<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended December 31, 1999
------------------------------------------------------
( ) 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 0-9116
----------------------------------------------------
PANHANDLE ROYALTY COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1055775
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Grand Centre Suite 210, 5400 N Grand Blvd., Oklahoma City, Oklahoma 73112
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code (405) 948-1560
----------------------------
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x Yes No
---- ----
Outstanding shares of Class A Common stock (voting) at February 2, 2000:
2,056,986
---------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets -
December 31, 1999 (unaudited) and
September 30, 1999 ...........................................................1
Condensed Consolidated Statements of Income -
Three months ended December 31, 1999 and 1998
(unaudited) ..................................................................2
Condensed Consolidated Statements of Cash
Flows - Three months ended December 31, 1999 and 1998
(unaudited) ..................................................................3
Notes to Condensed Consolidated Financial
Statements (unaudited) .......................................................4
Item 2. Management's discussion and analysis of financial
condition and results of operations ..........................................5
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K ................................................7
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at December 31, 1999 is unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
Assets 1999 1999
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 237,253 $ 213,207
Oil and gas sales and other receivables 1,119,782 1,134,153
Prepaid expenses 19,845 4,132
------------------ ------------------
Total current assets 1,376,880 1,351,492
Properties and equipment, at cost, based on
successful efforts accounting
Producing oil and gas properties 24,820,405 24,074,383
Non producing oil and gas properties 5,801,862 5,804,543
Other 264,432 263,695
------------------ ------------------
30,886,699 30,142,621
Less accumulated depreciation,
depletion and amortization 18,817,829 18,337,952
------------------ ------------------
Net properties and equipment 12,068,870 11,804,669
Other assets 107,716 107,716
------------------ ------------------
$ 13,553,466 $ 13,263,877
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued liabilities
and gas imbalance liability $ 418,720 $ 566,649
Dividends payable 177,632 33,296
Income taxes payable 63,577 46,328
Deferred income taxes 93,000 93,000
------------------ ------------------
Total current liabilities 752,929 739,273
Deferred income taxes 1,476,000 1,476,000
Long-term debt 200,000 --
Stockholders' equity
Class A voting Common Stock, $.0333 par value;
6,000,000 shares authorized,
2,056,986 issued and outstanding at
December 31, 1999 and 2,056,990 at
September 30, 1999 68,566 68,566
Capital in excess of par value 587,058 587,058
Retained earnings 10,468,913 10,392,980
------------------ ------------------
Total stockholders' equity 11,124,537 11,048,604
------------------ ------------------
$ 13,553,466 $ 13,263,877
================== ==================
</TABLE>
(1)
<PAGE> 4
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 1,627,739 $ 1,031,133
Lease bonuses and rentals 440 4,471
Interest 1,413 3,783
Other 21,369 3,086
--------------- ---------------
1,650,961 1,042,473
Costs and expenses:
Lease operating expenses
and production taxes 271,658 203,955
Exploration costs 85,751 88,083
Depreciation, depletion,
amortization
and impairment 479,877 372,743
General and administrative 407,417 371,595
--------------- ---------------
1,244,703 1,036,376
--------------- ---------------
Income before provision
for income taxes 406,258 6,097
Provision for income taxes 42,000 --
--------------- ---------------
Net income $ 364,258 $ 6,097
=============== ===============
Basic earnings per share (Note 4) $ .18 $ --
=============== ===============
Diluted earnings per share (Note 4) $ .18 $ --
=============== ===============
Dividends declared and paid in the
quarter ended December 31, $ .07 $ .07
=============== ===============
Dividends declared for and to be
paid in the quarter ended
March 31, (Note 7) $ .07 $ .07
=============== ===============
</TABLE>
(2)
<PAGE> 5
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 364,258 $ 6,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 479,877 372,743
Exploration costs 85,751 88,083
Cash provided (used) by changes in assets
and liabilities:
Oil and gas sales and other receivables 14,371 (57,284)
Prepaid expenses and other assets (15,713) 16,319
Income taxes payable 17,249
Accounts payable, accrued liabilities,
gas imbalance liability and dividends payable (147,509) (171,526)
--------------- ---------------
Total adjustments 434,026 248,335
--------------- ---------------
Net cash provided by operating activities 798,284 254,432
Cash flows from investing activities:
Purchase of and development of
properties and equipment (829,829) (580,976)
--------------- ---------------
Net cash used in investing activities (829,829) (580,976)
Cash flows from financing activities:
Borrowings under line of credit 200,000 300,000
Acquisition of Company's common shares -- (237)
Payment of dividends (144,409) (136,906)
--------------- ---------------
Net cash provided by
financing activities 55,591 162,857
--------------- ---------------
Increase (decrease) in cash and cash equivalents 24,046 (163,687)
Cash and cash equivalents at beginning of period 213,207 320,210
--------------- ---------------
Cash and cash equivalents at end of period $ 237,253 $ 156,523
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 1,583 $ 787
Income taxes paid 24,751 25
--------------- ---------------
$ 26,334 $ 812
=============== ===============
</TABLE>
(See accompanying notes)
(3)
<PAGE> 6
PANHANDLE ROYALTY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated results presented for the three-month periods ended
December 31, 1999 and 1998 are unaudited, but management of Panhandle
Royalty Company believes that all adjustments necessary for a fair
presentation of the consolidated results of operations for the periods
have been included. All such adjustments are of a normal recurring
nature. The consolidated results are not necessarily indicative of those
to be expected for the full year.
2. The Company utilizes tight gas sands production tax credits to reduce its
federal income tax liability, if any. These credits are scheduled to be
available through the year 2002.
3. On February 26, 1999, the Company's Board of Directors approved a
proposal to (1) amend the Company's duration from fifty years to
perpetuity; (2) amend the Company's Articles of Incorporation to increase
the number of authorized shares of Class A Common Stock from 1,000,000
shares to 6,000,000 shares; (3) effect a 3-for-1 stock split of the
outstanding Class A Common Stock and a corresponding reduction of the par
value per share from $.10 to $.03 1/3; (4) adopt amendments to the
Articles of Incorporation and Bylaws to change voting rights from one
vote per shareholder to one vote per share; and (5) amend the Articles of
Incorporation to provide that generally any merger, consolidation,
liquidation or dissolution of the Company or sale of substantially all of
the assets of the Company require the affirmative vote of the holders of
66 2/3% or more of the Company's outstanding Class A Common Stock. On May
7, 1999, these proposals were put forth to a vote of the shareholders,
for which a majority of the shareholders voted in favor of each proposal,
causing these proposals to become effective on such date. The Class A
Common Stock split was effected in the form of a stock dividend,
distributed on June 1, 1999, to shareholders of record on May 7, 1999.
All agreements concerning Common Stock of the Company, including the
Company's Employee Stock Ownership Plan and the Company's commitment
under the Deferred Compensation Plan for Non-Employee Directors, provide
for the issuance or commitment, respectively of additional shares of the
Company's stock due to the declaration of the stock split. All references
to number of shares, per share, and authorized share information in the
accompanying condensed consolidated financial statements have been
adjusted to reflect the stock split and increase in authorized shares
approved on May 7, 1999, at the Special Meeting of the Shareholders of
the Company.
4. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which was adopted by the Company
on December 31, 1997. The Company's diluted earnings per share
calculation takes into account certain shares that may be issued under
the Non-Employee Director's Deferred Compensation Plan. The following
table sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Numerator for primary
and diluted earnings per share:
Net income $ 364,258 $ 6,097
=============== ===============
Denominator:
For basic earnings per share
Weighted average shares 2,056,986 2,047,596
Effect of potential diluted shares:
Directors deferred
compensation shares 17,771 14,919
--------------- ---------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and potential
shares 2,074,757 2,062,515
=============== ===============
Basic earnings per share $ .18 $ --
=============== ===============
Diluted earnings per share $ .18 $ --
=============== ===============
</TABLE>
(4)
<PAGE> 7
5. The Company had a revolving line of credit with Bank One, Texas, in the
amount of $2,500,000. The credit facility's maturity was January 3, 2001.
At December 31, 1999, the Company had $200,000 outstanding under the Bank
One facility. On December 29, 1999, the Company instituted a $5,000,000
line of credit with BancFirst in Oklahoma City, OK. This facility matures
on December 31, 2002. On January 4, 2000, the Company paid off the
$200,000 due Bank One and canceled the line of credit. At February 2,
2000, the Company had $500,000 outstanding under the BancFirst facility.
6. On January 4, 2000, the Company closed on the acquisition of producing
and non-producing mineral properties at a cost of $444,617. The
acquisition was funded from cash on hand and $300,000 of borrowings under
the Company's new line of credit discussed in Note 5.
7. On December 14, 1999, the Company's Board of Directors approved the
payment of a $.07 per share dividend. The dividend is to be paid on March
10, 2000, to shareholders of record on February 9, 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-Looking Statements for 2000 and later periods are made in this
document. Such statements represent estimates of management based on the
Company's historical operating trends, its proved oil and gas reserves and other
information currently available to management. The Company cautions that the
forward-looking statements provided herein are subject to all the risks and
uncertainties incident to the acquisition, development and marketing of, and
exploration for oil and gas reserves. These risks include, but are not limited
to, oil and natural gas price risk, environmental risks, drilling risk, reserve
quantity risk and operations and production risk. For all the above reasons,
actual results may vary materially from the forward-looking statements and there
is no assurance that the assumptions used are necessarily the most likely to
occur.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 working capital was $623,951 as compared to $612,219
at September 30, 1999. Cash flow from operating activities for the first quarter
of fiscal 2000, was $798,284 as compared to $254,432 for the first fiscal
quarter of fiscal 1999. This increase of $543,852 is principally attributable to
increased oil and gas sales revenues in the 2000 quarter. This increase in oil
and gas sales revenues is discussed in detail in "Results of Operations".
Capital expenditures for oil and gas activities for the first quarter of
2000 amounted to $829,829 as compared to $580,976 in the first quarter of fiscal
1999. This increased spending on oil and gas property development was a result
of increased oil and natural gas market prices over the last six months, causing
new wells to be drilled. As the Company does not operate any wells, when wells
are proposed by operators on the Company's mineral property holdings, the
Company usually agrees to participate in drilling these wells. The Company, at
December 31, 1999, had remaining projected costs of $1,536,366 for its share of
drilling and equipment costs on working interest wells which have been proposed
or were in the process of being drilled or completed. The Company has
historically funded drilling and other capital expenditures, overhead costs and
dividend payments from operating cash flow. However, in December 1999, the
Company borrowed $200,000 under its bank line of credit to help fund these
costs.
The Company, as of December 29, 1999, has a $5,000,000 line of credit
available (see Note 5. to the Condensed Consolidated Financial Statements
contained herein at Item 1.) The funds available under the line of credit, and
expected cash flow are more than sufficient to meet all expected costs and
capital obligations for the remainder of fiscal 2000. A large acquisition of oil
and properties could increase capital expenditures to a level that additional
debt or debt and equity would be needed to finance the purchase. Future capital
expenditures can be affected by many factors, including drilling results, oil
and gas sales prices, industry conditions and acquisition opportunities, among
others.
(5)
<PAGE> 8
RESULTS OF OPERATIONS
Revenues increased significantly for the three month period ended
December 31, 1999, as compared to the same period in fiscal 1999. This increase
is a function of increased gas sales volumes and increased sales prices for both
oil and gas, offset somewhat by a decline in oil sales volumes. The chart below
outlines the Company's production and average sales prices for crude oil and
natural gas for the three month periods of fiscal 2000 and fiscal 1999.
<TABLE>
<CAPTION>
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Three months ended 12/31/99 15,321 $ 23.87 525,400 $ 2.40
Three months ended 12/31/98 18,984 $ 12.22 379,666 $ 2.10
</TABLE>
As shown in the above chart, gas sales volumes increased 38% in the 2000
quarter as compared to the 1999 quarter and the average gas sales price
increased 14%. The gas volume increase was principally due to additional
production in the Potato Hills Field in eastern Oklahoma and from new gas
production in western Oklahoma coming on line. Management currently expects gas
production to increase slightly over the remaining three quarters of fiscal 2000
and for gas prices to remain relatively firm until summertime when demand for
gas usually decreases, causing prices to decrease. Oil sales prices almost
doubled in the 2000 quarter as compared to the 1999 quarter, however, sales
volumes decreased 19% in the 2000 quarter. The decrease in oil sales volume was
principally the result of production declines in the Dagger Draw Field of New
Mexico. These oil wells which were shut-in for a good part of fiscal 1999, and
are experiencing production declines from pre-shut-in production volumes. It is
expected this problem will continue into fiscal 2000 and maybe longer, thus,
adversely affecting oil sales revenues in the coming quarters. Production from
several new oil wells which are coming on line, should offset some of the above
discussed production decline.
Costs and expenses increased 20% or $208,327 in the 2000 period over the
1999 period. The increase was principally a result of increased production taxes
on the increased oil and gas sales revenues and increased depreciation,
depletion, amortization, and impairment costs (DD&A). The increased DD&A costs
were the result of high production volumes on several newer wells causing DD&A
units of production rates on these wells to be higher than expected, and the
recognition of a $60,000 oil and gas property impairment provision in the 2000
quarter compared to a $30,000 impairment provision in the 1999 quarter.
The Company's provision for income taxes differs from the statutory rate
due to benefits from tight gas sands gas production tax credits and percentage
depletion.
The Company's earnings benefited from the increase in oil and gas sales
revenues, explained above. It currently appears earnings for the remainder of
fiscal 2000 will benefit from continuing increased sales prices for both oil and
gas, as compared to 1999 prices, and from increasing gas sales volumes. However,
should additional exploratory drilling projects result in non productive wells,
increasing exploration costs, or the market price of oil and or natural gas
decline, expected earnings would be negatively impacted.
YEAR 2000 ISSUES
The Company has completed its assessment of both its computer ("IT
systems") and operational equipment ("non-IT systems"). The Company replaced its
computer system hardware with new hardware which has operating systems which are
year 2000 compliant and the Company's software has been replaced with software
which is year 2000 compliant. The system software currently being used, is the
year 2000 software. It has been used to process all business for fiscal 2000 to
the date of this statement and no material problems have developed . The Company
has no non-IT systems which are expected to be impacted in any material manner
by year 2000.
The cost of replacement of the Company's IT systems noted above
was less than $30,000. Any additional costs to assess the year 2000 matter or
become compliant therewith are not expected to be significant.
(6)
<PAGE> 9
Management currently feels the most likely worst case scenario of a
Year 2000 effect on the Company would be the operators of the oil & gas
properties in which the Company has an interest, purchasers who buy oil and gas
from the Company's properties or financial institutions ("External Agents") used
by the Company not properly addressing the year 2000 matter, thus, causing a
delay in the Company receiving payment for the sale of its oil and gas. Should
this occur, the Company would be required to borrow additional amounts on its
available line of credit to fund normal operating and capital costs, incurring
additional interest expense over that otherwise anticipated. However, the
Company does not expect the year 2000 will have a material impact on its
financial position or results of operations. The Company has no systems which
directly interface with External Agents. To date, there have been no material
problems related to year 2000 with External Agents.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORT ON FORM 8-K
(a) EXHIBITS - Exhibit 10 - Loan Agreement with BancFirst dated
December 29, 1999
Exhibit 27 - Financial Date Schedule
(b) FORM 8-K - There were no reports on FORM 8-K filed for the three
months ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANHANDLE ROYALTY COMPANY
February 11, 2000 /s/ H W Peace II
---------------------- ----------------------------
Date H W Peace II, President
and Chief Executive Officer
February 11, 2000 /s/ Michael C. Coffman
---------------------- ----------------------------
Date Michael C. Coffman,
Vice President,
Chief Financial Officer and
Secretary and Treasurer
(7)
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10 Loan Agreement with BancFirst dated December 29, 1999
27 Financial Date Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10
LOAN AGREEMENT
THIS LOAN AGREEMENT (hereinafter referred to the "AGREEMENT") executed
on 29th of December, 1999, by and between PANHANDLE ROYALTY COMPANY, an Oklahoma
corporation, (hereinafter referred to as the "BORROWER") and BANCFIRST, an
Oklahoma banking corporation (hereinafter referred to as "BANK").
WITNESSETH:
WHEREAS, Borrower has requested that the Bank provide Borrower with a
revolving loan facility and the Bank is willing to make such facility available
to Borrower.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. DEFINITIONS. When used herein, the terms "Agreement," "Borrower" and
"Bank" shall have the meanings indicated above. When used herein the following
terms shall have the following meanings:
(a) Prime Rate - The fluctuating per annum rate of interest
(expressed as a percentage) designated as the "Prime Rate" in the
"Money Rates" section as published in the most recent issue of The Wall
Street Journal. If more than one Prime Rate is designated in The Wall
Street Journal then the Index Rate will be the highest rate so
determined. The Prime Rate as of the date of this Agreement is 8.5%.
(b) Borrowing Base - The value assigned by the Bank from time to
time to the Oil and Gas Properties. Until the next determination of the
Borrowing Base pursuant to Section 5 hereof, the aggregate Borrowing
Base for the Revolving Loan Commitment shall be $5,000,000.
(c) Business Day - The normal banking hours during any day (other
than Saturdays or Sundays) that banks are legally open for business in
Oklahoma City, Oklahoma.
(d) Effective Date - The date of this Agreement.
(e) Environmental Laws - The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Super Fund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601,
et seq., the Resource Conservation and Recovery Act, as amended by the
Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. Section 6901, et
seq., the Clean Air Act, 42 U.S.C.A. Section 1251, et seq., the Toxic
Substances Control Act, 15 U.S.C.A. Section 2601, et seq., and all
other laws relating to air pollution, water pollution, noise control
and/or the handling, discharge, disposal or recovery of on-site or
off-site hazardous substances or materials, as each of the foregoing
may be amended from time to time.
(f) Environmental Liability - Any claim, demand, obligation, cause
of action, accusation, allegation, odder, violation, damage, injury,
judgment, penalty or fine, cost of enforcement, cost of remedial action
or any other costs or expense whatsoever, including reasonable
attorneys' fees and disbursements, resulting from the violation or
alleged violation of any Environmental Law or the imposition of any
Environmental Lien (as hereinafter defined) which would individually or
in the aggregate have a Material Adverse Effect.
<PAGE> 2
(g) Environmental Lien - A Lien in favor of any court, governmental
agency or instrumentality or any other person (i) for any liability
under any Environmental Law or (ii) for damages arising from or cost
incurred by such court or governmental agency or instrumentality or
other person in response to a release or threatened release of
hazardous or tone waste, substance or constituent into the environment.
(h) ERISA - The Employee Retirement income Security Act of 1974, as
amended.
(i) Financial Statements - Balance sheets, income statements,
statements of cash flow and appropriate footnotes and schedules
prepared in accordance with GAAP.
(j) GAAP - Generally accepted accounting principles, consistently
applied.
(k) Lien - Any mortgage, deed of trust, pledge, security interest,
assignment, encumbrance or lien (statutory or otherwise) of every kind
and character.
(1) Loan Documents - This Agreement and the Note and all other
documents executed in connection with the transaction described in this
Agreement.
(m) Material Adverse Effect - Any material adverse effect on (i) the
assets or properties, liabilities, financial condition, business,
operations, affairs or circumstances of Borrower or from those
reflected in the Financial Statements of Borrower or from the facts
represented or warranted in this Agreement, or (ii) the ability of
Borrower to carry out its businesses as at the date of this Agreement
or as proposed at the date of this Agreement to be conducted or to meet
its obligations under the Note and this Agreement on a timely basis.
(n) Note - The $5,000,000 Note described in Section 3 hereof.
(o) Oil and Gas Properties - All proved oil, gas and mineral
properties and interests, and related personal properties, in which
Borrower has granted and hereinafter grants (to the satisfaction of
Bank) to Bank a negative pledge.
(p) Permitted Liens - The term Permitted Lien shall mean (i)
royalties, overriding royalties, reversionary interests, production
payments and similar burdens if the net cumulative effect of such
burdens does not (when considered cumulatively with the matters
discussed in clause (ii) below) operate to deprive the Borrower of any
material right in respect of Borrower's assets or properties (except
for rights customarily granted with respect to such interests); (ii)
sales contracts or other arrangements for the sale of production of
oil, gas or associated liquid or gaseous hydrocarbons which would not
(when considered cumulatively with the matters discussed in clause (i)
above) deprive the Borrower of any material right in respect of any of
Borrower's assets or properties (except for rights customarily granted
with respect to such contracts and arrangements); (iii) statutory liens
for taxes or other assessments that are not yet delinquent (or that, if
delinquent, are being contested in good faith by appropriate
proceedings and for which the Borrower has set aside on their books
adequate reserves in accordance with GAAP); (iv) easements, rights of
way, servitudes, permits, surface leases and other rights in respect to
surface operations, pipelines, grazing, logging, canals, ditches,
reservoirs or the like, conditions, covenants and other restrictions,
and easements of streets, alleys, highways, pipelines, telephone lines,
power lines, railways and other easements and rights of way on, over or
in respect of any of Borrower's assets or properties; (v)
materialmen's, mechanic's, repairman's, employee's, contractor's,
subcontractor's, operator's and other Liens incidental to the
construction, maintenance, development or operation of Borrower's
assets or properties to the
2
<PAGE> 3
extent not delinquent (or which, if delinquent, are being contested in
good faith by appropriate proceedings and for which the Borrower have
set aside on its books adequate reserves in accordance with GAAP); (vi)
all contracts, agreements and instruments, and all defects and
irregularities and other matters affecting the Borrower's assets and
properties which were in existence at the time the Borrower's assets
and properties were originally acquired by the Borrower and all routine
operational agreements entered into in the ordinary course of business,
which contracts, agreements, instruments, defects, irregularities and
other matters and routine operational agreements are not such as to,
individually or in the aggregate, interfere materially with the
operation, value or use of Borrower's assets and properties, considered
in the aggregate; (vii) liens in connection with workmen's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations; (viii) legal or equitable
encumbrances deemed to exist by reason of the existence of any
litigation or other legal proceeding or arising out of a judgment or
award with respect to which an appeal is being prosecuted in good
faith; (ix) rights reserved to or vested in any municipality,
governmental, statutory or other public authority to control or
regulate any Borrower's assets and properties in any manner, and all
applicable laws, rules and orders from any governmental authority; (x)
Liens created by or pursuant to this Agreement or pursuant to security
instruments between the Bank and Borrower; and (xi) Liens existing at
the date of this Agreement which have been disclosed to Bank in
Borrower's Financial Statements or otherwise in writing to Bank.
(q) Plan - Any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute
on behalf of their respective employees.
(r) Revolving Loan - Loan or loans made under the Revolving Loan
Commitment pursuant to Section 2 hereof.
(s) Revolving Loan Amounts - $5,000,000.
(t) Revolving Loan Commitment - The loan commitment contained in
Section 2 of this Agreement.
(u) Revolving Maturity Date - December 31, 2002.
2. COMMITMENT OF THE BANK, TERMS OF REVOLVING LOAN COMMITMENT. On the
terms and conditions hereinafter set forth, Bank agrees to make loans
(hereinafter sometimes referred to as "ADVANCES" and individually as an
"ADVANCE") to the Borrower from time to time during the period beginning on the
Effective Date and ending on the Revolving Maturity Date in such amounts as
Borrower may request up to an amount not to exceed, in the aggregate principal
amount outstanding at any time, the lesser of (i) the Borrowing Base or (ii) the
Revolving Loan Amount. Notwithstanding any other provision of this Agreement, no
Advance shall be required to be made hereunder if any Event of Default (as
hereinafter defined) has occurred and is continuing or if any event or condition
has occurred that may, with notice, be an Event of Default.
(a) Procedure for Borrowing. Whenever Borrower desires an Advance
hereunder, it shall give Bank written notice via facsimile ("NOTICE OF
BORROWING") of such requested Advance.
(b) Reduction of Revolving Loan Commitment. Borrower may at any
time, or from time to time, upon not less than three (3) Business Days
prior written notice to Bank, reduce or terminate the Revolving Loan
Commitment; provided, however, that (i) each reduction in the Revolving
Loan Commitment must be in the amount of $250,000 or if more, in
increments of
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$100,000 and (ii) each reduction must be accompanied by a prepayment of
the Note in the amount by which the principal balance of the Note
exceeds the Revolving Loan Commitment as reduced pursuant to this
Section 2.
3. NOTE EVIDENCING LOAN. The loan described above in Section 2 shall be
evidenced by a promissory note of Borrower as follows:
(a) Form of Note - The Revolving Loan shall be evidenced by a Note,
be payable to the order of Bank, in the face amount of $5,000,000, and
shall be in the form of EXHIBIT "A" hereto with appropriate insertion.
Notwithstanding the principal amount of the Note, as stated on the face
thereof, the actual principal amount due from Borrower to Bank on
account of the Note, as of any date of computation, shall be the sum of
Advances then and theretofore made on account thereof, less all
principal payments actually received by Bank in collected funds with
respect thereto. Although the Note shall be dated as of the Effective
Date, interest in respect thereof shall be payable only for the period
during which the loans evidenced thereby are outstanding and, although
the stated amount of the Note may be higher, the Note shall be
enforceable, with respect to Borrower's obligation to pay the principal
amount thereof, only to the extent of the unpaid principal amount of
the loans.
(b) Interest Rate - The unpaid principal balance of the Note shall
bear interest from time to time as set forth in Section 4 hereof.
(c) Payment of Interest - Interest on the Note shall be payable
monthly in arrears on the first Business Day of each calendar quarter,
beginning April 1, 2000.
(d) Payment of Principal - Principal of the Note shall be repayable
in full at the Revolving Maturity Date.
4. INTEREST RATES.
(a) Basic Rate. The unpaid principal balance of the Note shall bear
interest at a fluctuating rate per annum from day to day equal to the
Prime Rate minus 1/4 of one percent.
(b) Default Rate. After maturity (whether by acceleration or
otherwise), the principal balance of the Note shall bear interest at a
rate of two percent (2%) higher than the Basic Rate but in no event
more than 18% per year.
5. BORROWING BASE.
(a) Initial Borrowing Base. During the period from the date hereof
to the first Determination Date (as hereinafter defined), the Borrowing
Base shall be $5,000,000.
(b) Subsequent Determinations of Borrowing Base. Subsequent
determinations of the Borrowing Base shall be made by the Bank at least
annually on the dates set forth hereinbelow and the Bank may make
additional redeterminations at any time it appears to the Bank, in the
exercise of its discretion, that there has been a material change in
the value of the Oil and Gas Properties ("UNSCHEDULED
REDETERMINATIONS"). Borrower shall furnish to the Bank no later than
November 15 of each year, beginning November 15, 2000, and at such
other times as Bank shall request an Unscheduled Redetermination, all
information, reports and data which the Bank has then requested
concerning the Oil and Gas Properties, said information to include, but
not be limited to, (i) revenue and lifting costs summary report for all
Oil and Gas Properties, (ii)
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on November 15 of each year, beginning November 15, 2000, an
engineering report in form and substance satisfactory to Bank prepared
by an independent petroleum engineer as is acceptable to Bank, covering
the Oil and Gas Properties, (iii) the most recently available
production curves and tabular production updates, including economic
projections on any new production from acquired or drilled acreage, and
(iv) such other information concerning the value of the Oil and Gas
Properties as Bank may reasonably deem necessary. Bank shall by notice
to Borrower no later than January 1 of each year, commencing January 1,
2001, designate the new Borrowing Base available to Borrower hereunder
during the period beginning on each January 1 (herein called the
"DETERMINATION DATE") and continuing until but not including the next
date as of which the Borrowing Base is redetermined. If an Unscheduled
Redetermination is made by the Bank, the Bank shall notify Borrower
within a reasonable time after receipt of all requested information of
the new Borrowing Base, if any, and such new Borrowing Base shall
continue until redetermined pursuant to the provisions hereof. If
Borrower does not furnish all such information, reports and data by the
date specified in the first sentence of this Section 5(b), unless such
failure is of no fault of Borrower, the Bank may nonetheless designate
the Borrowing Base at any amount which the Bank determines in its
reasonable discretion and may redesignate the Borrowing Base from time
to time thereafter until the Bank receives all such information,
reports and data, whereupon the Bank shall designate a new Borrowing
Base as described above. The Bank shall determine the amount of the
Borrowing Base based upon the loan collateral value which it in its
reasonable discretion assigns to such Oil and Gas Properties of
Borrower at the time in question and based upon such other credit
factors consistently applied (including, without limitation, the
assets, liabilities, cash flow, business, properties, prospects,
management and ownership of Borrower and its affiliates) as the Bank
customarily considers in evaluating similar oil and gas credits. It is
expressly understood that the Bank has no obligation to designate the
Borrowing Base at any particular amount, except in the exercise of its
good faith discretion, whether in relation to the Revolving Loan
Commitment or otherwise, and that the Bank commitment to advance funds
hereunder is determined by reference to the Borrowing Base from time to
time in effect.
6. COMMITMENT FEE. In consideration of the Revolving Loan Commitment,
Borrower shall pay to the Bank Commitment Fee (hereinafter referred to as the
"COMMITMENT FEE") equivalent to 1/16 of 1% per annum on the average daily amount
of the unadvanced amount of the Borrowing Base. The Commitment Fee shall
commence to accrue on the Effective Date and shall be payable quarterly in
arrears hereafter on the first Business Day of each calendar quarter commencing
April 1, 2001, with the final fee payment due at the Revolving Maturity Date for
any period then ending for which the Commitment Fee shall not have been
theretofore paid. There will be no Commitment Fee from the date of this
Agreement through December 31, 2000.
In the event the Commitment terminates on any date prior to the end of
any calendar quarter as a result of either (i) Borrower terminating the
Commitment or (ii) Borrower's default hereunder followed by the termination of
the Commitment by the Bank as a result of such default, Borrower will pay to
Bank, on the date of such termination, the total Commitment Fee due for the
quarter in which such termination occurs. Bank shall invoice Borrower for the
Commitment Fee provided that the failure to do so shall not relieve the Borrower
of its obligations to pay the same in the time and manner set forth hereinabove
after receipt of each such invoice.
7. PREPAYMENTS.
(a) Voluntary Prepayments. The Borrower may at any time and from
time to time, without penalty or premium, prepay the Note in whole or
in part.
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(b) Mandatory Prepayment. In the event the aggregate principal
amount outstanding on the Note ever exceeds the Borrowing Base as
determined by Bank pursuant to Section 5 hereof, Borrower shall, within
thirty (30) days after notification from the Bank, either (A) provide
additional Oil and Gas Properties with value and quality in amounts
satisfactory to the Bank in its sole discretion in order to increase
the Borrowing Base by an amount at least equal to such excess, or (B)
prepay, without premium or penalty, the principal amount of the Note in
an amount at least equal to such excess.
8. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this Agreement, Borrower hereby represents and warrants to the Bank (which
representations and warranties will survive the delivery of the Note) that:
(a) Corporate Existence. Borrower is a corporation duty organized,
validly existing and in good standing under the laws of the
jurisdiction in which it was incorporated and is duly qualified as a
foreign corporation in all jurisdictions wherein the failure to qualify
may result in Material Adverse Effect.
(b) Corporate Power and Authorization. Borrower is duly authorized
and empowered to create and issue the Note; and Borrower is duly
authorized and empowered to execute, deliver and perform the Security
Instruments, including this Agreement; and all corporate and other
action on Borrower's part requisite for the due creation and issuance
of the Note and this Agreement, has been duly and effectively taken.
(c) Binding Obligations. This Agreement does, and the Note upon its
creation, issuance, execution and delivery will, constitute valid and
binding obligations of Borrower enforceable in accordance with its
terms (except that enforcement may be subject to any applicable
bankruptcy, insolvency or similar laws generally affecting the
enforcement of creditors' rights and subject to availability of
equitable remedies).
(d) No Legal Bar or Resultant Lien. The Note and this Agreement do
not and will not violate any provisions of any contract, agreement,
law, regulation, order, injunction, judgment, decree or writ to which
Borrower is subject, or result in the creation or imposition of any
lien or other encumbrance upon any assets or properties of Borrower,
other than those contemplated by this Agreement.
(e) No Consent The execution, delivery and performance by Borrower
of the Note and this Agreement, and the execution and delivery of this
Agreement do require the consent or approval of any other person or
entity, including without limitation any regulatory authority or
governmental body of the United States or any state thereof or any
political subdivision of the United States or any state thereof except
for consents required for federal, state and, in some instances,
private leases, right of ways and other conveyances or encumbrances of
oil and gas leases.
(f) Financial Condition. The audited Financial Statements of
Borrower, dated as of September 30, 1999, which have heretofore been
delivered to Bank are complete and correct in all material respects and
fully and accurately reflect in all material respects the financial
condition, results of the operations and contingent liabilities of
Borrower as of the date or dates and for the period or periods stated.
No change has since occurred in the condition, financial or otherwise,
of Borrower which is reasonably expected to have a Material Adverse
Effect, except as disclosed to the Bank in EXHIBIT "B" attached hereto.
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<PAGE> 7
(g) Liabilities. Borrower does not have any material (individually
or in the aggregate) liability, direct or contingent, except as
disclosed to the Bank in their respective Financial Statements dated as
of September 30, 1999, or in EXHIBIT "B" attached hereto. No unusual or
unduly burdensome restriction, restraint, or hazard exists by contract,
law or governmental regulation or otherwise relative to the business,
assets or properties of Borrower which is reasonably expected to have a
Material Adverse Effect.
(h) Litigation. Except as described in the notes to the Financial
Statements, or as otherwise disclosed to the Bank in EXHIBIT "C"
attached hereto, there is no litigation, legal or administrative
proceeding, investigation or other action of any nature pending or, to
the knowledge of the officers of Borrower, threatened against or
affecting Borrower which involves the possibility of any judgment or
liability not fully covered by insurance, and which is reasonably
expected to have a Material Adverse Effect.
(i) Taxes, Governmental Charges. Borrower has filed all tax returns
and reports required to be filed and has paid all taxes, assessments,
fees and other, governmental charges levied upon it or its assets,
properties or income which are due and payable, including interest and
penalties, or has provided adequate reserves, if required, in
accordance with GAAP for the payment thereof, except such as are being
contested in good faith by appropriate proceedings and for which
adequate reserves for the payment thereof as required by GAAP have been
provided.
(i) Titles, Etc. Borrower has good and indefeasible title to its
assets and properties, including without limitation, the Oil and Gas
Properties, free and clear of all liens or other encumbrances, except
Permitted Liens.
(k) Defaults. Borrower is not in default and no event or
circumstance has occurred which, but for the passage of time or the
giving of notice, or both, would constitute a default under any loan or
credit agreement, indenture, mortgage, deed of trust, security
agreement or other agreement or instrument to which Borrower is a party
in any respect that would be reasonably expected to have a Material
Adverse Effect. No Event of Default hereunder has occurred and is
continuing.
(1) Casualties, Taking of Properties. Since the dates of the latest
Financial Statements of Borrower provided to Bank, none of the business
or the assets or properties of Borrower have been materially or
adversely affected as a result of any fire, explosion, earthquake,
flood, drought, windstorm, accident, strike or other labor disturbance,
embargo, requisition or taking of property or cancellation of
contracts, permits or concessions by any domestic or foreign government
or any agency thereof, riot, activities of armed forces or acts of God
or of any public enemy.
(m) Use of Proceeds, Margin Stock. The Proceeds of the loans
hereunder will be used by Borrower for working capital and general
corporate purposes. Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying any "margin
stock" as defined in Regulation U of the Board of Governors of the
Federal Reserve System (12 C.F.R. Part 221), or for the purpose of
reducing or retiring any indebtedness which was originally incurred to
purchase or carry a margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of
said Regulation U. The Borrower is not engaged principally, or as one
of its important activities, in the business of extending credit for
the purpose of purchasing or carrying margin stock.
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<PAGE> 8
Neither Borrower nor any person or entity acting on behalf of Borrower
has taken or will take any action which might cause the loans hereunder or any
of the Security Instruments, including this Agreement, to violate Regulation U
or any other regulation of the Board of Governors of the Federal Reserve System
or to violate the Securities Exchange Act of 1934 or any rule or regulation
thereunder, in each case as now in effect or as the same may hereafter be in
effect.
(n) Location of Business and Offices. The principal place of
business and executive offices of Borrower are located at the address
stated in Section 14 hereof.
(o) Compliance with the Law. Borrower:
(i) is not in violation of any law, judgment, decree, order,
ordinance, or governmental rule or regulation to which Borrower or
Guarantor, or any of their assets or properties are subject; or
(ii) has not failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of any
of its assets or properties or the conduct of its business;
which violation or failure is reasonably expected to have a Material Adverse
Effect.
(p) No Material Misstatements. No information, exhibit or report
furnished by Borrower to the Bank in connection with the negotiation of
this Agreement contained any material misstatement of fact or omitted
to state a material fact or any fact necessary to make the statement
contained therein not misleading.
(q) Not A Utility. Borrower is not an entity engaged in any state in
which it operates in the (i) generation, transmission, or distribution
and sale of electric power; (ii) transportation, distribution and sale
through a local distribution system of natural or other gas for
domestic, commercial, industrial, or other use; (iii) ownership or
operation of a pipeline for the transmission or sale of natural or
other gas, crude oil or petroleum products to other pipeline companies,
refineries, local distribution systems, municipalities, or industrial
consumers; (iv) provision of telephone or telegraph service to others;
(v) production, transmission, or distribution and sale of steam or
water; (vi) operation of a railroad; or (vii) provision of sewer
service to others.
(r) ERISA. Borrower is in compliance in all material respects with
the applicable provisions of ERISA, and no "reportable event", as such
term is defined in Section 4043 of ERISA, has occurred with respect to
any Plan of Borrower.
(s) Public Utility Holding Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," or a "public utility" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(t) Environmental Matters. Except as disclosed on EXHIBIT "D",
Borrower (i) has not received notice or otherwise learned of any
Environmental Liability which would individually or in the aggregate
have a Material Adverse Effect arising in connection with (A) any
noncompliance with or violation of the requirements of any
Environmental Law or (B) the release or threatened release of any toxic
or hazardous waste into the environment, (ii) to its knowledge has
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<PAGE> 9
no threatened or actual liability in connection with the release or
threatened release of any toxic or hazardous waste into the environment
which would individually or in the aggregate have a Material Adverse
Effect, or (iii) has not received notice or otherwise learned of any
federal or state investigation evaluating whether any remedial action
is needed to respond to a release or threatened release of any toxic or
hazardous waste into the environment for which Borrower is or may be
liable.
9. CONDITIONS OF LENDING.
(a) The obligation of the Bank to make the initial Advance under the
Revolving Loan shall be subject to the following conditions precedent:
(i) Borrower's Execution and Delivery - Borrower shall have
executed and delivered to the Bank this Agreement and the Note, and
other required documents, all in form and substance satisfactory to
the Bank;
(ii) Corporate Documentation - Bank shall have received (i)
certified copies of the Articles of Incorporation and By-Laws of
Borrower and all amendments thereto, (ii) appropriate corporate
resolutions of Borrower, (iii) evidence of good standing and
existence for Borrower, and (iv) a certificate of the Secretary of
Borrower certifying the names of each of the officers of Borrower
authorized to sign on its behalf, together with the true signatures
of each such officer.
(iii) Other Documents - The Bank shall have received such other
instruments and documents incidental and appropriate to the
transaction provided for herein as the Bank or its counsel may
reasonably request, and all such documents shall be in form and
substance satisfactory to the Bank; and
(iv) Legal Matters Satisfactory - All legal matters incident to
the consummation of the transactions contemplated hereby shall be
satisfactory to special counsel for the Bank.
(b) The obligation of the Bank to make any Advance (including the
initial Advance) on the Revolving Loan Commitment shall be subject to
the following additional conditions precedent that, at the date of
making each such Advance and after giving effect thereto.
(i) Representation and Warranties - With respect to any Advance,
the representations and warranties of Borrower under this Agreement
are true and correct in all material respects as of such date, as if
then made (except to the extent that such representations and
warranties related solely to an earlier date);
(ii) No Event of Default - No Event of Default shall have
occurred and be continuing nor shall any event have occurred or
failed to occur which, with the passage of time or service of
notice, or both, would constitute an Event of Default;
(iii) Other Documents - The Bank shall have received such other
instruments and documents incidental and appropriate to the
transaction provided for herein as the Bank or its counsel may
reasonably request, and all such documents shall be in form and
substance satisfactory to the Bank; and
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<PAGE> 10
(iv) Legal Matters Satisfactory - All legal matters incident to
the consummation of the transactions contemplated hereby shall be
satisfactory to special counsel for the Bank.
10. AFFIRMATIVE COVENANTS. A deviation from the provisions of this
Section 10 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by the Bank. Without the prior written
consent of the Bank, Borrower will at all times comply with the covenants
contained in this Section 10 from the date hereof and for so long as the Note is
in existence.
(a) Financial Statements and Reports. Borrower shall promptly
furnish to the Bank from time to time upon written request such
information regarding the business and affairs and financial condition
of the Borrower, as the Bank may reasonably request, and will furnish
to the Bank:
(i) Annual Consolidated Financial Statements - As soon as
available, and in any event within ninety (90) days after the close
of each fiscal year, the annual audited Financial Statements of the
Borrower, including an opinion from the auditors regarding the fair
presentation of such Financial Statements;
(ii) Quarterly Financial Statements - As soon as available, and
in any event within sixty (60) days after the end of each fiscal
quarter (except the last such quarter in any fiscal year) of each
year, the quarterly unaudited Financial Statements of the Borrower;
(iii) Report on Properties - As soon as available and in any
event on or before November 1 of each calendar year, and at such
other times as the Bank may reasonably request, the engineering
reports required to be furnished to the Bank under Section 5 hereof
on the Oil and Gas Properties.
(iv) Additional Information - Promptly upon request of the Bank
from time to time any additional financial information or other
information that the Bank may reasonably request.
All such reports, balance sheets and Financial Statements referred to
in Subsection 10(a) above shall be in such detail as the Bank may
reasonably request and shall be prepared in a manner consistent with
the Financial Statements.
(b) Certificates of Compliance. Concurrently with the furnishing of
the annual audited Financial Statements pursuant to Subsection 10(a)(i)
hereof and each of the quarterly unaudited Financial Statements
pursuant to Subsection 10(a)(ii) hereof, Borrower will furnish or cause
to be furnished to the Bank a certificate signed by the controller or
general manager of the Borrower (i) stating that the Borrower has
fulfilled in all material respects its obligations under the Note and
this Agreement, including, but not limited to, its obligations under
Section 10(j) hereof, and that all representations and warranties made
herein continue to be true and correct in all material respects (or
specifying the nature of any change), or if an Event of Default has
occurred, specifying the Event of Default and the nature and status
thereof; (ii) to the extent requested from time to time by the Bank,
specifically affirming compliance of the Borrower in all material
respects with any of its representations or obligations under said
instruments; (iii) setting forth the computation, in reasonable detail
as of the end of each period covered by such certificate, of compliance
with Sections 11(d) and (g); and (iv) containing or accompanied by
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<PAGE> 11
such financial or other details, information and material as the Bank may
reasonably request to evidence such compliance.
(c) Taxes and Other Liens. The Borrower will pay and discharge
promptly all taxes, assessments and governmental charges or levies
imposed upon Borrower or upon the income or any assets or property of
the Borrower as well as all claims of any kind (including claims for
labor, materials, supplies and rent) which, if unpaid, might become a
lien or other encumbrance upon any or all of the assets or property of
Borrower; provided, however, that Borrower shall not be required to pay
any such tax, assessment, charge, levy or claim (i) if the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings diligently conducted or (ii) if the
failure to pay would result only in the imposition of a lien or other
encumbrance which is a Permitted Lien.
(d) Compliance with Laws. Borrower will observe and comply, in all
material respects, with all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules,
regulations, orders and restrictions relating to environmental
standards or controls or to energy regulations of all federal, state,
county, municipal and other governments, departments, commissions,
boards, agencies, courts, authorities, officials and officers, domestic
or foreign.
(e) Further Assurances. Borrower will cure promptly any defects in
the creation and issuance of the Note and the execution and delivery of
the Note and this Agreement. Borrower at its sole expense will promptly
execute and deliver to Bank upon request all such other and further
documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements in this Agreement, or to
correct any omissions in the Note or more fully to state the
obligations set out herein.
(f) Performance of Obligations. Borrower will pay the Note and other
obligations incurred by it hereunder according to the reading, tenor
and effect thereof and hereof; and Borrower will do and perform every
act and discharge all of the obligations provided to be performed and
discharged by Borrower under this Agreement, at the time or times and
in the manner specified.
(g) Insurance. Borrower now maintains and will continue to maintain
insurance with financially sound and reputable insurers with respect to
its assets against such liabilities, fires, 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. Upon request of the Bank, Borrower will furnish or cause to
be furnished to the Bank from time to time a summary of the respective
insurance coverage of Borrower in form and substance satisfactory to
the Bank, and, if requested, will furnish the Bank copies of the
applicable policies. Upon demand by Bank, any insurance policies
covering any such property shall be amended (i) to provide that such
policies may not be canceled, reduced or affected in any manner for any
reason without fifteen (15) days prior notice to Bank, (ii) to provide
for insurance against fire, casualty and other hazards normally insured
against, in the amount of the full value (less a reasonable deductible
not to exceed amounts customary in the industry for similarly situated
business and properties) of the property insured, and (iii) to provide
for such other matters as the Bank may reasonably require. Borrower
shall at all times maintain adequate insurance with respect to its
properties against its liability for injury to persons or property,
which insurance shall be by financially sound and reputable insurers
and shall without limitation provide the following coverage:
comprehensive general liability (including coverage for damage to
underground resources and equipment, damage caused by blowouts or
cratering, damage caused by explosion, damage to underground
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<PAGE> 12
minerals or resources caused by saline substances, broad form property
damage coverage, broad form coverage for contractually assumed
liabilities and broad form coverage for acts of independent
contractors), worker's compensation and automobile liability. Borrower
shall at all times maintain cost of control of well insurance with
respect to its properties which shall insure Borrower against seepage
and pollution expense if deemed economical in the reasonable discretion
of Borrower; redrilling expense; and cost of control of well; fires,
blowouts, etc. Additionally, Borrower shall at all times maintain
adequate insurance with respect to all of its other assets and wells in
accordance with prudent business practices.
(h) Accounts and Records. Borrower will keep books, records and
accounts in which full, true and correct entries will be made of all
dealings or transactions in relation to their business and activities,
prepared in a manner consistent with prior years.
(i) Right of Inspection. Borrower will permit any officer, employee
or agent of the Bank to examine Borrower's books, records and accounts,
and take copies and extracts therefrom, all at such reasonable times
and as often as the Bank may reasonably request. Bank will use its best
efforts to keep all such information confidential and will not without
prior written consent disclose or reveal the information or any part
thereof to any person other than the Bank's officers, employees, legal
counsel, regulatory authorities or advisors to whom it is necessary to
reveal such information for the purpose of effectuating the agreements
and undertakings specified herein.
(j) Notice of Certain Events. Borrower shall promptly notify the
Bank if Borrower learns of the occurrence of (i) any event which
constitutes an Event of Default, together with a detailed statement by
Borrower of the steps being taken to cure the Event of Default; or (ii)
any legal, judicial or regulatory proceedings affecting the Borrower,
or any of the assets or properties of the Borrower which, if adversely
determined, could reasonably be expected to have a Material Adverse
Effect; or (iii) any dispute between the Borrower and any governmental
or regulatory body or any other person or entity which, if adversely
determined, might reasonably be expected to cause a Material Adverse
Effect; or (iv) any other matter which in its reasonable opinion could
have a Material Adverse Effect.
(k) ERISA Information and Compliance. Borrower will promptly furnish
to the Bank immediately upon becoming aware of the occurrence of any
"reportable event," as such term is defined in Section 4043 of ERISA,
or of any "prohibited transaction", as such term is defined in Section
4975 of the Internal Revenue Code of 1954, as amended, in connection
with any Plan or any hug created thereunder, a written notice signed by
the President or the chief financial officer of the Borrower,
specifying the nature thereof, what action Borrower is taking or
proposes to take with respect thereto, and, when known, any action
taken by the Internal Revenue Service with respect thereto.
(1) Environmental Reports and Notices. Borrower will deliver to the
Bank (i) promptly upon its becoming available, one copy of any material
report sent by the Borrower to any court, governmental agency or
instrumentality pursuant to any Environmental Law, (ii) notice, in
writing, promptly upon Borrower's learning that it has received notice
or otherwise learned of any claim, demand, action, event, condition,
report or investigation indicating any potential or actual liability
arising in connection with (x) the non-compliance with or violation of
the requirements of any Environmental Law which reasonably could be
expected to have a Material Adverse Effect; (y) the release or
threatened release of any toxic or hazardous waste into the environment
which reasonably could be expected to have a Material Adverse Effect or
which release Borrower would have a duty to report to any court or
government agency or
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<PAGE> 13
instrumentality, or (iii) the existence of any Environmental Lien on
any properties or assets of the Borrower, and Borrower shall
immediately deliver a copy of any such notice to Bank.
(m) Maintenance. Borrower will (i) observe and comply with all valid
laws, statutes, codes, acts, ordinances, orders, judgments, decrees,
injunctions, rules, regulations, orders and restrictions relating to
environmental standards or controls or to energy regulations of all
federal, state, county, municipal and other governments, departments,
commissions, boards, agencies, courts, authorities, officials and
officers, domestic or foreign; (ii) except as provided in Subsections
10(n) and 10(o) below, maintain the Oil and Gas Properties and other
assets and properties in good and workable condition at all times and
make all repairs, replacements, additions, betterments and improvements
to the Oil and Gas Properties and other assets and properties as are
needed and proper so that the business carried on in connection
therewith may be conducted properly and efficiently at all times in the
opinion of the Borrower exercised in good faith; (iii) take or cause to
be taken whatever actions are reasonably necessary or desirable to
prevent an event or condition of default by Borrower under the
provisions of any gas purchase or sales contract or any other contract,
agreement or lease comprising a part of the Oil and Gas Properties; and
(iv) furnish Bank upon request evidence satisfactory to Bank that there
are no liens, claims or encumbrances on the Oil and Gas Properties,
except laborers', vendors', repairmen's, mechanics', workers', or
materialmen's liens arising by operation of law or incident to the
construction or improvement of property if the obligations secured
thereby are not yet due or are being contested in good faith by
appropriate legal proceedings or Permitted Liens.
(n) Operation of Properties. Except as provided in Subsection 10(p)
below, Borrower will operate, or cause to be operated, all Oil and Gas
Properties in a careful and efficient manner in accordance with the
practice of the industry and in compliance in all material respects
with all applicable laws, rules, and regulations, and in compliance in
all material respects with all applicable proration and conservation
laws of the jurisdiction in which the properties are situated, and all
applicable laws, rules, and regulations, of every other agency and
authority from time to time constituted to regulate the development and
operation of the properties and the production and sale of hydrocarbons
and other minerals therefrom; provided, however, that Borrower shall
have the right to contest, in good faith by appropriate proceedings,
the applicability or lawfulness of any such law, rule or regulation and
pending such contest may defer compliance therewith, as long as such
deferment shall not subject the properties or any part thereof to
foreclosure or loss.
(o) Compliance with Leases and Other Instruments. Borrower will pay
or cause to be paid and discharged all rentals, delay rentals,
royalties, production payment, and indebtedness required to be paid by
the Borrower accruing under, and perform or cause to be performed in
all material respects each and every act, matter, or thing required of
the Borrower by each and all of the assignments, deeds, leases,
subleases, contracts, and agreements in any way relating to the
Borrower and do all other things necessary of the Borrower to keep
unimpaired in all material respects the rights of the Borrower
thereunder and to prevent the forfeiture thereof or default thereunder;
provided, however, that nothing in this Subsection 10(o) shall be
deemed to require the Borrower to perpetuate or renew any oil and gas
lease or other lease by payment of rental or delay rental or by
commencement or continuation of operations or to prevent the Borrower
from abandoning or releasing any oil and gas lease or other lease or
well thereon when, in any of such events, in the opinion of Borrower
exercised in good faith, it is not in the best interest of the Borrower
to perpetuate the same.
(p) Certain Additional Assurances Regarding Maintenance and
Operations of Properties. With respect to those Oil and Gas Properties
which are being operated by operators
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<PAGE> 14
other than Borrower, Borrower shall not be obligated to perform any
undertakings contemplated by the covenants and agreement contained in
Subsections 10(n) or 10(o) hereof which are performable only by such
operators and are beyond the control of Borrower; however, Borrower
agrees to promptly take all actions available under any operating
agreements or otherwise to bring about-the performance of any such
undertakings required to be performed thereunder.
11. NEGATIVE COVENANTS. A deviation from the provisions of this Section
11 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by the Bank. Without the prior written
consent of the Bank, Borrower will at all times comply with the covenants
contained in this Section 11 from the date hereof and for so long as the Note
is in existence.
(a) Liens. Borrower will not create, incur, assume or permit to
exist any lien, security interest or other encumbrance on any of its
materials, assets or properties, including, but not limited to, Oil and
Gas Properties, except Permitted Liens.
(b) Sales of Assets. The Borrower will not sell, lease or otherwise
transfer, directly or indirectly, all or any material part of the Oil
and Gas Properties or oil and gas assets, to any other person or
entity, except sales, leases or other transfers (i) made in the
ordinary course of business by Borrower, and (ii) sales of Oil and Gas
Properties or oil and gas assets, the gross sales proceeds of which do
not exceed $250,000 in the aggregate in any fiscal year.
(c) Debts, Guaranties and Other Obligations. Borrower will not
incur, create, assume or in any manner become or be liable in respect
of any indebtedness, nor will the Borrower guarantee or otherwise in
any manner become or be liable in respect of any indebtedness,
liabilities or other obligations of any other person or entity, whether
by agreement to purchase the indebtedness of any other person or entity
or agreement for the furnishing of funds to any other person or entity
through the purchase or lease of goods, supplies or services (or by way
of stock purchase, capital contribution, advance or loan) for the
purpose of paying or discharging the indebtedness of any other person
or entity, or otherwise, except that the foregoing restrictions shall
not apply to:
(i) the Note, or other indebtedness of Borrower or Guarantor
heretofore disclosed to Bank in writing;
(ii) taxes, assessments or other government charges which are
not yet due or are being contested in good faith by appropriate
action promptly initiated and diligently conducted, if such reserve
as shall be required by generally accepted accounting principles
shall have been made therefor; and
(iii) indebtedness incurred in the ordinary course of business.
(d) Dividends. The aggregate cash dividends paid on the stock of
Borrower shall not exceed an amount equal to 50% of Borrower's cash
flow from operations (as determined in accordance with GAAP) after
payment of any debt service requirements, to be tested quarterly at the
end of each fiscal quarter using the fiscal quarter ended just prior to
the testing date plus the previous three fiscal quarters.
(e) Stock Acquisitions. Borrower shall not acquire in any fiscal
year treasury stock with a value exceeding $250,000 in the aggregate,
exclusive of Employee Stock Option Plan transactions that the Borrower
is, as of the date hereof, contractually obligated to complete.
14
<PAGE> 15
(f) Other Negative Pledges. Borrower will not grant a negative
pledge on any of its assets except the negative pledge granted herein
to Bank.
(g) Net Income. Borrower shall not allow its net income (calculated
in accordance with GAAP), to ever be less than $0, excluding therefrom
the effect of any oil and gas property asset writedowns mandated by the
Securities and Exchange Commission regulations regarding capitalized
assets, said net income to be tested quarterly using the fiscal quarter
ending just prior to the testing date plus the previous three fiscal
quarters.
12. EVENTS OF DEFAULT. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) Borrower shall fail to pay when due or declared due the
principal of or interest on the Note or any fee or any other
indebtedness of Borrower incurred pursuant to this Agreement; or
(b) Any representation or warranty made by Borrower under this
Agreement, or in any certificate or statement furnished or made to Bank
pursuant hereto, or in connection herewith, or in connection with any
document furnished hereunder, shall prove to be untrue in any material
respect as of the date on which such representation or warranty is made
(or deemed made), or any representation, statement (including financial
statements), certificate, report or other data furnished or to be
furnished or made by Borrower under this Agreement, proves to have been
untrue in any material respect, as of the date on which the facts
therein set forth were stated or certified; or
(c) Default shall be made in the due observance or performance of
any of the covenants or agreements of the Borrower contained in this
Agreement, and such default shall continue for more than thirty (30)
days; or
(d) Default shall be made in respect of any obligation for borrowed
money, other than the Note, for which the Borrower is liable (directly,
by assumption, as guarantor or otherwise), or any obligations secured
by any mortgage, pledge or other security interest, lien, charge or
encumbrance with respect thereto, on any asset or property of the
Borrower or in respect of any agreement relating to any such
obligations, and such default shall continue beyond the applicable
grace period, if any; or
(e) Borrower shall commence a voluntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking an appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any action
authorizing the foregoing; or
(f) An involuntary case or other proceeding shall be commenced
against the Borrower seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency or similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain
15
<PAGE> 16
undismissed and unstayed for a period of thirty (30) days; or an order
for relief shall be entered against the Borrower under the federal
bankruptcy laws as now or hereinafter in effect; or
(g) A final judgment or order for the payment of money in excess of
$100,000.00 (or judgments or orders aggregating in excess of
$100,000.00) shall be rendered against the Borrower and such judgment
or order shall continue unsatisfied and unstayed for a period of thirty
(30) days; or
(h) In the event the aggregate principal amount outstanding under
the Note shall at any time exceed the Borrowing Base established for
the Note, Borrower shall fail to provide such additional Oil and Gas
Properties or prepay the principal of such Note, or either of them, in
compliance with the provisions of Section 7 hereof.
Upon occurrence of any Event of Default specified in Subsections 12(e)
and 12(f) hereof, the Revolving Loan Commitment shall terminate and the entire
principal amount due under the Note and all interest then accrued thereon, and
any other liabilities of Borrower hereunder, shall become immediately due and
payable all without notice and without presentment, demand, protest, notice of
protest or dishonor or any other notice of default of any kind, all of which are
hereby expressly waived by Borrower. In any other Event of Default, the Bank may
by notice to Borrower terminate the Revolving Loan Commitment and declare the
principal of, and all interest then accrued on, the Note and any other
liabilities hereunder to be forthwith due and payable, whereupon the same shall
forthwith become due and payable without presentment, demand, protest or other
notice of any kind, all of which Borrower hereby expressly waives, anything
contained herein or in the Note to the contrary notwithstanding. Nothing
contained in this Section 12 shall be construed to limit or amend in any way the
Events of Default enumerated in the Note, or any other document executed in
connection with the transaction contemplated herein.
Upon the occurrence and during the continuance of any Event of Default,
the Bank is hereby authorized at any time and from time to time, without notice
to Borrower (any such notice being expressly waived by Borrower), to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower against any and all of the
indebtedness of the Borrower under the Note and this Agreement, irrespective of
whether or not the Bank shall have made any demand under the Security
Instrument, including this Agreement or the Note and although such indebtedness
may be unmatured. Any amount set off by the Bank shall be applied against the
indebtedness owed the Bank by Borrower. The Bank agrees promptly to notify
Borrower after any such setoff and application, provided that the failure to
give such notice shall not affect the validity of such setoff and application.
The rights of the Bank under this Section 12 are in addition to other rights and
remedies (including, without limitation, other rights of setoff) which the Bank
may have. None of the rights granted to the Bank in this Section 12 shall apply
to any deposits held by the Bank constituting trust funds and so identified to
the Bank at the time the applicable deposit account is created. Within five (5)
Business Days after such setoff or appropriation by the Bank, the Bank shall
give Borrower written notice thereof. However, a failure to give such notice
will not affect the validity of the setoff or appropriation.
13. EXERCISE OF RIGHTS. No failure to exercise, and no delay in
exercising, on the part of the Bank, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right. The rights
of the Bank hereunder shall be in addition to all other rights provided by law.
No modification or waiver of any provision of this Agreement, or the Note or
consent to departure therefrom, shall be effective unless in writing, and no
such consent or waiver shall extend beyond the particular case and purpose
involved. No
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<PAGE> 17
notice or demand given in any case shall constitute a waiver of the right to
take other action in the same, similar or other circumstances without such
notice or demand.
14. NOTICES. Any notices or other communications required or permitted
to be given by this Agreement or any other documents and instruments referred to
herein must be given in writing and must be personally delivered or mailed by
prepaid certified or registered mail to the party to whom such notice or
communication is directed at the address of such party as follows: (a) BORROWER:
PANHANDLE ROYALTY COMPANY, Grand Centre, Suite 210, 5900 N.W. Grand Blvd.,
Oklahoma City, Oklahoma 73112-5088, Attention: Michael C. Coffman, Vice
President/Treasurer; (b) BANCFIRST, 101 N. Broadway, Oklahoma City, Oklahoma
73102, Attention: E.G. Alexander, Senior Vice President. Any such notice or
other communication shall be deemed to have given (whether actually received or
not) on the day it is personally delivered as aforesaid or, if mailed, on the
fifth day after it is mailed as aforesaid. Any party may change its address for
purposes of this Agreement by giving notice of such change to the other party
pursuant to this Section 14. Upon receipt by Bank of any such notice, Bank shall
promptly provide copies of such notice or notices to the Bank.
15. EXPENSES.
(a) The Borrower shall pay (i) any waiver or consent hereunder or
any amendment hereof or any default or Event of Default and (ii) if a
default or an Event of Default occurs, all reasonable and necessary
out-of-pocket expenses incurred by the Bank, including fees and
disbursements of counsel, in connection with such default and Event of
Default and collection and other enforcement proceedings resulting
therefrom. The Borrower shall indemnify the Bank against any transfer
taxes, document taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of this Agreement or
the Note.
(b) The Borrower agrees to indemnify and hold harmless the Bank from
and against any loss, cost, liability, damage or expense (including the
reasonable fees and out-of-pocket expenses of counsel to the Bank,
including all local counsel hired by such counsel) incurred by the Bank
in investigating or preparing for, defending against, or providing
evidence, producing documents or taking any other action in respect of
any commenced or threatened litigation, administrative proceeding or
investigation under any federal securities law or any other statute of
any jurisdiction, or any regulation, or at common law or otherwise,
which is alleged to arise out of or is based upon any acts, practices
or omissions or alleged acts, practices or omissions of the Borrower or
its agents. The indemnity set forth herein shall be in addition to any
other obligations or liabilities of the Borrower to the Bank hereunder
or at common law or otherwise, and shall survive any termination of
this Agreement, the expiration of the Revolving Loan Commitment and the
payment of all indebtedness of the Borrower to the Bank hereunder and
under the Note, provided that the Borrower shall have no obligation
under this Section 15 to the Bank with respect to any of the foregoing
arising out of the gross negligence or willful misconduct of the Bank.
16. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND
IS INTENDED TO BE PERFORMED, IN OKLAHOMA CITY, OKLAHOMA, AND THE SUBSTANTIVE
LAWS OF OKLAHOMA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS
REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN OR UNLESS THE LAWS OF
ANOTHER STATE REQUIRE THE APPLICATION OF THE LAWS OF SUCH STATE.
17
<PAGE> 18
17. INVALID PROVISIONS. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under present or future laws effective
during the term of this Agreement, such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
18. MAXIMUM INTEREST RATE. Regardless of any provisions contained in
this Agreement or in any other documents and instruments referred to herein, the
Bank shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Note any amount in excess of the maximum
rate of interest permitted to be charged by applicable law, and in the event the
Bank ever receives, collects or applies as interest any such excess, or if an
acceleration of the maturities of the Note or if any prepayment by Borrower
results in Borrower having paid any interest in excess of the maximum rate, such
amount which would be excessive interest shall be applied to the reduction of
the unpaid principal balance of the Note for which such excess was received,
collected or applied, and, if the principal balance of such Note is paid in
full, any remaining excess shall forthwith be paid to Borrower. All sums paid or
agreed to be paid to the Bank for the use, forbearance or detention of the
indebtedness evidenced by the Note and/or this Agreement shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
maximum lawful rate permitted under applicable law. In determining whether or
not the interest paid or payable under any specific contingency exceeds the
maximum rate of interest permitted by law, Borrower and the Bank shall, to the
maximum extent permitted under applicable law, (i) characterize any
non-principal payment as an expense, fee or premium, rather than as interest;
and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare
the total amount of interest contracted for, charged or received with the total
amount of interest which could be contracted for, charged or received throughout
the entire contemplated term of the Note at the maximum lawful rate under
applicable law.
19. AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
20. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number
of identical separate counterparts, each of which for all purposes is to be
deemed an original, but all of which shall constitute, collectively, one
agreement. No party to this Agreement shall be bound hereby until a counterpart
of this Agreement has been executed by all parties hereto.
21. SURVIVAL. All covenants, agreements, undertakings, representations
and warranties made in this Agreement, the Note or other documents and
instruments referred to herein shall survive all closings hereunder and shall
not be affected by any investigation made by any party.
22. PARTIES BOUND. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns,
heirs, legal representatives and estates, provided, however, that Borrower may
not, without the prior written consent of the Bank, assign any rights, powers,
duties or obligations hereunder.
23. PARTICIPATIONS. The Bank shall have the right at any time and from
time to time to sell one or more participations in the Note or any Advance
thereunder. To the extent of any such participation, the provisions of this
Agreement shall inure to the benefit of, and be binding on, each participant,
including, but not limited to, any indemnity from Borrower to the Bank. The
Borrower shall have no obligation or liability to and no obligation to negotiate
or confer with, any participant, and Borrower shall be entitled to treat the
Bank as the sole owner of the Note without regard to notice or
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<PAGE> 19
actual knowledge of any such participation. Upon the occurrence of a default or
an Event of Default, each participant will have and is hereby granted the right
to set off against and to appropriate and apply from time to time, without prior
notice to the Borrower or any other party, any such notice being hereby
expressly waived, any and all deposits (general or special or other indebtedness
or claims, direct or indirect, contingent or otherwise), at any time held or
owing by the participant to or for the credit or account of Borrower against the
payment of the Note and any other obligations of the Borrower hereunder,
provided, however, none of the rights granted in this Section 23 shall apply to
any deposits held by any participant constituting trust funds and so identified
to such participant at the time the applicable deposit account is created.
Within five (5) Business Days after such setoff or appropriation by a
participant, that participant shall give Borrower written notice thereof.
However, a failure to give such notice will not affect the validity of this
setoff or appropriation.
24. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
"BORROWER": PANHANDLE ROYALTY COMPANY,
an Oklahoma corporation
By: /s/ H W PEACE, II
--------------------------------------
Name: H W Peace, II
Title: President and CEO
"BANK": BANCFIRST, an Oklahoma banking corporation
By: /S/ ED ALEXANDER
--------------------------------------
Ed Alexander, Senior Vice President
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<PAGE> 20
EXHIBIT A
ADJUSTABLE RATE PROMISSORY NOTE
U.S. $5,000,000.00
December 29, 1999
Oklahoma City, OK
1. BORROWER'S PROMISE TO PAY. FOR VALUE RECEIVED, PANHANDLE ROYALTY
COMPANY, an Oklahoma corporation (herein "BORROWER") promises to pay BANCFIRST,
an Oklahoma banking corporation (herein "NOTE HOLDER," which term shall be
deemed to include any subsequent holder of this Note), or order, at P.O. Box
26788, Oklahoma City, Oklahoma 73126, Attn: Ed Alexander, Senior Vice President,
or such other place as the Note Holder may designate in writing, the principal
sum of Five Million and No/100 Dollars (U.S. $5,000,000.00), or so much thereof
as shall be disbursed hereunder, together with interest on the unpaid principal
balance as hereinafter set forth. This Note is issued pursuant to a Loan
Agreement between Borrower and Note Holder dated the same date as this Note (the
"LOAN AGREEMENT"). Unless otherwise defined in this Note or unless otherwise
required by the context of this Note, capitalized terms used in this Note will
have the meanings ascribed to those terms in the Loan Agreement. Advances
hereunder will be made pursuant to the terms of the Loan Agreement and may
involve the readvancement of sums previously paid pursuant to a revolving line
of credit.
2. INTEREST. As used herein, the term "PRIME RATE" will mean the per
annum rate of interest (expressed as a percentage) designated as the "Prime
Rate" (in the "Money Rates" section) as published in the most recent issue of
The Wall Street Journal. If more than one Prime Rate is designated in The Wall
Street Jo then the Index Rate will be the highest rate so designated.
2.1 INTEREST RATE PRIOR TO MATURITY. Commencing on the date funds
are advanced by the Note Holder and prior to maturity of this Note, the unpaid
principal balance of this Note will bear interest at the rate which is equal to
the Prime Rate, as adjusted as hereinafter provided, minus one-quarter percent
(1/4%). Borrower acknowledges that on the date of this Note the Prime Rate is
8.50%; therefore, the current interest rate under this Note is 8.25%.
2.2 ADJUSTMENTS IN RATE. The interest rate under this Note will be
adjusted effective on the date of any adjustment in the Prime Rate (the "CHANGE
DATES"). On each Change Date the interest rate will be adjusted to equal the per
annum rate which is one-quarter percent (1/4%) less than the then current Prime
Rate.
2.3 POSTMATURITY RATE; INTEREST COMPUTATION. After maturity (as
scheduled, pursuant to acceleration, or otherwise) the unpaid balance of this
Note will bear interest at the per annum which is two percent (2%) in excess of
the interest rate in effect immediately preceding maturity (the "Default Rate").
Interest will be computed on a per them basis over the actual number of days
elapsed, including the date of disbursement and the date of repayment, based on
a 365-day year and the actual number of days in a month.
2.4 SUBSTITUTION OF PRIME RATE. If the Prime Rate as described above
is not available at any time, then the Note Holder will select an alternate
reference or index based on comparable information to use as the Prime Rate
hereunder. The Note Holder will notify Borrower of the new Prime Rate.
3. PAYMENTS. The principal of, and interest on, this Note will be paid
as follows:
<PAGE> 21
3.1 INTEREST ONLY. On the first day of April 1, 2000 and the first
day of every calendar quarter thereafter, Borrower shall pay the Note Holder
interest only, accrued through the last day of the preceding calendar quarter.
3.2 MANDATORY PRINCIPAL PAYMENTS. Borrower shall be required to make
mandatory principal payments under this Note if and as required under the Loan
Agreement.
3.3 FINAL PAYMENT. The principal and all accrued unpaid interest and
other sums due under this Note shall become due and payable on December 31,
2002.
3.4 PAYMENTS DUE ON NON-BUSINESS DAYS. In the event any payment
hereunder becomes due on a day which is not a regular business day of the Note
Holder, the due date of such payment will be extended to the next succeeding
business day of the Note Holder and interest will accrue during the interim.
4. DEFAULT; ACTIONS RELATING TO NOTE. If any installment or other
payment required under this Note is not paid when due, and such default is not
cured within ten (10) days after the due date of such payment, the entire
principal amount outstanding hereunder and all accrued unpaid interest and other
charges hereunder shall at once become due and payable, at the option of the
Note Holder. The Note Holder may exercise this option to accelerate during any
Event of Default (as defined in the Loan Agreement) regardless of any prior
forbearance. In the event of any default in the payment of this Note and
referral of the same to an attorney at law for collection (whether or not suit
is instituted), or the establishment or collection of any sums evidenced by this
Note through any bankruptcy, probate, receivership, reorganization, arrangement
or other judicial proceedings, or if any action at law or in equity is brought
with respect hereto, Borrower shall pay the Note Holder all its expenses and
costs incurred in connection therewith, including, without limitation, the
reasonable fees and disbursements of the Note Holder's attorneys, and any costs,
expenses and attorney's fees incurred in connection with appellate proceedings.
After any default under this Note or the Loan Agreement, the Note Holder may
accept any partial payment of the sums then due under this Note or the Loan
Agreement without prejudice to its right to collect the balance of the sums then
due and to enforce this Note and the Loan Agreement.
5. LATE CHARGE. If any installment under this Note is not received by
the Note Holder within ten (10) days after the installment is due, Borrower
shall pay to the Note Holder a late charge equal to five percent (5%) of such
installment for the purpose of defraying the additional costs and expenses of
collection, it being impracticable or extremely difficult to fix the actual
costs and expenses to the Note Holder occasioned thereby. Such late charges
shall be immediately due and payable without demand by the Note Holder, and
payment thereof shall, at the Note Holder's option, be a condition precedent to
curing any default hereunder. The Note Holder's acceptance of subsequent
installments without having received any accrued late charges will not waive the
Note Holder's right to collect such late charges at any time thereafter,
including if applicable, upon maturity of this Note. During the existence of any
default, the Note Holder may apply payments received on any amount due hereunder
or under the Loan Agreement, as the Note Holder may determine in its discretion.
No late charges will be assessed after maturity of this Note, whether by
acceleration, as scheduled, or otherwise.
6. PREPAYMENT. This Note may be prepaid in whole or in part at any time
without premium or penalty.
7. CONSENTS. From time to time, the Note Holder may take any Permitted
Action, as hereinafter defined, (a) without affecting the obligation of
Borrower, or the successors or assigns of
2
<PAGE> 22
Borrower, if any, to pay the sums evidenced by this Note and to observe and
perform the covenants of Borrower contained in this Note or the Loan Agreement,
(b) without giving notice to or obtaining the consent of Borrower, Borrower's
successors or assigns, and (c) without liability on the part of the Note Holder.
As used herein the following shall constitute "PERMITTED ACTIONS":
(i) the extension of time for payment of any principal, interest
or other sums due under this Note or the Loan Agreement;
(ii) the acceptance of partial payments;
(iii) the granting of any indulgences, leniencies or waivers;
(iv) the release of any person or entity obligated to pay any sums
evidenced hereby;
(v) the joinder with Borrower or Borrower's successors or assigns,
in the modification of any of the terms of this Note or the
Loan Agreement;
(vi) the acceptance of an amended, restated, renewal and/or
substitute promissory note as evidence of the indebtedness
evidenced hereby; or
(vii) the release of any or all collateral securing payment of this
Note.
8. WAIVERS; LIABILITY. Except as otherwise specifically provided
herein, presentment, demand, notice of demand, notice of nonpayment or dishonor,
protest, and notice of protest are hereby waived by all makers, sureties and
guarantors hereof. Each party who is now or may hereafter become liable hereon
as a surety or guarantor, to the extent not prohibited by law, waives the
benefit of any law or rule of law intended for its advantage or protection as an
obligor hereunder or providing for its release or discharge from liability
hereon, in whole or in part, on account of any facts or circumstances other than
payment in full of all amounts due hereunder. This Note shall be the joint and
several obligation of all makers, sureties and guarantors, and shall be binding
upon them and their heirs, personal representatives, successors and assigns.
9. CROSS-DEFAULT WITH LOAN AGREEMENT. A default under the Loan
Agreement will constitute a default under this Note, and if such default is not
cured within any applicable grace or cure period stated therein, the Note Holder
will be entitled to terminate its obligations under the Loan Agreement
accelerate the entire indebtedness evidenced by this Note and enforce this Note
and the Loan Agreement.
10. MISCELLANEOUS. This Note shall be governed by the law of the State
of Oklahoma. Borrower expressly states that this Note is made for a business
purpose. In the event any provision contained in this Note conflicts with
applicable law, such conflict shall not affect other provisions of this Note
which can be given effect without the conflicting provisions. To this end the
provisions of this Note are declared to be severable. It is not the intent of
the Note Holder to collect interest or other loan charges in excess of the
maximum amount permitted by the laws of Oklahoma. If interest or other loan
charges collected or to be collected by the Note Holder exceed any applicable
permitted limits then (a) any such interest or other loan charge shall be
reduced by the amount necessary to reduce the interest or other loan charge to
the permitted limit, and (b) any sums already collected from Borrower which
exceeded permitted limits will be refunded to Borrower. The Note Holder may
choose to make such refund by reducing the principal balance of this Note or by
making a direct payment to Borrower. If a refund is made by reducing the
principal, the reduction will be treated as a partial prepayment.
3
<PAGE> 23
11. NOTICES. Any notice or other communication to Borrower or the Note
Holder required or authorized herein shall be sufficient if made in writing and
either (a) delivered personally or by messenger or a nationally recognized
overnight courier service, (b) sent postage prepaid by express mail or first
class certified mail, return receipt requested, or (c) sent by facsimile or
other similar means of rapid transmission and confirmed by mailing written
confirmation thereof (as provided in clause (b) above) at substantially the same
time as such rapid transmission. The effective date of any notice shall be the
date of delivery of the notice, if by personal delivery, messenger or courier
service, or facsimile, or if mailed, on the date upon which the express mail
receipt or the return receipt is signed or delivery is refused or the notice is
designated by the postal authorities as not deliverable, as the case may be.
Borrower hereby designates the address set forth below as its notice address
under this Note. Either party may change its notice address by written notice to
the other as provided above; however, no such change shall be effective until
received by the other party.
12. LINE OF CREDIT. This Note evidences a revolving line of credit.
Advances under this Note may be made from time to time pursuant to the terms of
the Loan Agreement. The Note holder's records of advances and payments and
interest accruing hereunder shall be prima facie evidence of the amounts owing
hereunder; subject, however, to evidence of disbursements and payments which
Borrower may present.
Executed and delivered as of the date first above written.
"BORROWER": PANHANDLE ROYALTY COMPANY,
an Oklahoma corporation
By:
----------------------------------------
Name: H W Peace II
Title: President and CEO
Borrower's Notice Address:
Panhandle Royalty Company
Attn: H W Peace II, CEO and President
5900 N.W. Grand Boulevard, Suite 210
Oklahoma City, Oklahoma 73112-5088
4
<PAGE> 24
EXHIBIT "B"
MATERIAL ADVERSE FINANCIAL EVENTS
1. None
<PAGE> 25
EXHIBIT "C"
LITIGATION
1. [to be completed] None
<PAGE> 26
EXHIBIT "D"
ENVIRONMENTAL LIABILITIES
1. [to be completed] None known
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 237,253
<SECURITIES> 0
<RECEIVABLES> 1,119,782
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<INVENTORY> 0
<CURRENT-ASSETS> 1,376,880
<PP&E> 30,886,699
<DEPRECIATION> 18,817,829
<TOTAL-ASSETS> 13,553,466
<CURRENT-LIABILITIES> 752,929
<BONDS> 0
0
0
<COMMON> 68,566
<OTHER-SE> 11,055,971
<TOTAL-LIABILITY-AND-EQUITY> 13,553,466
<SALES> 1,627,739
<TOTAL-REVENUES> 1,650,961
<CGS> 271,658
<TOTAL-COSTS> 1,243,120
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,583
<INCOME-PRETAX> 406,258
<INCOME-TAX> 42,000
<INCOME-CONTINUING> 364,258
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<NET-INCOME> 364,258
<EPS-BASIC> .18
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