,
instruments and certificates as Bank may reasonably deem necessary or
appropriate in order to perfect and maintain the Bank Liens in favor of Bank
and preserve and protect the Rights of Bank.
6.4 Compliance with Laws and Rules. Borrower and each
Subsidiary shall comply with all applicable Laws relative to the conduct of its
business or the ownership of its properties or assets.
6.5 Maintenance of Properties. Borrower and each
Subsidiary shall at all times maintain and keep, or cause to be maintained and
kept, in good repair, working order and condition all of its respective
property used or useful in the conduct of its business, and will from time to
time make or cause to be made all needful and proper repairs, renewals,
replacements, betterments and improvements thereto, so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times.
6.6 Insurance. Borrower and each Subsidiary now
maintains, and Borrower and each Subsidiary shall continue to maintain, at its
expense, with financially sound and reputable insurers, insurance with respect
to its properties and business against such liabilities, casualties, risks and
contingencies and in such types and amounts as is customary in the case of
Persons engaged in the same or similar businesses and similarly situated. In
the case of any fire, accident or other casualty causing loss or damage to any
properties of Borrower or any Subsidiary, at Borrower's or any Subsidiary's
discretion, the proceeds of such policies shall be used (i) to repair or
replace the damaged property; or (ii) to prepay the Obligation.
6.7 Taxes. Borrower and each Subsidiary shall promptly
pay when due any and all Taxes due by Borrower or any Subsidiary, except Taxes
being contested in good faith by appropriate legal proceedings with respect to
which reserves have been established in an amount acceptable to Bank and the
criteria for Permitted Liens have been satisfied. Borrower and each Subsidiary
shall not, directly or indirectly, use any portion of the proceeds of any
Advance to pay the wages of employees unless a portion of the proceeds or other
funds are also used to make timely payment to or deposit with the United States
of America all amounts of Tax required to be deducted and withheld with respect
to such wages by Borrower or any Subsidiary under Subtitle C of the IRC.
6.8 Payment and Prepayment of Obligations. Borrower and
each Subsidiary shall promptly pay or renew and extend all of its Debt and
other contractual obligations for the payment
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of money as the same become due, except any such Debt or contractual
obligations being contested in good faith by appropriate legal proceedings, for
which a reserve for the payment thereof has been established in accordance with
GAAP, and with respect to which failure to promptly pay or renew and extend
does not result in the violation of any provision of any material agreement,
contract, document or instrument of Borrower or any Subsidiary that could cause
a Material Adverse Effect. Furthermore, if an Event of Default shall have
occurred, Borrower or any Subsidiary shall not, directly or indirectly, make
any voluntary or involuntary prepayment on the principal of any Debt (other
than the Obligation), whether subordinate to the Obligation or not.
6.9 Debt. Borrower shall not, directly or indirectly,
create, incur or suffer to exist any direct, indirect, fixed or contingent
liability for any Debt, other than (a) the Obligation; (b) current accounts
payable incurred in the ordinary course of business, (c) such other Debt as set
forth on Schedule 6.9; (d) purchase money Debt of Borrower not to exceed
$500,000, and Debt in favor of Stratum under the Stratum Documents.
6.10 Lease Obligations. Borrower or any Subsidiary shall
not, directly or indirectly, enter into, assume, or otherwise obligate itself
for the performance of the obligations of the lessee or tenant under any lease
or sublease (including, without limitation, leases or subleases which should,
in accordance with GAAP, be capitalized for financial reporting purposes) of
property, other than leases or subleases which would not require Borrower or
any Subsidiary to make lease or sublease payments in excess of $250,000 in the
aggregate during any twelve (12) month period (provided, however, that the
foregoing limitations shall not apply to oil and gas leases entered into in the
ordinary course of business.)
6.11 Liens. Borrower or any Subsidiary shall not,
directly or indirectly, create, incur, suffer or permit to be created or
incurred or to exist, any Lien upon any of its assets, except Permitted Liens.
6.12 Mergers and Dispositions. Except as set forth in
Schedule 6.12, Borrower or any Subsidiary shall not, directly or indirectly,
(a) merge or consolidate with any Person unless Borrower is the surviving or
successor entity; or (b) sell, lease or otherwise dispose of all or any part of
its assets, except for sales of inventory in the ordinary course of business.
Notwithstanding the foregoing, without the prior consent of Bank, Borrower or
any Subsidiary will not sell, assign, farmout, convey or otherwise transfer any
Oil and Gas Property or any interest in any Oil and Gas Property except for (i)
the sale of Hydrocarbons in the ordinary course of business; (ii) sales,
farmouts or other transfers of unproved acreage and assignments in connection
with such sale, farmout or transfer; (iii) the sale or transfer of equipment
that is no longer necessary for the business of Borrower or any Subsidiary or
is replaced by equipment of at least comparable value and use; and (iv) during
any calendar year, sales in ordinary course of business of Oil and Gas
Properties which shall not exceed $500,000 in the aggregate.
6.13 Loans, Advances and Investments. Borrower shall not
and shall not permit any Subsidiary to, directly or indirectly, make any loan,
advance, extension of credit or capital contribution to, make investment in or
purchase or commit to purchase stock or other securities or evidences of Debt
of, or interests in, any Person, other than (a) investments in obligations of
the United States of America and agencies thereof and obligations guaranteed by
the United States of America maturing within one (1) year from the date of
acquisition; (b) certificates of deposit issued by Bank or any other commercial
bank which is organized under the Laws of the United States of
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America or any state thereof and which has a combined capital, surplus and
undivided profits of not less than $250,000,000.00; (c) current trade and
customer accounts receivable which are for goods furnished or services rendered
in the ordinary course of business and are payable in accordance with customary
trade terms; and (d) advances to employees in the ordinary course of business
not in excess of $25,000.00 in the aggregate at any one time outstanding.
6.14 Dividends. Borrower or any Subsidiary shall not
declare or pay any dividend on any shares of its capital stock or make any
other distribution to its stockholders, or purchase, redeem or otherwise
acquire for value any of its capital stock.
6.15 Budget. On or before February 15 of each year and if
not delivered by such date within 5 days after request by Bank, Borrower shall
deliver to Bank a financial budget and projections for the fiscal year
beginning January 1 of the Borrower and its Subsidiary which will include, but
not be limited to, projections for Capital Expenditures and Cash Flow for such
fiscal year.
6.16 Current Ratio. Borrower shall not permit its Current
Ratio to ever be less than 1.0:1.0.
6.17 Tangible Net Worth. Borrower shall not permit its
Tangible Net Worth to ever be less than $8,000,000.
6.18 [Intentionally left blank.]
6.19 Transactions with Affiliates. Borrower shall not and
shall not permit any Subsidiary to, directly or indirectly, enter into any
transaction (including, but not limited to, the sale or exchange of property or
the rendering of any service) with any of its Affiliates, other than in the
ordinary course of business of Borrower or any Subsidiary and upon the same or
similar terms as Borrower or any Subsidiary could obtain in an arm's length
transaction with a Person who is not an Affiliate of Borrower or any
Subsidiary.
6.20 Employee Benefit Plans. Borrower shall not and shall
not permit any Subsidiary to, directly or indirectly, engage in any prohibited
transaction (as defined in ERISA), permit the funding requirements under ERISA
with respect to any employee benefit plan established or maintained by Borrower
or any Subsidiary to ever be less than the minimum required by ERISA or the
regulations thereunder, permit any employee benefit plan established or
maintained by Borrower or any Subsidiary to ever be subject to involuntary
termination proceedings or fully or partially withdraw from any multiemployer
pension plan (as such terms are defined in ERISA).
6.21 Changes. Borrower and each Subsidiary shall conduct
their business in substantially the same areas of business as are now and have
heretofore been conducted by Borrower and each Subsidiary. Borrower shall not
and shall not permit any Subsidiary to, directly or indirectly, engage in any
business other than the businesses in which it is presently engaged or change
its method of accounting which effects the calculation of the financial
covenants in Section 6.16 and Section 6.17 above.
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6.22 Inspection. Borrower and each Subsidiary shall
permit Bank or its representatives to visit and inspect any of its properties,
subject to reasonable safety restrictions and in accordance with customs in the
industry and any applicable operating agreement, corporate books and financial
records and to discuss its affairs, finances and accounts with its respective
officers or personnel, all at such times and as often as Bank may request.
6.23 Notice. As soon as reasonably practical after
Borrower becomes aware of same, Borrower or any Subsidiary shall promptly give
written notice to Bank of (i) the occurrence of any Potential Default or Event
of Default; (ii) any legal, judicial or regulatory proceedings affecting either
Borrower, any Subsidiary or any of its properties or assets, in which the
amount involved is material and is not covered (subject to normal deductibles)
by insurance and that is likely to have a Material Adverse Effect on the
business or financial condition of Borrower or any Subsidiary; (iii) any
dispute between Borrower, any Subsidiary and any governmental regulatory body
or other Person that is likely materially to interfere with the normal business
operations of Borrower or any Subsidiary; (iv) substantial damage to any
material part of the Collateral, specifying the nature and extent of damage and
whether such damage is being repaired in due course, or total loss or
destruction of any material part of the Collateral; (v) any other action, event
or condition of any nature of which it has knowledge which may have, or lead
to, or result in, any Material Adverse Effect upon the business, assets or
financial condition of Borrower or any Subsidiary, all taken as a whole; and
(vi) the voluntary or involuntary bankruptcy of, or any assignment for the
benefit of creditor or the seeking of any relief under any Debtor Relief Law by
Borrower or any Subsidiary.
6.24 Assignment. Except as set forth on Schedule 6.24,
Borrower shall not and shall not permit any Subsidiary to, directly or
indirectly, assign, transfer or attempt to do so, any of its Rights, duties or
obligations under any Loan Document.
6.25 Expenses of Bank. Borrower and each Subsidiary will
promptly pay all reasonable out-of-pocket costs, fees and expenses paid or
incurred by (a) Bank incident to any of the Loan Documents (including, without
limitation, the fees and expenses of counsel to Bank in connection with the
negotiation, preparation, and execution hereof and any amendment, waiver or
consent with respect hereto, whether any Advance is ever made, and in
connection with the making of any Advance) or; (b) Bank incident to the
enforcement of the obligations of Borrower or any Subsidiary or the exercise of
any Rights (including, without limitation, attorneys' fees and court costs).
All of the foregoing shall be part of the Obligation.
6.26 Preservation of Oil and Gas Properties. Borrower and
each Subsidiary (except Venus Development) will at their own expense do or
cause to be done all things reasonably necessary to preserve and keep in good
repair, working order and efficiency in accordance with good industry practices
all of the Oil and Gas Properties owned by Borrower or any such Subsidiary
including, without limitation, all equipment, machinery and facilities, and
from time to time will make all the reasonably necessary repairs, renewals and
replacements so that at all times the state and condition of the Oil and Gas
Properties owned by Borrower or any such Subsidiary will be fully preserved and
maintained, except to the extent a portion of such Oil and Gas Properties is no
longer capable of producing Hydrocarbons in economically reasonable amounts.
Borrower and each such Subsidiary will promptly pay and discharge or cause to
be paid and discharged all delay rentals, royalties, expenses and Debt accruing
under, and perform or cause to be performed each and every act, matter or thing
required by, each and all of the assignments, deeds, leases, sub-leases,
contracts and agreements affecting Borrower's or any such Subsidiary's
interests in its Oil and Gas Properties
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and will do all other things necessary to keep unimpaired Borrower's or any
such Subsidiary's Rights with respect thereto and prevent any forfeiture
thereof or a default thereunder, except to the extent a portion of such Oil and
Gas Properties has not been or is no longer capable of producing Hydrocarbons
in economically reasonable amounts. Borrower and each such Subsidiary will
operate the Oil and Gas Properties owned by Borrower or any such Subsidiary or
cause such Oil and Gas Properties to be operated in a manner in accordance with
the practices of the industry and in compliance with all applicable contracts
and agreements and in compliance in all material respects with all requirements
of any Tribunal.
6.27 Reserve Reports.
(a) By February 15 and August 15 of each year, Borrower
and each Subsidiary shall furnish to Bank reports in form and substance
reasonably satisfactory to Bank prepared by an independent engineering firm
reasonably acceptable to Bank (for the report delivered by February 15) or
other qualified petroleum engineers reasonably acceptable to Bank (for the
report delivered by August 15 which may be prepared by an employee of or
consultant to Borrower), which reports shall evaluate the Oil and Gas
Properties of Borrower or any Subsidiary as of the immediately preceding six
months (and dated as of January 1 and July 1, respectively) and which shall,
together with any other information reasonably requested by Bank, set forth the
proven producing and proven non-producing oil and gas reserves attributable to
such Oil and Gas Properties together with a projection of the rate of
production and future net income with respect thereto as of such date.
6.28 Title Information.
(a) By February 15 of each year, Borrower and each
Subsidiary will deliver acquisition summaries, title opinions and due diligence
reports prepared in connection with the acquisition and the financing of the
acquisition of such property prepared for Borrower or any Subsidiary and such
additional title information in form and substance reasonably acceptable to
Bank as is requested so that Bank shall have received, together with the title
information previously received by Bank, satisfactory title information
covering Oil and Gas Properties representing eighty percent (80%) of the value
of such Oil and Gas Properties as set forth in the Reserve Report specified in
Section 6.27, as such value is set forth therein.
6.29 Sales and Leasebacks. Neither Borrower nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby Borrower or any Subsidiary shall sell or transfer any Property,
whether now owned or hereafter acquired, and whereby Borrower or any Subsidiary
shall then or thereafter rent or lease, as lessee, such Property or any part
thereof or other Property which Borrower or any Subsidiary intends to use for
substantially the same purpose or purposes as the Property sold or transferred.
6.30 Hedging Agreements. Neither Borrower nor any
Subsidiary (except in the case of Venus Development which may be required to do
so under the Stratum Documents) will enter into or become obligated under any
Hedging Agreement, except for such agreements which (i) in the aggregate do not
cover at any time a volume of oil and gas (on a barrel of oil equivalent basis)
equal to more than ninety percent (90%) of the projected production of oil and
gas (on a barrel of oil equivalent basis) in any month from Borrower's or any
Subsidiary's proved, developed, producing reserves which are included in the
Borrowing Base; and (ii) are for delivery or settlement on or before the end of
the first calendar year after the calendar year of the date of such agreement.
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6.31 Stratum Documents. Neither Borrower nor any
Subsidiary will enter into any amendment, modification or renewal of the
Stratum Documents without the prior written approval of Bank and at all times,
the Stratum Documents shall remain non recourse to Borrower or any other Person
other than Venus Development.
6.32 Venus Development. Neither Borrower nor any
Subsidiary shall make any additional investment in equity contribution to, or
loan or advance to Venus Development in excess of $20,000 per year in the
aggregate.
ARTICLE 7. DEFAULT
7.1 Default. The occurrence of any of the following
events or conditions shall constitute an Event of Default:
(a) The failure or refusal of Borrower to pay principal
of or interest on the Obligation, or any part thereof, or to pay any fees in
respect of all or any part of the Obligation, as the same become due in
accordance with the terms of the Loan Documents.
(b) The failure or refusal of Borrower or any Subsidiary
to punctually and properly perform, observe and comply with any covenant,
agreement or condition contained in any Loan Document (other than covenants to
pay the Obligation) and such failure or refusal continues unremedied for a
period of ten (10) days.
(c) Borrower or any Subsidiary (except Venus Development)
shall (i) become insolvent, as that term is defined under any applicable Debtor
Relief Law; (ii) fail to pay its Debts generally as they become due; (iii)
voluntarily seek, consent to or acquiesce in the benefit or benefits of any
Debtor Relief Law; or (iv) become a party to (or be made the subject of) any
proceeding provided for by any Debtor Relief Law that could suspend or
otherwise affect any Rights of Bank granted in the Loan Documents.
(d) Borrower or any Subsidiary (except Venus Development)
shall fail (i) to have discharged within a period of thirty (30) days after the
commencement thereof any attachment, sequestration or similar proceeding
against any assets of Borrower or any Subsidiary; or (ii) to pay any money
judgment against it at least ten (10) days prior to the date on which any of
its assets may be lawfully sold to satisfy such judgment.
(e) Borrower or any Subsidiary (except Venus Development)
shall fail to make any payment due on any Debt of Borrower or any Subsidiary or
on any security (with respect to which Borrower or any Subsidiary have
redemption, sinking fund or other purchase obligations), or any event shall
occur or any condition shall exist in respect of any such Debt or security, or
under any agreement securing or relating to such Debt or security, the effect
of which event or condition would (i) permit the taking of any action by any
holder of such Debt or security or a trustee to cause such Debt or security, or
a portion thereof, to become due prior to its stated maturity or prior to its
regularly scheduled date(s) of payment; or (ii) permit a trustee or the holder
of any Debt or security to elect (whether or not such holder or trustee does
elect) a majority of the directors on the Board of Directors of Borrower or any
Subsidiary; or (iii) permit the taking of any action by a trustee or the holder
of any security to demand or request that Borrower or any Subsidiary shall, and
thereby obligate Borrower and each Subsidiary to, purchase or redeem such
security prior to its scheduled
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redemption date. (As used in this Section, the term "security" has the meaning
set forth in the Securities Act of 1933, as amended from time to time).
(f) A petition or complaint is filed by any Tribunal
seeking to cause Borrower or any Subsidiary to divest a significant portion of
its assets pursuant to any antitrust, restraint of trade, unfair competition or
similar Laws, and such petition or complaint is not dismissed, discharged or
stayed within sixty (60) days of the filing thereof.
(g) The discovery by Bank that any statement,
representation, or warranty in the Loan Documents or in any writing ever
delivered to Bank pursuant to the Loan Documents is materially false,
misleading or erroneous and the same remains unremedied for a period of ten
(10) days.
(h) Any substantial impairment of value, loss, damage or
destruction (not covered by insurance) of the Collateral occurs and the same
remains unremedied for a period of ten (10) days.
(i) Any Material Adverse Effect shall occur with respect
to Borrower or any Subsidiary (except Venus Development) and the same remains
unremedied for a period of ten (10) days.
(k) The occurrence of a material change in Control or in
the executive management of Borrower.
7.2 Remedies Upon Default. Should an Event of Default
occur, Bank may, at its election, do any one or more of the following:
(a) Declare the entire unpaid balance of the Obligation,
or any part thereof, immediately due and payable, whereupon it shall be due and
payable, without notice of any kind to Borrower or any Subsidiary; provided
that, upon the occurrence of an Event of Default under Section 7.1(c), the
entire Obligation shall automatically become immediately due and payable
without notice or other action of any kind whatsoever.
(b) Terminate its commitment to lend hereunder.
(c) Reduce any claim to judgment.
(d) Take such steps as Bank may deem appropriate to
foreclose the Bank Liens and/or otherwise realize upon any and all of the
Rights Bank may have in and to the Collateral or any part thereof.
(e) Exercise any and all other Rights afforded by the
Laws of the State of Texas, the United States of America or any other
jurisdiction, as Bank shall deem appropriate, or by any of the Loan Documents,
at Law, in equity or otherwise, including, but not limited to, the Rights to
bring suit or other proceedings before any Tribunal either for specific
performance of any covenant or condition contained in any of the Loan Documents
or in aid of the exercise of any Right granted to Bank in any of the Loan
Documents.
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(f) Exercise the Rights of offset and/or banker's Lien
against the interest of Borrower or any Subsidiary in and to every account and
other property which are in the possession of Bank to the extent of the full
amount of the Obligation.
7.3 Performance by Bank. Should any material covenant,
duty or agreement of Borrower or any Subsidiary fail to be performed in
accordance with the terms of the Loan Documents, Bank may, at its option,
perform or attempt to perform, such covenant, duty or agreement on behalf of
Borrower and each Subsidiary. In such event, Borrower and each Subsidiary
shall, at the request of Bank, promptly pay to Bank any reasonable amount
expended by Bank in such performance or attempted performance, together with
interest thereon at a rate per annum equal to the Default Rate in effect from
day to day, from the date of such expenditure by Bank until paid.
Notwithstanding the foregoing, it is expressly understood that Bank does not
assume and shall never have, except by express written consent of Bank, any
liability or responsibility for the performance of any covenant, duty or
agreement of Borrower and each Subsidiary under any Loan Document.
7.4 Bank Not in Control. None of the covenants or other
provisions contained in this Agreement shall, or shall be deemed to, give Bank
the right or power to exercise control over the affairs and/or management of
Borrower or any Subsidiary, the power of Bank being limited to the right to
exercise the remedies provided in this Section 7.
7.5 Waivers. The acceptance by Bank at any time and from
time to time of part payment on the Obligation shall not be deemed to be a
waiver of any Event of Default then existing. No waiver by Bank of any Event
of Default shall be deemed to be a waiver of any other then-existing or
subsequent Events of Default. No delay or omission by Bank in exercising any
Right under the Loan Documents shall impair such Right or be construed as a
waiver thereof or any acquiescence therein, nor shall any single or partial
exercise of any such Right preclude other or further exercise thereof, or the
exercise of any other Right under the Loan Documents or otherwise.
7.6 Cumulative Remedies. All Rights available to Bank
under the Loan Documents shall be cumulative of and in addition to all other
Rights granted to Bank at law or in equity.
7.7 Expenditures by Bank. Any sums spent by Bank
pursuant to the exercise of any Right provided herein shall become part of the
Obligation and shall bear interest at a rate per annum from day to day equal to
the Default Rate in effect from day to day, from the date spent until the date
repaid by Borrower or any Subsidiary.
7.8 Delegation of Duties and Rights. Bank may exercise
any of its duties and/or exercise any of its Rights under the Loan Documents by
or through its respective officers, directors, employees, attorneys, agents or
other representatives.
ARTICLE 8. GENERAL
8.1 Ratifications. The terms and provisions as set forth
in this Second Amended and Restated Loan Agreement shall modify and supersede
all inconsistent terms and provisions set forth in the Loan Agreement and
except as expressly modified and superseded by this Second Amended and Restated
Loan Agreement, the terms of the Note and any and all other Loan Documents
executed in connection therewith or hereunto are hereby ratified and confirmed
and shall
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continue in full force and effect. Borrower and Bank agree that this Second
Amended and Restated Loan Agreement, the Note and the other Loan Documents are
and shall continue to be the legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms.
8.2 Status of Claims. Borrower hereby represents and
warrants to Bank that no facts, events, status or conditions presently exist
which, either now or with the passage of time or the giving of notice or both,
presently constitute or will constitute a basis for any claim or cause of
action against Bank, or any defense to the payment of any of the Obligations.
Borrower hereby releases, relinquishes and forever discharges Bank, its
successors, assigns, agents, officers, directors, employees and
representatives, of and from any and all claims, demands, actions and causes of
action of any and every kind or character, whether known or unknown, present or
future, which Borrower may have against Bank, its successors, assigns, agents,
officers, directors, employees and representatives, arising out of or with
respect to any and all past transactions relating to the Amended and Restated
Loan Agreement, this Second Amended and Restated Loan Agreement, or any Loan
Document, including any loss, cost or damage, or any kind or character, arising
out of or in any way connected with or in any way resulting from the acts,
actions or omissions of Bank, its successors, assigns, agents, officers,
directors, employees or representatives.
8.3 Captions. The headings, captions and arrangements
used in any of the Loan Documents are, unless specified otherwise, for
convenience only and shall not be deemed to limit, amplify or modify the terms
of the Loan Documents, nor affect the meaning thereof.
8.4 Exhibits. All exhibits and Schedules attached hereto
shall be and are hereby incorporated herein, and made a part of this Agreement
for all purposes.
8.5 Notices. Unless specifically otherwise provided,
whenever any Loan Document requires or permits any consent, approval, notice,
request or demand from one Party to another, such communication must be in
writing to be effective and shall be deemed to have been given on the day
actually delivered. For purposes hereof, until changed by written notice
pursuant hereto, the addresses for Borrower and Bank are as follows:
Borrower: Venus Exploration, Inc.
1250 Northeast Loop 410, Suite 1000
San Antonio, Texas 78209
Attention: John Y. Ames
Copy to: Haynes & Boone, L.L.P.
112 E. Pecan St., Suite 1600
San Antonio, Texas 78205
Attention: Will C. Jones, IV, Esq.
Bank: Wells Fargo Bank (Texas) N.A.
1000 Louisiana, 3rd Floor
Houston, Texas 77002
Attention: Theodore M. Nowak, Vice President
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Copy to: Brown, Parker & Leahy, L.L.P.
1200 Smith Street, Suite 3600
Houston, Texas 77002
Attention: Barry Davis, Esq.
8.6 Governing Law.
(a) THE LOAN DOCUMENTS ARE BEING EXECUTED AND DELIVERED
BY BORROWER AND BANK, AND ARE INTENDED TO BE PERFORMED, IN THE STATE OF TEXAS,
AND (EXCEPT AS SPECIFICALLY PROVIDED OTHERWISE IN ANY LOAN DOCUMENT OR TO THE
EXTENT THAT THE LAWS OF ANY OTHER JURISDICTION OTHERWISE REQUIRE) THE INTERNAL
LAWS OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA SHALL GOVERN THE
RIGHTS AND DUTIES OF THE PARTIES AND THE VALIDITY, CONSTRUCTION, ENFORCEMENT,
AND INTERPRETATION OF THE LOAN DOCUMENTS.
(b) THE PARTIES AGREE TO BE BOUND BY THE TERMS AND
PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF BANK, WHICH IS INCORPORATED BY
REFERENCE HEREIN AND IS ACKNOWLEDGED AS RECEIVED BY THE PARTIES, PURSUANT TO
WHICH ANY KNOWN DISPUTES SHALL BE RESOLVED BY MANDATORY BINDING ARBITRATION
UPON THE REQUEST OF EITHER PARTY. THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY
OR OTHERWISE, SHALL BE RESOLVED ONLY BY THE TERMS AND PROVISIONS OF THE CURRENT
ARBITRATION PROGRAM OF BANK WHICH IS ATTACHED HERETO AS EXHIBIT 8.4(b) AND IS
INCORPORATED HEREIN BY REFERENCE, PURSUANT TO WHICH ANY AND ALL DISPUTES SHALL
BE RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF ANY PARTY.
8.7 Interest. It is the intention of the Parties to
comply with applicable usury Laws; accordingly, it is agreed that
notwithstanding any provisions to the contrary in any Loan Document, in no
event shall any Loan Document permit the collection of interest in excess of
the maximum amount permitted by such Laws. If any such excess of interest is
contracted for, charged or received under any Loan Document or if the maturity
of the Obligation is accelerated in whole or in part, or in the event that all
or part of the principal or interest of the Obligation shall be prepaid, so
that under any of such circumstances the amount of interest contracted for,
charged or received under any Loan Document on the amount of principal actually
outstanding from time to time under the Obligation shall exceed the maximum
amount of interest permitted by applicable usury Laws, then in any such event
(a) the provisions of this Section 8.5 shall govern and control; (b) no Person
now or hereafter liable for the payment of the Obligation shall be obligated to
pay the amount of such interest to the extent that it is in excess of the
maximum amount of interest permitted to be contracted for by, charged to or
received from the Person obligated thereon under the applicable usury Laws; (c)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount on the Obligation or refunded
to the Person paying the same, at the holder's option; and (d) the effective
rate of interest shall be automatically reduced to the maximum lawful rate of
interest permitted to be contracted for by, charged to or received from the
Person obligated thereon under the applicable usury Laws as now or hereafter
construed by the courts having jurisdiction thereof. To the extent the Laws of
the State of Texas are applicable for
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purposes of determining the "Highest Lawful Rate," such term shall mean the
"indicated rate ceiling" from time to time in effect under Article 1.04, Title
79, Revised Civil Statutes of Texas, 1925, as amended, or, if permitted by
applicable Law and effective upon the giving of the notices required by such
Article 1.04 (or effective upon any other date otherwise specified by
applicable Law), the "monthly ceiling," the "quarterly ceiling," or "annualized
ceiling" from time to time in effect under such Article 1.04, whichever Bank
shall elect to substitute for the "indicated rate ceiling," and vice versa,
each such substitution to have the effect provided in such Article 1.04; and
Bank shall be entitled to make such election from time to time and one or more
times and, without notice to Borrower, to leave any such substitute rate in
effect for subsequent periods in accordance with subsection (h)(1) of such
Article 1.04. Pursuant to Article 15.10(b) of Chapter 15, Subtitle 79, Revised
Civil Statutes of Texas, 1925, as amended, Borrower agrees that such Chapter 15
shall not govern or in any manner apply to the Obligation.
8.8 INDEMNIFICATION. BORROWER HEREBY INDEMNIFIES BANK
AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
ATTORNEYS, AND AGENTS FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND
ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, COSTS, AND
EXPENSES (INCLUDING ATTORNEYS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT
DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION,
DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN
DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C)
ANY BREACH BY BORROWER OR ANY SUBSIDIARY OF ANY REPRESENTATION, WARRANTY,
COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE
PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY
HAZARDOUS SUBSTANCE LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE
PROPERTIES OR ASSETS OF BORROWER OR ANY SUBSIDIARY, OR (E) ANY INVESTIGATION,
LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED
INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING
OR RELATING TO ANY OF THE INVENTORY PRODUCED OR SOLD BY BORROWER. WITHOUT
LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS
THE EXPRESS INTENTION OF THE PARTIES THERETO THAT EACH PERSON TO BE INDEMNIFIED
UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND
ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, COSTS, AND
EXPENSES (INCLUDING ATTORNEY'S FEES) ARISING OUT OF OR RESULTING FROM THE SOLE
OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED. THE OBLIGATIONS OF
BORROWER UNDER THIS SECTION SHALL SURVIVE THE REPAYMENT OF THE OBLIGATIONS.
8.9 Severability. If any provision of any of the Loan
Documents is held to be illegal, invalid or unenforceable under present or
future Laws effective during the term thereof, such provision shall be fully
severable; the appropriate Loan Document shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
thereof; and the remaining provisions thereof shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance therefrom. Furthermore, in lieu of
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such illegal, invalid or unenforceable provision, there shall be added
automatically as a part of such Loan Document a provision as similar in terms
to such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
8.10 Entire Agreement. This instrument embodies the
entire agreement among the Parties with respect to the subject matter hereof,
supersedes and replaces all prior agreements and understandings, if any,
relating to the subject matter hereof, and may be amended only by an instrument
in writing executed jointly by authorized officers of Borrower and Bank, and
supplemented only by documents delivered or to be delivered in accordance with
the express terms hereof.
8.11 Multiple Counterparts. This Agreement may be
executed in a number of identical counterparts, each of which shall be deemed
an original for all purposes and all of which constitute, collectively, one
agreement; but, in making proof of this Agreement, it shall not be necessary to
produce or account for more than one such counterpart.
8.12 Successors. This Agreement shall be binding upon and
inure to the benefit of Borrower and Bank and their respective successors and
assigns. Borrower expressly recognizes and agrees that Bank may sell to other
financial institutions interests in the Loans incurred by Borrower hereunder,
and may in connection therewith, assign to such financial institutions any
Right, Bank Lien, or any part thereof created or arising out of any Loan
Document.
8.13 Survival of Representations. All representations and
warranties herein contained or made in writing in connection with this
Agreement shall survive the execution and delivery of this Agreement and the
making of the Loans hereunder and shall continue in full force and effect until
the Obligation shall have been paid in full.
8.14 NO ORAL AGREEMENTS. THIS WRITTEN LOAN AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
IN WITNESS WHEREOF, the Parties have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
"BORROWER"
VENUS EXPLORATION, INC.
By:
---------------------------------
John Y. Ames, President
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"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By:
-------------------------------
Theodore M. Nowak,
Vice President
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EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the
1st day of June, 1996, by and between Venus Energy PLC, a company organized and
existing under the laws of the United Kingdom ("Company"), and E. L. Ames, Jr.,
an individual residing in San Antonio, Bexar County, Texas ("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and
the mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. EMPLOYMENT. Company hereby employs Employee and Employee
hereby accepts employment with Company on the terms and conditions herein set
forth. In consideration of Employee's employment by Company, Employee agrees
to the terms, conditions and covenants of this Agreement.
2. TERM OF EMPLOYMENT. Employment of Employee by Company shall
be for a term of three (3) years.
3. DUTIES AND RESPONSIBILITIES. Employee shall serve as Chief
Executive Officer and, if elected by the Board of Directors of the Company,
Chairman of the Board of Directors of the Company.
3.01 EXTENT OF SERVICES. Employee shall devote his efforts to
the advancement of the interests of the Company's business,
and he shall pursue no new business interests other than
passive investments, without the prior written approval of the
Company, which approval shall not be unreasonably withheld.
Employee shall minimize the interference any such activities
have on the conduct of the Company's business.
3.02 APPROVED OTHER BUSINESS INTERESTS. The Company
understands and accepts the facts that the Employee owns
certain interests in oil and gas properties in his own right
and that the Employee may develop those interests and the
surrounding Areas of Mutual Interest without offering same to,
or in any way involving, the Company. However, Employee
agrees that he will not acquire any new interests outside of
such Areas of Mutual Interests and that all new oil and gas
projects in which he is involved outside of such Areas of
Mutual Interest will be considered a Company project.
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4. COMPENSATION AND BENEFITS. The compensation and other
benefits listed below as payable to or accruing to Employee shall constitute
the full consideration to be paid to Employee for all services to be rendered
by Employee to Company and all other agreements of Employee hereunder.
4.01 BASE SALARY. As compensation for all services of
whatever type rendered by Employee in the performance of his
duties under this Agreement and for all other agreements and
undertakings of Employee hereunder, Company shall pay to
Employee a base salary to be determined from time to time and
approved by the Board of Directors; however, in no event will
such salary be less than $_______ per year. Such salary shall
be payable in equal regular installments in accordance with
Company's customary payroll payment policy. It is
specifically understood and agreed that a portion of
Employee's annual base salary hereunder is attributable to
Employee's agreement, pursuant to Section 8 hereof, to
maintain the confidentiality of "Confidential Information" (as
herein defined), both during and after the term of this
Agreement, and that Employee's salary would be reduced
significantly if Employee did not agree to be bound by the
terms of Section 8. It is further understood and agreed that
a portion of Employee's annual base salary is attributable to
Employee's agreement, pursuant to Section 9 hereof, not to
compete with Company either during or for a specified period
of time after the expiration or termination of this Agreement
and that Employee's annual salary would be reduced
significantly if Employee did not agree to be bound by the
terms of Section 9 hereof. Employee agrees that he is being
fairly and reasonably compensated for the agreements
undertaken by Employee pursuant to Sections 8 and 9 hereof.
4.02 BENEFITS. Employee shall be entitled to four weeks
paid vacation each year, the times for such vacation to be
mutually agreed upon by Employee and Company. Employee shall
be entitled to participate in the Company benefit programs
designed for Company employees with similar salaries, duties
and responsibilities.
4.03 EXPENSES. Company shall pay or reimburse Employee
for all reasonable and necessary expenses actually incurred or
paid by Employee during the term of this Agreement in the
performance of Employee's services under this Agreement, upon
presentation of expense statements or vouchers or such other
supporting documents as Company may reasonably require.
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4.04 AUTOMOBILE. The Company shall provide Employee an
automobile of class, style and age that are commensurate with
the position he holds and the needs of Employee in that
position.
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee
represents, warrants and agrees that: (i) Employee is not currently bound by
any employment agreement, restriction or other obligation of any kind that
would in any way materially interfere with or be inconsistent with the services
to be provided by Employee to Company hereunder; and (ii) Employee is free to
enter into this Agreement and the services and work product provided by
Employee to Company hereunder will be original works of Employee.
6. REGULATIONS AND POLICIES. Employee shall, during the term of
this Agreement, comply with all Company regulations and policies, including,
without limitation, security regulations.
7. CONFIDENTIAL INFORMATION. The term "Confidential
Information," as used herein, shall mean and include any and all documents,
knowledge, data or information (in whatever medium) known, communicated,
provided or made available to Employee, whether before or after the execution
of this Agreement, which are marked within a confidentiality legend by Company
or which Employee knows or reasonably should know constitute trade secrets of
Company or information belonging to third parties to whom Company may have an
obligation of confidentiality; provided, however, that Confidential Information
shall not include any information or materials which are or become generally
available to the public other than as a result of any breach of the provisions
of this Agreement or any other agreement between Employee and Company (or their
respective successors, assigns or affiliates).
8. CONFIDENTIALITY. Employee acknowledges and agrees that in his
employment by Company he occupies a position of trust and confidence and that
during the term of his employment under this Agreement he will have access to
and will become familiar with Company's Confidential Information. Employee
further acknowledges and agrees that the Confidential Information, including
any and all copies thereof, constitutes trade secrets of Company and is
confidential and proprietary information of Company. Employee further
acknowledges and agrees that he has no right, title, interest or claim in or to
any of the Confidential Information or any copies thereof. Employee agrees to
maintain the confidentiality of the Confidential Information and agrees that he
will not take, or permit to be taken, any action with respect to the
Confidential Information (or any portion thereof) which is inconsistent with
the confidential and proprietary nature of such information. Without limiting
the generality of the foregoing, Employee agrees that he will not, directly or
indirectly, without the prior specific written consent of Company, except as
specifically required in the course of his employment,
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(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership,
corporation or other entity, or
(ii) use any Confidential Information in any manner except as
specifically required in connection with the performance of
services hereunder.
Employee agrees to take any and all steps reasonably necessary to
protect the confidentiality of the Confidential Information. Employee shall,
upon termination of this Agreement, immediately return to Company all
Confidential Information in Employee's control or possession, including,
without limitation, any and all copies thereof. This Section shall survive the
expiration or termination of this Agreement for a period of three (3) years.
9. RESTRICTIVE COVENANT AND NONCOMPETITION.
9.01 UPON TERMINATION. As an independent covenant, Employee agrees
that, for a period of three (3) years commencing upon the termination
of this Agreement by expiration of its term or by the Company for
cause, as provided in Section 12 of this Agreement, Employee will not,
unless granted express written permission by the Board of Directors of
Company, develop, work on or in any way advance, directly or
indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other
capacity, any competitor of Company or any other third party, any oil,
gas and mineral exploration or production from the geographic areas,
horizons, plays, formations or trends that the Company was studying to
any significant extent during his employment; provided, however, that
the foregoing shall not prohibit Employee from becoming a passive
shareholder owning less than five percent (5%) of the shares of
another corporation whose shares are publicly traded.
9.02 COMPANY EMPLOYEES. As an independent covenant, Employee agrees,
during the term of this Agreement and, upon termination or expiration
of this Agreement for any reason, for a period of eighteen (18) months
thereafter, not to induce or attempt to influence any employee of
Company to terminate his or her employment with Company.
9.03 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect
the legitimate business interests of Company, including Company's
interest in Confidential Information, and not to restrict his mobility
or to prevent him from utilizing his skills. Employee recognizes and
acknowledges the necessarily national and international scope of the
market served by Company and agrees that the restrictions set forth in
this Section are reasonable.
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9.04 SURVIVAL. This Section 9 shall survive the expiration or
termination of this Agreement.
10. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees
that the value of the Confidential Information and the success and long-term
viability of Company depends largely upon Employee's performance of his
obligations under Sections 8 and 9 of this Agreement.
11. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in
the event of any unauthorized use or disclosure of Confidential Information in
violation of the terms and conditions of Section 8 of this Agreement by
employee, or any breach of any of the terms and conditions of Section 9 of this
Agreement by Employee, Company will suffer irreparable injury not compensable
by money damages and, therefore, will not have an adequate remedy available at
law. Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Section 8 or 9 of this Agreement, Company shall be entitled to
obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to
and without prejudice to such other rights as Company may have at law or in
equity.
12. TERMINATION.
12.01 TERMINATION. Employee's employment hereunder is terminable,
with cause, at the will of either Company or Employee upon the giving
of 30 days' prior written notice by either party; otherwise, it shall
continue for the term of the Agreement as specified in Section 2, at
which time it shall terminate. If Employee's employment is terminated
for cause by the Company before the expiration of the term of the
Agreement, Company shall discontinue Employee's compensation as of the
effective date of the termination of Employee's employment. If
Employee's employment is terminated for cause by the Employee, is
terminated involuntarily, including, without limitation, termination
resulting from the death or mental or physical disability of Employee,
or is terminated without cause by the Company, Employee's regular
compensation shall continue for the remainder of the term of the
Agreement. For purposes of this Agreement, "for cause" shall mean:
(a) Any willful or intentional act of either Employee or the
Company that has or will have the effect of injuring the
reputation or business relationships of the other party or its
affiliates;
(b) The non-terminating party's conviction of or entering a
plea of nolo contendere to a charge of felony or a misdemeanor
involving dishonesty or fraud;
5
<PAGE> 6
(c) The non-terminating party's material breach of any of the
terms, covenants or conditions contained in this Agreement;
provided, however, that with respect to any breach that can be
effectively cured by some act of a party, termination of this
Agreement shall be revoked if, within ten (10) days after
receipt of notice of such breach from the non-breaching party,
the breaching party cures such breach to the reasonable
satisfaction of the other party or, if such cure cannot
reasonably be accomplished within such ten (10) day period, if
the breaching party initiates efforts to cure such breach
within such ten (10) day period and diligently pursues such
cure efforts thereafter until such cure is accom- plished; or
(d) The non-terminating party's repeated or continuous
failure, neglect or refusal to perform its duties under this
Agreement.
Until the effective date of termination, Employee, if requested to do
so by Company, shall continue to render services to Company.
12.02 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post-employment payment or benefit paid or
provided to Employee under this Agreement by seeking other employment
or otherwise, nor shall the amount of any such payment or benefit paid
or provided to Employee under this Agreement be reduced or offset by
any compensation earned by Employee as the result of employment by
another employer or otherwise.
13. EFFECT OF TERMINATION. Upon the termination or expiration of
this Agreement: (i) Employee shall immediately return to Company any and all
Confidential Information in his possession or control (including, without
limitation, all copies thereof and all materials incorporating such
Confidential Information), (ii) Employee shall have no further obligation to
perform services for Company hereunder, provided, however, that Employee shall
continue to be bound by the terms of Sections 8 and 9 hereof, and (iii) except
to the extent specifically provided in Section 12 above, Company shall have no
further obligation to compensate or provide benefits to Employee hereunder.
14. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything
to the contrary contained in this Agreement, it is specifically understood and
agreed that Employee has, prior to entering into this Agreement, developed
significant business expertise, ideas and experience (collectively "Business
Experience") that such Business Experience, to the extent it applies to
business operations generally and not to the specific operations, technologies
or trade secrets of Company, shall not be
6
<PAGE> 7
deemed to constitute Confidential Information, and nothing contained in Section
8 of this Agreement shall be deemed to prevent Employee form using such general
Business Experience in such a manner as does not violate any of the other terms
and conditions of this Agreement.
15. GENERAL.
15.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties and covenants contained herein shall
survive the execution of this Agreement and the consummation of the
transactions contemplated hereby.
15.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective
heirs, successors, assigns and legal representatives, but it shall not
be assignable by Employee. Any purported assignment in violation of
the foregoing shall be invalid and of no force and effect. No
assignment of this Agreement shall relieve the assigning party of any
obligation or liability hereunder.
15.03 NOTICES. Any notice, demand, payment, request, response or
other communication provided for herein or given hereunder to a party
hereto shall be in writing and shall be deemed to have been duly given
if signed by the party giving it. Notice shall be deemed effective
upon delivery by hand, or on the third business day after it is
deposited in the United States mail, postage prepaid (registered or
certified mail) or on the business day after it is sent by federal
express or similar overnight service to the address of the parties
listed below:
If to Company: John Y. Ames,
President
700 N. St. Mary's St., Suite 1900
San Antonio, Texas 78205
If to Employee: E. L. Ames, Jr.
700 N. St. Mary's St., Suite 1900
San Antonio, Texas 78205
or to such other address as the party to receive such communication
has last designated by notice delivered to the other party in
accordance with the foregoing provisions.
15.04 WAIVER. Failure to delay in insisting upon strict compliance
with any provision hereof shall not be deemed a waiver of such
provision or any other provision hereof with respect to prior,
contemporaneous or subsequent occurrences. No waiver by either party
of any right hereunder or of any default shall be binding upon such
party unless such waiver is
7
<PAGE> 8
in writing and signed by Employee (in the case of Employee) or a duly
authorized officer of Company in the case of Company.
15.05 GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas. Employee
and Company hereby agreed that the sole and exclusive place of
jurisdiction and venue for resolution of any disputes arising
hereunder or relating hereto shall be San Antonio, Bexar County,
Texas, and Employee hereby specifically consents to personal
jurisdiction in such location.
15.06 ENTIRE AGREEMENT. This Agreement, as may be amended from time
to time, shall represent the sole and entire agreement between
Employee and Company respecting the employment relationship between
Company and Employee. There are no representations, agreements,
arrangements or understandings, oral or written, between or among the
parties hereto relating to the employment relationship between Company
and Employee that are not fully expressed in this Agreement. This
Agreement may be amended only by a writing signed by both parties.
15.07 SEVERABILITY. The provisions of this Agreement are severable
and the invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability any other provision. In
addition, in the event that any provision of this Agreement (or
portion thereof) is determined by a court to be unenforceable as
drafted by virtue of the scope, duration, extent or character of any
obligation contained therein, the parties acknowledge that it is their
intention that such provision (or portion thereof) shall be construed
in a manner designed to effectuate the purposes of such provision to
the maximum extent enforceable under applicable law.
15.08 ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection
with any of the provisions of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees and other
costs incurred in that action or proceeding, in addition to any other
relief to which it may be entitled.
8
<PAGE> 9
15.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to, and not in lieu of,
any other remedies available to either party under this or any other
agreement between the parties or at law, in equity or otherwise.
15.10 LANGUAGE. The language used in this Agreement shall be deemed
to be language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction against any party shall
apply to any term or condition of this Agreement.
15.11 MEDIATION AND ARBITRATION. THE PARTIES HEREBY AGREE THAT ANY
CONTROVERSY ARISING BETWEEN THE PARTIES TO THIS AGREEMENT, INCLUDING
BUT NOT LIMITED TO COMMON LAW, STATUTORY, TORT OR CONTRACT CLAIMS OR
OTHER CLAIMS IN ANY MANNER WHATSOEVER PERTAINING TO THIS AGREEMENT OR
ANY OTHER DISPUTE BETWEEN THE PARTIES (OR ANY AGENT, OFFICER, DIRECTOR
OR AFFILIATE OF ANY PARTY) ("DISPUTE") SHALL BE SUBMITTED TO MEDIATION
AND, FAILING TO REACH A SETTLEMENT IN MEDIATION, TO BINDING
ARBITRATION IN ACCORDANCE WITH THE RULES OF THE CPR INSTITUTE FOR
DISPUTE RESOLUTION.
Notwithstanding anything to the contrary in this Agreement, this
arbitration provision shall be governed by the provisions of the
Federal Arbitration Act, 9 U.S.C. Section 1 et seq. Judgment upon the
arbitration award may be entered in any court having jurisdiction
thereof.
15.12 HEADINGS. The descriptive headings of the sections, paragraphs
and subparagraphs hereof are inserted for convenience only and do not
constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
VENUS ENERGY PLC
By:
-----------------------------
John Y. Ames,
President
9
<PAGE> 10
EMPLOYEE:
-----------------------------
E. L. Ames, Jr.
10
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF VENUS EXPLORATION, INC.
1. Venus Development, Inc., a Texas corporation
2. Texplor T & T Corporation, a Texas corporation
<PAGE> 1
EXHIBIT 23.1
The Board of Directors and Shareholders
Venus Exploration, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-1903) on Form S-8 of Venus Exploration, Inc. (formerly Xplor Corporation)
of our report dated March 26, 1998, relating to the consolidated balance sheets
of Venus Exploration, Inc. and subsidiaries and predecessor entities as of
December 31, 1997, and 1996, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1997 which report appears in
the December 31, 1997 annual report on Form 10-K of Venus Exploration, Inc.
KPMG Peat Marwick LLP
San Antonio, Texas
March 26, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
Williamson Petroleum Consultants, Inc. (Williamson) hereby consents to the
references to Williamson and our report entitled "Evaluation of Oil and Gas
Reserves to the Interests of Venus Exploration, Inc. in Certain Properties,
Effective December 31, 1997, for Disclosure to the Securities and Exchange
Commission, Williamson Project 8.8572" in the Venus Exploration, Inc. Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission on
March 27, 1998.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
March 27, 1998
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<PERIOD-START> JAN-01-1997
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<CASH> 682,000
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