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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number: 0-12633
TEXOIL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 88-0177083
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
110 CYPRESS STATION DRIVE, SUITE 220
HOUSTON, TEXAS 77090-1629
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(ISSUER'S TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 per share Boston Stock Exchange
Class A Warrants exercisable to Boston Stock Exchange
purchase one share of Common Stock
Class B Warrants exercisable to Boston Stock Exchange
purchase one share of Common Stock
Securities registered under section 12(g) of the Exchange Act: Common
Stock, par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $10,356,000.
The aggregate market value of the Common Stock held by non-affiliates of
the registrant was $31,927,263 as of March 24, 1999. On such date, the last
sales price of registrant's Common Stock was $.8125 per share.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 39,295,094 shares of Common
Stock, $.01 par value, issued and outstanding at March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Description of Business.............. 1
Item 2. Description of Property.............. 9
Item 3. Legal Proceedings.................... 17
Item 4. Submission of Matters to a Vote of
Security Holders................... 18
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters................ 19
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Item 7. Financial Statements................. 29
Item 8. Changes in Registrant's
Accountants........................ 29
PART III
Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16(a) of
the Exchange Act................... 30
Item 10. Executive Compensation............... 31
Item 11. Security Ownership of Certain
Beneficial Owners and Management... 33
Item 12. Certain Relationships and Related
Transactions....................... 34
Item 13. Exhibits and Reports on Form 8-K..... 35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Texoil, Inc. ("Texoil" or the "Company"), is an independent oil and gas
company engaged in the acquisition and development of oil and gas reserves
through a diversified program which includes purchases of reserves,
re-engineering, development and exploration activities currently focused in
Texas, Oklahoma and Louisiana with an emphasis on South Louisiana and the Texas
Gulf Coast. On December 31, 1997, as more fully described in "Cliffwood
Merger", the Company underwent a substantial change in ownership, management,
assets and business strategy, as a result of a reverse merger ("the Merger")
with Cliffwood Oil & Gas Corp. The Company's address is 110 Cypress Station
Drive, Suite 220, Houston, Texas, 77090-1629 and the telephone number is (281)
537-9920. From 1964 through the end of 1997, the Company's business was
conducted primarily by its wholly-owned subsidiary, Texoil Company.
CLIFFWOOD MERGER
On December 31, 1997, the Company acquired Cliffwood Oil & Gas Corp.
("Cliffwood"), a privately-owned independent oil and gas company in a reverse
merger transaction ("Merger") that, (i) shifted stockholder control of the
Company to the former stockholders of Cliffwood, (ii) changed the composition of
the Company's Board of Directors to include a majority of directors nominated by
Cliffwood, (iii) completely replaced the executive officers and employees of the
Company with those of Cliffwood, (iv) resulted in a significant change in the
Company's oil and gas operating strategy, (v) increased the quantity and
geographic diversity of the Company's oil and gas assets, and (vi) improved the
Company's overall financial position and its capital resources. The acquisition
of Cliffwood was accomplished through a reverse merger and related transactions,
in accordance with a definitive Plan and Agreement of Merger (the "Merger
Agreement") dated December 31, 1997. Information on the Merger is also
described in Item 6, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the Notes to Consolidated Financial
Statements, included elsewhere in this annual report. The historical financial
information presented herein represents the historical activities of Cliffwood
with the net assets of Texoil, existing immediately prior to the Merger, treated
as having been acquired on December 31, 1997.
Cliffwood was a private, independent oil and gas company, whose strategy
had been to achieve growth through diversified activities, including purchases
of reserves, re-engineering, recompletions, development drilling and
exploration. At the time of the Merger, Cliffwood's principal proved reserves
were located in Texas. Cliffwood's exploratory drilling efforts were focused
primarily in Southern Louisiana and the Texas Gulf Coast. Its drilling strategy
was to originate drilling prospects, acquire leases and lease options and
solicit participants on a promoted basis. In this way Cliffwood had the
potential to earn a net revenue interest in the properties greater than its
proportionate cost.
CONVERSION OF SECURITIES; REPAYMENT OF NON-CONVERTIBLE INDEBTEDNESS
The Merger Agreement required that all pre-Merger preferred stock and
indebtedness of the Company be converted into Common Stock or be repaid, as a
condition to closing the Merger. Accordingly, the following securities and
indebtedness of the Company which were outstanding immediately prior to the
Merger were converted or repaid.
o The holders of $2.3 million of Texoil's Series A Preferred Stock
converted those securities plus accrued dividends into 904,667 shares
of Common Stock.
o Convertible notes held by certain Directors of the Company, amounting
to $611,800 in unpaid principal and interest, were converted into
764,795 shares of Common Stock.
o $1.05 million of unpaid principal and interest on non-convertible
notes owed to a Director of the Company and his affiliates was repaid.
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o $4.57 million of unpaid principal and accrued interest on convertible
notes owed to affiliates of Resource Investors Management Company
("RIMCO") was converted by the RIMCO affiliates into approximately
4.83 million shares of Common Stock.
RIMCO FINANCING
As a condition to the Merger, on December 31, 1997, Texoil entered into a
Note Purchase Agreement (the "RIMCO Agreement") with four limited partnerships
of which RIMCO is the controlling general partner (the "RIMCO Lenders"). Under
the RIMCO Agreement, the RIMCO Lenders agreed to provide $10.0 million in
financing and Texoil issued 7.875% Convertible Subordinated General Obligation
Notes in the principal amount of $10.0 million to the RIMCO Lenders (the
"Convertible Notes"), which will mature on December 31, 1999 ("Maturity
Date"), subject to extension, under certain terms of the RIMCO Agreement.
Interest is payable on the first day of each month. All outstanding principal
plus all accrued and unpaid interest is due and payable on the Maturity Date or
upon a "Change of Control" as defined in the RIMCO Agreement.
At any time prior to the Maturity Date, outstanding indebtedness is
convertible by holders of the Convertible Notes, in whole or in part, into
Texoil Common Stock at a conversion price equal to $1.75 per share, subject to
anti-dilution adjustments. Conversion is mandatory if the average per share
closing price during a period of 20 consecutive trading days ("Average Price")
equals or exceeds 130% of the conversion price (or $2.275 per share). If on
December 31, 1999, cash availability of the Company and its subsidiaries (as
defined in the RIMCO Agreement), is less than the principal and accrued and
unpaid interest outstanding for the Convertible Notes, the RIMCO Lenders can be
required to convert the outstanding principal and accrued and unpaid interest
into Texoil Common Stock, provided that the market price is 60% of the
conversion price ($1.05 per share) or more. Alternatively, if the stock price is
less than $1.05, the RIMCO Lenders may elect to convert to common shares at the
market price or extend the maturity by approximately 18 months. The indebtedness
under the RIMCO Agreement is subject to the terms of a subordination agreement
among the RIMCO Lenders, Comerica Bank-Texas, N.A. (for itself and as agent for
another lender), the Company and certain subsidiaries.
RECENT DEVELOPMENTS
ACQUISITIONS AND DEVELOPMENT
During 1998, the Company made a series of acquisitions, implemented certain
development programs, expanded its exploration capabilities, consolidated and
increased its interests in certain properties and generally pursued its business
strategy. The Company financed its activities through internally generated cash
flow and bank debt. A significant acquisition of properties from Sonat
Exploration Company ("Sonat"), a subsidiary of Sonat, Inc., was closed on
October 30, 1998. The acquisition is referred to throughout this report as the
"Sonat Acquisition" or "Sonat Properties". The Sonat Acquisition
significantly increased the Company's reserves, cash flows and operating
activities in South Texas and Louisiana. The purchase price was approximately
$17.1 million at closing, net of post-closing adjustments, as specified in the
purchase agreement.
BANK CREDIT AGREEMENT
In October 1998, the Company increased and amended its revolving credit
agreement ("Credit Agreement") with Comerica Bank-Texas and First Union
National Bank to finance property acquisitions and temporary working capital
requirements. The Credit Agreement, as amended, provides up to $50 million in
available borrowings limited by a borrowing base (as defined in the Credit
Agreement), which was $28 million and $10 million at December 31, 1998 and 1997,
respectively. The borrowing base is redetermined annually (or more frequently at
the option of the Company) and is reduced over a five-year period. The Credit
Agreement provides for an annual facility fee of 1/4% of the initial borrowing
base and on any increase thereto, and it also provides for monthly interest
payments at the lender's prime rate plus 1/2%. In addition, the Company arranged
a London Interbank Offering Rate ("LIBOR") option at 1 3/4% to 2 1/4% over the
LIBOR rate, at differing borrowing levels. The Company has granted first
mortgages, assignments
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of production, security agreements and other encumbrances on its oil and gas
properties to the lender, as collateral, pursuant to the Credit Agreement.
The Credit Agreement restricts the payment of dividends on any security,
limits the amount of consolidated debt, limits the Company's ability to make
certain loans and investments and requires that the Company remain in compliance
with certain of its covenants.
BUSINESS STRATEGY
The Company's business strategy includes the purchase, re-engineering,
exploitation and development of proved oil and gas properties as a core business
activity, as well as an active exploration and drilling program. The Company's
strategy will continue to include exploration and development drilling programs
designed to use three dimensional ("3-D") seismic technology with
comprehensive integration of subsurface control, production, engineering and
other data, as available, as a means of reducing risk.
Normally the capital budget would be approximately 40% acquisitions, 30%
re-engineering and development and 30% exploration. However, considering the
current depressed industry conditions, management intends to focus on
acquisitions (either purchases of assets or corporate acquisitions and mergers),
which it expects will be available in 1999. The Company has budgeted
approximately $5 million of capital expenditures in 1999 related to currently
held projects. Management has set a goal of $20 million of capital expenditures
related to the purchase and development of new properties. If management is
successful toward its goal, approximately 67% of its budget will be for
purchases and re-engineering of producing properties, with the remainder
dedicated to development activities, pre-drilling exploration costs, and
exploratory drilling. The proportion of the Company's capital expenditure budget
expended for each of these activities could change substantially, depending upon
the relative cost of the drilling and acquisition opportunities presented to the
Company, the availability of external financing and management's assessment of
the risk, cost, and potential return.
The Company will continue to direct a portion of its capital budget and
manpower to exploration activities, by means of retaining direct interests and
selling interests in its prospects to industry participants for cash and carried
or reversionary interests. Under such arrangements, the Company's percentage
interest in revenues from successful drilling could be higher than its
percentage share of the cost. This strategy is intended to expose the Company to
potentially significant reserve discoveries, reduce risk and lower finding
costs. The Company intends to retain the exploration strategy of generating
prospects which can be partially sold to industry or institutional partners on a
promoted basis. The Company will continue to use a disciplined and financially
oriented approach to such projects and will determine its retained interest with
full consideration of underlying equity, profits from sales of partial
interests, capital resources and cash flows.
ACQUISITION OF PRODUCING PROPERTIES
In 1999, management plans to further diversify the Company's operations by
placing a greater emphasis on the acquisition of proved properties. Particular
emphasis will be placed on currently producing properties where production can
be increased through re-engineering, development and exploration activities. The
successful acquisition of such properties requires an assessment of recoverable
reserves, future oil and natural gas prices, operating costs, potential
environmental liabilities and other factors which are beyond the Company's
direct control. These assessments are inexact and, therefore, the future
financial performance of acquired properties is inherently uncertain. In
addition, the Company could be liable for some pre-closing liabilities,
including possibly, environmental liabilities. There can be no assurance that
any properties acquired by the Company will be economically produced or
developed. Uneconomical properties could have a material adverse effect on the
Company.
RE-ENGINEERING AND DEVELOPMENT OF PRODUCING PROPERTIES
A significant part of the Company's efforts will be directed to
re-engineering projects designed to enhance current production, lower operating
costs and potentially increase the economic life and return on investment of the
property. Re-engineering activities may include well workovers, recompletions of
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existing or untested horizons in existing well bores, installation of artificial
lift equipment, revamping production facilities, drilling and installing salt
water disposal facilities and the implementation or improvement of water flood
or other secondary recovery techniques. While generally involving less risk of
failure than drilling operations, re-engineering operations pose the risk that
reserve additions or production rate improvements may not be achieved, or that
the results obtained are not sufficient to recover the investment and the
incremental cost of the re-engineering operations.
DRILLING ACTIVITIES
The Company expects that it will continue to engage in both development and
exploratory drilling operations. Such activities were limited in 1998 and are
expected to be limited in 1999, due to industry conditions. However, the Company
intends to maintain a diversified inventory of exploratory and development
prospects. The current portfolio includes lower-risk development and exploratory
prospects, as well as higher risk exploratory prospects with greater potential.
The objective of the Company's near-term strategy is maximization of the value
of its existing prospect inventory while reducing its cost and risk exposure. In
the near term, the Company plans to retain a 10% to 30% direct working interest
in each prospect, plus any carried or reversionary interest retained as part of
sales to industry partners. Direct participation may increase as corporate cash
flows and capital resources increase. Drilling prospects may result from the
evaluation of acquisitions or separate prospects generated internally or through
the Company's joint venture with Bechtel Exploration Company. Drilling
activities, whether exploratory or developmental, are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. There can be no assurance that any new wells drilled by the Company
will recover all or any portion of the related investment. The cost of drilling,
completing and operating wells is often uncertain and cost overruns can occur.
The Company's drilling operations might be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond the Company's control.
These factors include financial resources of the Company or its partners,
commodity prices, land and title issues, mechanical problems, weather conditions
and compliance with governmental requirements. Unsuccessful drilling activities
may have a material adverse effect on the Company.
THREE-DIMENSIONAL SEISMIC SURVEYS
The Company uses 3-D seismic technology along with other engineering and
technical data in its development and exploration activities. 3-D technology
involves the application of powerful computer workstations and sophisticated
software to seismic data acquired from a dense pattern of shot points to create
computer-generated, 3-D displays of subsurface geological formations.
Sophisticated seismic equipment and detailed 3-D survey design gather thousands
of times more data than conventional 2-D seismic surveys and permit a more
comprehensive image of the subsurface. This detail provides a better means to
detect seismic anomalies, faults and structural features that are not readily
apparent in 2-D surveys. Management believes that 3-D seismic surveys are
particularly suited to exploration and development activities in geologically
complex areas of the Texas and Louisiana Gulf Coast. Industry statistics have
generally shown that 3-D seismic technology, properly used, may reduce drilling
risks and costs by reducing the number of dry holes, optimizing well locations
and reducing the number of wells required to efficiently develop a discovery.
RESERVE REPLACEMENT AND GROWTH
The Company's future performance depends upon its ability to acquire and
develop additional oil and gas reserves that are economically recoverable. The
Company intends to continue its acquisition, development and drilling
activities. The Company expects to close additional acquisitions and drill or
participate in six to eight wells in 1999; however, no assurances can be given
that the Company will be successful or will have sufficient cash flow or sources
of external capital to acquire, develop or discover additional reserves at an
economical cost. Without successful acquisition, development and exploration
activities the Company's reserves will decline.
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EMPLOYEES
As of December 31, 1998, the Company had 28 full time employees, of which
19 are management, technical and administrative personnel and nine are field
employees. Contract personnel operate some of the Company's producing fields
under the direct supervision of Company employees.
FACILITIES
The principal offices are located at 110 Cypress Station Dr., Suite 220,
Houston, TX, 77090-1629, where the Company occupies approximately 7,600 square
feet. The lease provides for gross rent of $80,916 per year and expires on
February 1, 2000. The Company may terminate the lease in April 1999, without
incremental cost. Prior to the Merger, Texoil occupied approximately 6,700 net
square feet of office space located at 1600 Smith, Suite 4000, Houston, Texas,
77002. Under the terms of its prior lease, the Company exercised its option to
terminate the lease in September 1998. The Company incurred gross rent expense
on its pre-Merger office space through September 1998 of $91,905, which was
offset by $16,490 from a sublease for a portion of the space.
RISKS RELATING TO THE BUSINESS OF TEXOIL
VOLATILITY OF OIL AND GAS PRICES
The Company's financial condition, operating results, future growth, and
the carrying value of its oil and gas properties are substantially dependent on
prevailing prices of oil and gas. During 1998 and early 1999, oil prices have
collapsed and gas prices have softened. The Company's ability to maintain or
increase its borrowing capacity and to obtain additional capital on attractive
terms may also be significantly influenced by oil and gas prices. Prices for oil
and gas are subject to wide fluctuations in response to relatively minor changes
in the supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include:
o The supply and price of foreign oil and gas.
o The actions of the Petroleum Exporting Countries.
o The condition of the United States and world economy.
o Political stability in the Middle East and elsewhere.
o Weather conditions in the United States.
o Governmental regulation.
The substantial and extended decline in the price of oil and the softening
of gas prices, as occurred in 1998, has an adverse effect on the Company's
carrying value of its proved reserves, borrowing capacity, revenues,
profitability and cash flows from operations. Fluctuations in oil and gas prices
can also significantly impact the Company's ability to replace and increase its
oil and gas reserves. Volatile oil and gas prices make it difficult to estimate
the value of producing properties and predict future economic performance.
HEDGING ACTIVITIES
In connection with the Sonat Acquisition, the Company hedged certain future
natural gas production quantities beginning in early 1999, in order to reduce
the Company's sensitivity to price fluctuations. The Company intends to continue
to engage in hedging activities through price swaps, derivative financial
instruments and other market risk sensitive instruments in connection with new
acquisitions, if any. The Company uses such instruments for the purpose of
reducing its exposure to the volatility of oil and gas prices and not for
speculative investment purposes. While intended to reduce the effects of oil and
gas price volatility, hedging transactions may limit potential gains earned by
the Company from oil and gas price increases and may expose the Company to the
risk of financial loss in certain circumstances. In a typical hedge transaction,
it is expected that the Company will receive payment from a counterparty to the
hedge of the excess of the fixed price specified in the hedge contract over a
floating price based on a market index, multiplied by the volume of production
hedged. Conversely, if the floating price exceeds the fixed price, the
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Company would be required to pay the counterparty the difference multiplied by
the volume of production hedged. The Company would be required to pay the
difference between the floating price and the fixed price regardless of whether
the Company has sufficient production to cover the quantities specified in the
hedge. Under such circumstances, unanticipated reductions in production could
require the Company to make payments even when such payments are not offset by
proceeds from sales of production. Although the Company could benefit from a
hedging arrangement, hedging could also prevent the Company from receiving the
full advantage of increases in crude oil or natural gas prices above the fixed
price specified in the hedge.
JOINT OPERATIONS WITH OTHERS; NON-OPERATOR STATUS
The Company owns less than 100% of the working interest in many of its oil
and gas properties. Operations on such properties are likely to be conducted
jointly with other working interest owners. Joint operating arrangements are
customary in the oil and gas industry and are generally conducted pursuant to a
joint operating agreement, whereby a single working interest owner is designated
the operator. At present, the Company is the operator of the majority of its oil
and gas properties. The Company is also a non-operating working interest owner
in numerous wells. For properties where the Company owns less than 50% of the
working interest, drilling and operating decisions may not be entirely within
the Company's control. If the Company disagrees with the decision of a majority
of working interest owners, it may be required, among other things, to postpone
the proposed activity, relinquish or farm-out its interest or decline to
participate. If the Company declines to participate, it might be forced to
relinquish its interest or may be subject to certain non-consent penalties, as
provided in the applicable operating agreement. Such penalties typically allow
participating working interest owners to recover from the proceeds of
production, if any, an amount equal to 200%-500% of the non-participating
working interest owner's share of the cost of such operations.
Under most operating agreements, the operator is given direct and full
control over all operations on the property and is obligated to conduct
operations in a workman-like manner; however, the operator is usually not liable
to the working interest owners for losses sustained or for liabilities incurred,
except those resulting from its own gross negligence or willful misconduct. Each
working interest owner is generally liable for its share of the costs of
developing and operating jointly owned properties. The operator is required to
pay the expenses of developing and operating the property and will invoice
working interest owners for their proportionate share of such costs. In
instances where the Company is a non-operating working interest owner, it may
have a limited ability to exercise control over operations and the associated
costs of such operations. The success of the Company's investment in such
non-operated activities may, therefore, be dependent upon a number of factors
that are outside of the Company's direct control.
Under most operating agreements and the laws of certain states, operators
of oil and gas properties may be granted liens on the working interests of other
non-operating owners in the well to secure the payment of amounts due the
operator. The bankruptcy or failure of the operator or other working interest
owners to pay vendors who have supplied goods or services applicable to wells
could result in filing of mechanics' and materialmens' liens which would
encumber the well and the interests of all joint owners.
COMPETITION
The Company encounters strong competition from major and independent
companies in acquiring properties and leases for production operations,
exploration and development. The principal competitive factors in the
acquisition of such oil and gas properties include the staff and data necessary
to identify, investigate and purchase such leases, and the financial resources
necessary to acquire and develop such leases. Many of the Company's competitors
have financial resources, staffs and facilities substantially greater than those
of the Company.
MARKETING OF PRODUCTION
The Company's oil and gas production is marketed to third parties
consistent with industry practices. Typically, oil is sold at the wellhead at
field posted prices, plus or minus adjustments for quality and
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transportation. Natural gas is usually sold under a contract at a negotiated
price based upon factors normally considered in the industry, such as gas
quality, distance from the well to the pipeline, estimated reserves, liquid
hydrocarbon content of natural gas and prevailing supply/demand conditions.
LIMITED OPERATING HISTORY; RAPID GROWTH
Cliffwood, which is a wholly-owned subsidiary, commenced operations in
February 1996 and thus, has a brief operating history. Cliffwood's rapid growth
and that of the Company since the Merger may not be indicative of future
results. There can be no assurance that the Company will continue to experience
growth in revenues, oil and gas reserves or production. The Company's rapid
growth has placed significant demands on its management, personnel, operations
and financial resources. Any future growth in oil and gas reserves, production
and operations will place significant further demands on the Company. Texoil's
future performance and profitability will depend in part on its ability to
successfully integrate acquired properties and companies into its operations,
hire additional personnel and implement necessary enhancements to its management
systems. Although management has substantive and successful prior experience,
there can be no assurance that Texoil will be successful in these efforts.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance has been and will continue to be highly
dependent on Frank A. Lodzinski, Texoil's Chairman of the Board and Chief
Executive Officer and on certain members of senior management including Jerry M.
Crews, Francis M. Mury and Peggy C. Simpson (all being the founders of Cliffwood
and shareholders of the Company). Loss of the services of any of these
individuals, or other key personnel, could have an adverse effect on the
Company's operations. Texoil does not maintain key-person life insurance on any
of its personnel. With continued growth, Texoil will face competition for
talented personnel. While the employment markets have softened as a result of
poor commodity prices, there can be no assurance that Texoil will be successful
in hiring or retaining key personnel.
REGULATION
ENVIRONMENTAL REGULATION
Operations of the Company are subject to numerous Federal, state, and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and regulations
may require the acquisition of a permit before drilling commences; restrict or
prohibit the types, quantities and concentration of substances that can be
released into the environment in connection with drilling and production
activities; prohibit or limit drilling activities on certain lands lying within
wetlands or other protected areas; and impose substantial liabilities for
pollution resulting from past or present drilling and production operations.
Moreover, changes in Federal and state environmental laws and regulations could
occur and may result in more stringent and costly requirements which could have
a significant impact on the operating costs of the Company. The state
authorities regulating oil and gas activities have primary regulatory authority
over environmental matters. In general, under various applicable environmental
programs, the Company may be subject to enforcement action in the form of
injunctions, cease and desist orders and administrative, civil and criminal
penalties for violations of environmental laws. The Company may also be subject
to liability from third parties for civil claims by affected neighbors arising
out of a pollution event. Laws and regulations protecting the environment may,
in certain circumstances, impose strict liability rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. Such laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company which were
in compliance with all applicable laws at the time such acts were performed.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on the Company.
Insofar as such laws and regulations are expanded, amended or reinterpreted, the
Company is unable to predict the future cost or impact of compliance.
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The primary environmental, statutory, regulatory and safety regulations
that affect the Company's operations include:
OIL POLLUTION ACT AND CLEAN WATER ACT. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the Federal Water Pollution Control Act
of 1972, commonly referred to as the Clean Water Act ("CWA"), and other
statutes as they pertain to the prevention of and response to oil spills into
navigable waters. Under OPA, a person owning a facility or equipment from which
there is a discharge or threat of a discharge of oil into or upon navigable
waters and adjoining shorelines is liable as a "responsible party" for removal
costs and damages. Federal law imposes strict, joint and several liability on
facility owners for containment and clean-up costs and certain other damages,
including natural resource damages, arising from a spill. Responsible parties
under OPA include owners or operators of onshore or offshore drilling
facilities. OPA requires responsible parties to maintain proof of financial
responsibility to cover some portion of the cost of a potential spill and to
prepare an oil spill contingency plan. Failure to comply with these requirements
or inadequate cooperation in a spill event may subject a responsible party to
civil or criminal enforcement action. The CWA and similar state laws regulate
the discharge of pollutants, including dredged or fill materials, to waters of
the United States, including wetlands. A permit is required for such discharges,
and permit requirements may result either in operating limitations or treatment
requirements.
CLEAN AIR ACT. The operations of the Company may be subject to the Clean
Air Act ("CAA"), as amended, and comparable state statutes. Amendments to the
CAA contain provisions that may result in the imposition of certain requirements
for air pollution control equipment, obtaining operating permits and approvals,
and other emission-related requirements which may require capital expenditures
by the Company.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), commonly referred to as the "Superfund" law,
imposes strict, joint and several liability on certain classes of persons with
respect to the release or threatened release of a hazardous substance to the
environment. These persons include: (i) the owner and operator of a facility
from which hazardous substances are released; (ii) owners and operators of a
facility at the time any hazardous substances were disposed; (iii) generators of
hazardous substances that were released at such facility; and (iv) parties who
arranged for the transportation of hazardous substances to such facility. The
Company may be responsible under CERCLA for all or part of the costs to clean up
sites at which hazardous substances have been released. Some states have similar
provisions. In certain circumstances, neighbors and other third parties may file
claims based on common law tort liability theories for personal injury and
property damage allegedly caused by the release of hazardous substances at a
CERCLA site.
RESOURCE CONSERVATION AND RECOVERY ACT. The Company's operations may
generate and result in the transportation, treatment and disposal of both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the Federal Resource Conservation and Recovery Act ("RCRA") and comparable
state and local requirements. Although many of the Company's wastes are
presently exempt from requirements applicable to hazardous wastes, legislation
has been proposed in Congress from time to time that would reclassify certain
oil and gas wastes as "hazardous wastes" under RCRA, which reclassification
would make such solid wastes subject to much more stringent handling,
transportation, storage, disposal and clean-up requirements. State initiatives
to increase regulation of oil and gas wastes could have a similar impact.
NORM. Oil and gas exploration and production activities have been
identified as generators of naturally-occurring radioactive materials
("NORM"). Some states currently regulate the generation, handling and disposal
of NORM due to oil and gas exploration and production activities. The Company
does not believe that its compliance with such regulations will have a material
effect on its operations or financial condition, but there can be no assurance
in this regard.
SAFETY REGULATIONS
OSHA. The Occupational Safety and Health Act of 1970, as amended,
("OSHA") establishes employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious injury,
compliance with standards promulgated by the Occupational Safety and Health
8
<PAGE>
Administration, and various record keeping, disclosure and procedural
requirements. Various standards, including standards for notices of hazards,
safety in excavation and demolition work, and the handling of asbestos, may
apply to the Company's operations.
OIL AND GAS REGULATION
The Federal government and various state and local governments have
adopted, and the Company's operations are continuously affected by, numerous and
complex laws and regulations related to exploration and drilling for and
production, transportation and marketing of oil and natural gas. State and local
laws and regulations usually cover such matters as permitting and spacing of
wells, unitization and pooling of oil and gas properties, maximum and allowable
production rates, environmental protection, pollution control, taxation, bonding
and insurance, surface restoration, plugging and abandonment of wells, flaring
of gas, underground injection of saltwater and oilfield wastes, gathering and
transportation of oil and gas and other related matters. State laws and
regulations regarding spacing, unitization and pooling often dictate whether and
how much of the Company's leases will be entitled to participate in production
from oil and gas wells in which the Company has invested. Local governments are
becoming increasingly active in regulating oil and gas activities, especially
activities such as the location, drilling and operation of oil and gas wells and
the construction and operation of pipelines in or near populated areas.
In 1992, the Federal Energy Regulatory Commission ("FERC") issued Order
No. 636, which generally required interstate pipelines to "unbundle" or
separate their previously combined services for purchasing, transporting,
selling, gathering and storing natural gas. Currently, producers sell gas at
uncontrolled market prices. The Federal government and various state governments
have adopted laws and regulations regarding the methods of calculating lease
royalties, the time by which proceeds of production attributable to the
interests of others must be paid by producers and the rights of producers to
suspend payments for the proceeds of production attributable to others. Federal,
state and local governments and their agencies are constantly revising the laws
and regulations affecting the oil and gas industry. Such continuing revisions in
Federal, state and local regulation could affect the operations of the Company.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks normally incident
to the production of oil and gas, including blowouts, mechanical failure, casing
collapse, oil spills and fires, each of which could result in severe damage to
or destruction of oil and gas wells, production facilities or other property, or
injury to persons. The energy business also is subject to environmental hazards,
such as oil spills, gas leaks, and ruptures and discharge of toxic substances or
gases that could expose the Company to substantial liability due to pollution
and other environmental damage. The Company maintains insurance coverage
considered to be customary in the industry, either directly or through third
party operators who are contractually obligated to provide insurance coverage.
The Company may not, however, be fully insured against certain of these risks,
either because such insurance is not available or because of high premium costs.
The occurrence of a significant event that is not fully insured against could
have a material adverse effect on the Company's financial position.
ITEM 2. DESCRIPTION OF PROPERTY
Since the Merger, Company management has integrated the business activities
and operations of the separate companies which were both engaged in exploration
and production activities. In addition, management and the Company's technical
staff has continued to pursue acquisitions of proved properties and exploration
prospects consistent with its business strategy.
9
<PAGE>
PRODUCING PROPERTIES
From the commencement of significant operations in February 1996, the
Company has acquired producing properties with the intent of enhancing
production and lowering operating costs through re-engineering and development.
Management believes further development opportunities and exploration potential
exists in several of the fields. The following table lists fields operated by
the Company, their location, and approximate working and net revenue interest.
OPERATED PROPERTIES
<TABLE>
<CAPTION>
NET
WORKING REVENUE
1996 ACQUISITIONS COUNTY INTEREST INTEREST
-------------- ---------- -----------
<S> <C> <C> <C>
TEXAS
Day Dome................................ Madison 47% 38%
N.E. Madisonville....................... Madison 50% 43%
Fort Stockton........................... Pecos 40% 32%
Goldsmith-Landreth...................... Ector 34% 30%
New Diana............................... Upshur 100% 82%
1997 ACQUISITIONS
TEXAS
Huff-McFaddin........................... Victoria 60% 45%
Magnet Withers.......................... Wharton 60% 50%
Fort Stockton(1)........................ Pecos 20% 16%
Goldsmith -- Landreth(1)................ Ector 16% 14%
Loma Alta............................... McMullen 57% 43%
N. E. Madisonville...................... Madison 71% 57%
Fall City............................... Karnes 100% 89%
NEBRASKA
Hayes Field............................. Hayes 100% 81%
1998 ACQUISITIONS
TEXAS
Guerra Field............................ Webb & Duval 52.1%-99% 39.1%-69.3%
Goldsmith Landreth(1)................... Ector 33% 29%
Fort Stockton(1)........................ Pecos 40% 32%
Huff-McFaddin(1)........................ Victoria 40% 30%
Magnet Withers(1)....................... Wharton 40% 33%
Loma Alta(1)............................ McMullen 38% 30%
DCRC(2)................................. Duval 100% 71%-75%
Laredo(3)............................... Webb & Zapata 96.5%-100% 67.5%-80%
Vaquillas Ranch......................... Webb 39.2%-40% 31.1%-31.7%
Yorktown................................ Dewitt 100% 71%
N. Chocolate Bayou...................... Brazoria 49% 35.2%
S. Pocoso............................... Webb 100% 73.1%
S. Kasper............................... Dewitt 65% 50.9%
1998 ACQUISITIONS
LOUISIANA
Garrison Gas Unit....................... Cameron 75% 50.1%
North Crowley........................... Acadia 40.5%-60% 35.1%-54.4%
Neale................................... Beauregard 100% 82.65%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
10
<PAGE>
- ------------
(1) Incremental interests in previous acquisitions.
(2) Majority of wells are 100%, however, one at 30% W.I., 22.5% NRI.
(3) 70% W.I., 50.5% NRI, and one at 50% W.I., 35.75 NRI
(4) Table does not include subsequent divestitures.
In addition to the operated fields listed above, the Company has acquired
interests in numerous non-operated properties located primarily in Texas,
Oklahoma and Louisiana.
EXPLORATION AND DEVELOPMENT PROSPECTS
The Company's domestic drilling is conducted primarily on prospects located
in South Louisiana and along the Texas Gulf Coast. The Company generates its
exploratory and development drilling prospects internally (through acquisitions
or separately) or through a joint venture ("Joint Venture") with Bechtel
Exploration Company ("Bechtel"). Some of the Company's drilling prospects are
not fully leased or optioned but are in various stages of development and
leasing. The Company classifies individual prospects based on their risk
profile. A drilling prospect may be classified as "proved undeveloped" in
accordance with rules of the Society of Petroleum Evaluation Engineers
("SPEE") and the Securities and Exchange Commission ("SEC"). Such prospects
are referred to herein as "development prospects". All other drilling
prospects are classified as exploratory prospects. Risks associated with
exploratory drilling range from high risk "wildcat" type activities where
little data exists other than seismic data indicating a structure or trap, to
lower risk prospects where well control, engineering, production and other data
exists, along with seismic data, to indicate the possible presence of
hydrocarbons. Lower risk exploratory prospects are referred to as
"exploitation" opportunities or prospects. No assurances can be given that any
drilling prospect will result in commercial production. A summary of Company
prospects is set forth below.
RACELAND 3-D PROSPECT. The Company currently owns approximately 83% in
leases and/or options in the Raceland Prospect, located in Lafourche Parish,
Louisiana. Approximately 62 square miles of proprietary 3-D seismic data was
acquired in 1996 and processing was completed in 1997. In 1998, as a result of
the Merger and change in management, a new technical team was assigned to the
Raceland project. The seismic and well data was completely re-mapped and four
significant prospects with multiple drilling opportunities were developed.
Additional prospects are expected to be defined. Texoil increased its prospect
ownership to 83% from about 30%. Approximately 7,600 acres are now under lease
or option. The Company is continuing to interpret the 3-D data set for
additional prospects. The Company intends to solicit partners, on a promoted
basis, to drill the most significant features on its acreage. However, such
drilling requires a deep exploratory well estimated to cost in excess of $3.8
million. Industry conditions have adversely affected most corporate budgets and
accordingly, although the project has been favorably interpreted by a number of
companies, Texoil has yet to assemble adequate drilling partners. The Company
intends to maintain the project and solicit partners in 1999. The Raceland Field
has produced approximately 27 million barrels of oil and associated natural gas.
The productive field and surrounding area has not previously been analyzed by
3-D seismic surveys to detect untested fault blocks or deeper potential. The
project area lies in the vicinity of numerous significant fields, including the
Lake Boeuf and Southwest Lake Boeuf fields and targets miocene-age sand
objectives ranging from 12,000 to 17,000 feet in depth.
GREENS LAKE 3-D PROSPECT. The Company owns a 30% non-operated working
interest in approximately 5,500 gross acres located in Galveston County, Texas.
Texoil is attempting to increase its ownership and become the operator.
Approximately 22 square miles of proprietary 3-D seismic data was initially
acquired in 1996. An initial test well was drilled to a depth of 11,750 feet in
the summer of 1997 and determined to be non-commercial. However, more recently,
two discovery wells have been drilled by operators immediately offsetting the
Company's acreage. Interpretation of the complete 3-D data set continues over
prospective areas within the 3-D survey area. Multiple prospects have been
developed based on adjacent discoveries, including two proved undeveloped
locations, a low risk exploitation prospect, and a deep exploration prospect.
Some of the prospects have multiple sand objectives.
11
<PAGE>
JOINT VENTURE. The objective of the Joint Venture is to generate and lease
exploratory, exploitation and development prospects, fully integrating 3-D
seismic data with well control, engineering, production and other data, thereby
reducing drilling risk. Bechtel contributed numerous prospect leads, resulting
from extensive experience in South Louisiana and the Texas Gulf Coast, the use
of a 3-D work station and more than 50 square miles of 3-D data in Calcasieu and
Cameron Parishes, Louisiana. The Company funded the acquisition of approximately
200 square miles of 3-D seismic data in Lafayette, Vermilion and Acadia
Parishes, Louisiana, a limited amount of monthly operating costs and related
costs of leasing prospects. The initial 3-D based prospect generation activity
is referred to herein as the "Lafayette Project". Joint Venture activities are
not confined to the Lafayette Project and, accordingly, the Company retains an
80% interest in all prospects generated by the Joint Venture. That interest is
reduced to 75% on prospects generated after the Company is reimbursed for 100%
of its costs. The Company generally intends to retain a 10-30% interest in all
prospects and sell interests to industry or other partners on a promoted basis.
The following is a discussion of major prospect areas being developed by
the Joint Venture:
LAFAYETTE PROJECT. The primary focus of this project is to explore for and
develop reserves within a 200 square mile 3-D seismic data base located in
Acadia, Lafayette and Vermilion Parishes, Louisiana. The 3-D seismic data is
being interpreted by Bechtel and Company representatives. Prospective horizons
range from 9,000 feet to 17,000 feet subsurface. This project is designed to
generate or acquire low risk prospects with multiple objectives. Since September
of 1997, this project has generated numerous prospects. To date, Texoil has
generally retained a 10% direct interest plus certain carried or reversionary
interests. Following is a list of prospects in which Texoil has or intends to
directly participate.
PROSPECT STATUS
----------- -----------
West Ridge........................... Drilled -- discovery, on production
Lucky Seven.......................... Drilled -- dry-hole
Dixie Cup............................ Drilled -- completing
Dryades.............................. Leased -- to be drilled
Great Scott.......................... Leased -- to be drilled
Tee Scott............................ Leased -- to be drilled
Perry Pass........................... Leasing
The Joint Venture has developed additional prospects for which acreage is
not presently available. The Joint Venture will monitor lease status and pursue
such prospects when able. Additional prospects are expected to be generated from
existing data.
LAROSE PROJECT. The LaRose project is located in Lafourche Parish,
Louisiana and includes two development drilling prospects with multiple
objective sands, at depths down to approximately 13,500 feet, a shallow
exploratory test in a fault block adjacent to production and significant
potential below 14,500 feet. The Company presently controls 631 acres in the
heart of the play and is considering leasing additional acreage. Prospects have
initially been defined using traditional 2-D, well control and engineering
techniques and will be further developed with 3-D seismic technology. Shallow
objectives can be imaged with existing 3-D coverage which the Company plans to
purchase, but deeper potential may require shooting additional data.
OTHER PROSPECTS. The Company has certain other prospects under lease,
option or which are held by production in existing fields. Certain prospects may
be drilled without 3-D analysis due to the quality of existing engineering and
geological data and nature of the objective reservoir. Additional prospects and
leads are expected to be developed as a result of the continuing acquisition,
development and exploration program of the Company.
DRILLING ACTIVITIES, RESERVES AND PRODUCTION
The information set forth below concerning the Company's drilling
activities, oil and gas reserves and production reflect the operations of
Cliffwood as of and for the periods ended December 31, 1998 and 1997,
12
<PAGE>
with the net oil and gas properties of Texoil existing immediately prior to the
Merger reflected as an acquisition on December 31, 1997.
DRILLING ACTIVITIES
During 1998 the Company participated in the drilling of three exploratory
wells resulting in two discoveries and one dry hole. Successful drilling
resulted in .22 net wells to the Company's interest. No development wells were
drilled in 1998.
OIL AND GAS RESERVES
Presented below is information related to the proved reserves owned by the
Company as of December 31, 1998 and 1997. The Company's oil and gas reserves,
estimated pre-tax future net cash flows and related discounted present value at
10% ("PV-10 Value") were estimated by T. J. Smith & Company Inc., and W. D.
Von Gonten & Co., independent petroleum engineers.
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Proved developed:
Crude oil (MBbls)............... 7,341 4,138
Natural gas (MMcf).............. 28,643 7,294
Proved undeveloped:
Crude oil (MBbls)............... 1,872 565
Natural gas (MMcf).............. 8,916 4,328
Total proved:
Crude oil (MBbls)............... 9,213 4,703
Natural gas (MMcf).............. 37,559 11,622
Estimated pre-tax future net cash
flows ($000's)..................... $ 77,756 $ 46,252
PV-10 Value ($000's)................. $ 46,191 $ 27,116
The net reserve information listed above is only an estimate. Numerous
uncertainties are inherent in estimating quantities of proved reserves and in
projecting future rates of production, timing of development expenditures,
prices and many factors beyond the control of the Company. Reserve engineering
is a subjective process of estimating underground accumulations of crude oil and
natural gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. The quantities of oil
and gas that are ultimately recovered, production rates, operating costs, the
amount and timing of future development expenditures and future oil and gas
sales prices may all differ from those assumed in these estimates. Therefore,
the quantities and values shown above are subject to change and should not be
construed as the market value of the estimated oil and gas reserves attributable
to Texoil's properties.
In accordance with SEC guidelines, estimates of future net revenues from
the Company's properties and the present value thereof are made using oil and
gas sales prices being received as of the dates of such estimates and such
prices are held constant throughout the life of the properties, except where
such guidelines permit alternate treatment, including, in the case of gas
contracts, the use of fixed and determinable contractual price escalations. The
average product prices used in these estimates as of December 31, 1998, were
$9.51 per barrel of oil and $2.14 per thousand cubic feet of gas, which compares
to December 31, 1997, prices of $16.21 per barrel of oil and $2.52 per thousand
cubic feet of gas. The specified natural gas prices include the effect of
natural gas liquids (NGL's).
13
<PAGE>
PRODUCTION AND SALES
The following table presents certain information related to oil and gas
production from the Company's interest in its properties, average sales price
received and average production costs incurred during the two years ended
December 31, 1998 and 1997.
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Production:
Oil (MBbls)..................... 518 255
Gas (MMcf)...................... 1,468 707
Total (MBOE).................... 763 373
Average Sales Price
Oil (MBbls)..................... $ 12.29 $ 18.50
Gas (MMcf)...................... $ 1.90 $ 2.11
Per BOE......................... $ 12.04 $ 17.07
Production costs per BOE............. $ 5.71 $ 6.49
The Company's production is sold primarily to large petroleum purchasers.
Due to the quality of its crude oil production, the Company may receive a
discount or premium from index prices or "posted" prices in the area. Texoil's
gas production is sold primarily to pipelines and/or gas marketers under short-
term contracts at prices which are tied to the "spot" market for gas sold in
the area. Management believes that certain of the production costs incurred in
1998 and 1997 are a result of initial re-engineering activities that relate to
acquired properties and are non-recurring.
Revenues received (or receivables) from companies comprising more than 10%
of the Company's total sales in each of the last two years were as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
EOTT Energy.......................... 10% 16%
Gateway Gathering.................... 5% 20%
Phillips............................. 18% 13%
PRODUCTIVE WELLS AND ACREAGE
The following table summarizes the producing oil and gas wells in which the
Company had a working interest as of December 31, 1998:
<TABLE>
<CAPTION>
OIL WELLS GAS WELLS TOTAL
-------------------- -------------------- --------------------
GROSS(1) NET(2) GROSS(1) NET(2) GROSS NET
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Texas................................ 182 161 131 85 313 246
Louisiana............................ 40 28 6 2 46 31
Nebraska............................. 51 48 6 0 57 48
Oklahoma............................. 6 6 0 0 6 6
Other(3)............................. 41 1 11 1 52 2
--- ------- --- ------- --- -------
Total......................... 320 244 154 88 474 333
=== ======= === ======= === =======
</TABLE>
- ------------
(1) Gross wells are the total number of wells in which the Company has a working
interest.
(2) Net wells are the sum of the Company's fractional working interests in the
gross wells.
(3) Includes small geographically scattered non-operated interests in several
states.
14
<PAGE>
The following table shows the Company's developed and undeveloped acreage,
as of December 31, 1997.
GROSS NET
--------- ---------
Developed Acreage(1)................. 52,514 26,128
Undeveloped Acreage(2)............... 20,323 11,464
--------- ---------
72,837 37,592
========= =========
- ------------
(1) Developed acreage is comprised of acres pooled with, unitized from, or
assigned to productive wells.
(2) Undeveloped acres are acres on which wells have not been drilled or have not
been completed to a point that could permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves.
TITLE TO PROPERTIES
It is customary in the oil and gas industry to make a limited review of
title to undeveloped oil and gas leases at the time they are acquired. It is
also customary to obtain more extensive title examinations prior to the
commencement of drilling operations on undeveloped leases or prior to the
acquisition of producing oil and gas properties. With respect to the future
acquisition of both undeveloped and developed leaseholds, the Company plans to
conduct title examinations on such properties in a manner generally consistent
with such industry practices. The Company has obtained title opinions, title
reports or otherwise conducted title investigations covering substantially all
of its producing properties and believes it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
overriding royalty interests, liens for current taxes and other burdens which
the Company believes do not materially interfere with the use or affect the
value of such properties.
Substantially all of the Company's oil and gas properties are and may
continue to be mortgaged to secure borrowings under bank credit facilities (see
"Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources -- Cash Flow from
Financing").
GLOSSARY
The terms defined in this section are used throughout this Annual Report.
"BACK-IN INTEREST" is a carried share in a well that converts to a
regular working interest at a specific time, such as payout. The interest of a
farmor in a farmout agreement or assignor (the party that turns over their
interest) of a lease reverts to a specific share of the working interest for the
farmor or assignor after the farmee or assignee (the party that receives the
interest in the lease) has recovered specified costs, such as drilling and
completion costs from production (back-in right).
"BARREL OR BBL" refers to 42 U.S. gallons liquid volume and represents
the basic unit for measuring crude oil or other liquid hydrocarbons.
"BOE" refers to one barrel of oil equivalent, which is determined using
the ratio of one barrel of crude oil, condensate or natural gas liquids to six
Mcf (see below) of natural gas so that six thousand cubic feet of natural gas is
referred to as equivalent to one barrel of crude oil, condensate or natural gas
liquids.
"CARRIED INTEREST" OR "CARRIED WORKING INTEREST" is a fractional
interest in a lease which is free of all costs of drilling and completing a well
up to a certain point, such as to casing point, through the tanks, or during the
life of the well. The carried party's expenses are paid by the other parties who
own the working interest in the well. After the point is reached, the carried
interest usually becomes a working interest and shares in the costs.
"DEVELOPMENT WELL" means a well drilled within the proved area of an oil
or gas reservoir to the depth of a stratigraphic horizon indicated to be
productive in an attempt to recover proved undeveloped reserves.
15
<PAGE>
"DRY HOLE" refers to a well that is found to be incapable of producing
either oil or gas in sufficient quantities to justify completion as an oil or
gas well.
"EXPLORATORY WELL" means a well drilled to find and produce oil or gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
"FARM-OUTS" means an agreement whereby the owner of an oil and gas lease
who does not desire to drill agrees to assign the lease, or an interest therein,
to another who does desire to drill on the prospect of which the lease is a
part. The obligation of the lease owner to assign the lease or interest therein
is usually conditioned upon the drilling of one or more wells by the farmee and
the lease owner generally retains some interest in the interest assigned such as
an overriding royalty interest, working interest, production payment, offset
acreage or other type of interest.
"GROSS ACRE" refers to an acre in which a working interest is owned.
"GROSS WELL" refers to a well in which a working interest is owned.
"MCF" refers to one thousand cubic feet of natural gas, expressed, where
gas sales contracts are in effect, in terms of contractual temperature and
pressure bases and, where contracts are nonexistent, at 60F and 14.65 psi.
"MBBLS" means one thousand barrels.
"MBOE" means one thousand barrels of oil equivalent.
"MMCF" means one million cubic feet of natural gas, expressed on the same
basis as a Mcf of gas.
"NET ACRES OR NET WELLS" means the sum of the fractional working
interests owned in gross acres or gross wells.
"NET REVENUE INTEREST" means the percentage of production to which the
owner of a working interest is entitled. For example, the owner of a 100%
working interest in a well burdened only by a landowner's royalty of 20% would
have an 80% net revenue interest in that well.
"OIL" refers to crude oil and condensate.
"OVERRIDING ROYALTY INTEREST" refers to a royalty or percentage of the
gross income from production deducted from the working interest.
"PRODUCTION COSTS" means lease operating expenses and taxes on oil and
natural gas production.
"PROSPECT" means a geographic area believed by the Company to encompass
one or more subsurface features which the Company believes may be productive of
oil or natural gas if drilled. In order for a prospect to be drilled, it is
typically necessary for the operator of the prospect to obtain oil and gas
leases covering the prospect from multiple owners of the mineral interests
underlying the prospect. References in this Annual Report to "prospect areas"
or "prospects" mean geographic areas of exploratory interest that may be
entirely unleased or in various stages of leasing and should not be understood
to imply that all oil and gas leases necessary for drilling of the prospects are
owned by the operator of the prospect or the Company, as the case may be.
"PROVED DEVELOPED RESERVES" means oil or gas reserves that are expected
to be recovered from existing wells (including reserves behind pipe). Improved
recovery reserves are considered developed only after the necessary equipment
has been installed, or when the costs to do so are relatively minor. Proved
developed reserves may be subcategorized as producing or non-producing.
"PROVED RESERVES" means oil or gas reserves that can be estimated with
reasonable certainty to be recoverable under current economic conditions.
Current economic conditions include prices and costs prevailing at the time of
the estimate. Proved reserves may be developed or undeveloped. In general,
reserves are considered proved if commercial producability of the reservoir is
supported by actual production or formation tests. Proved reserves must have
facilities to process and transport those reserves to
16
<PAGE>
market that are operational at the time of the estimate or a commitment or
reasonable expectation to install such facilities in the future.
"PROVED UNDEVELOPED RESERVES" means oil or gas reserves that are expected
to be recovered: (i) from new wells on undrilled acreage, (ii) from deepening
existing wells to a different reservoir, or (iii) where a relatively large
expenditure is required to (a) recomplete an existing well or (b) install
production or transportation facilities for primary or improved recovery
projects.
"RECOMPLETION" refers to the completion of an existing well for
production from a formation that exists behind the casing of the well.
"RETAINED INTEREST" is typically an overriding royalty interest or a
working interest that is retained by the party originating a prospect or
project. The working interest may take several forms such as a carried working
interest and/or a back-in interest or other sharing arrangements whereby the
originator earns an interest in production greater than its proportionate cost.
"REVERSIONARY WORKING INTEREST" is an interest in a well in which the
party shares in neither the cost nor the revenues from production until a
specific time or event in the well such as the farmee recovering the costs of
drilling, completing, and production from the production revenues.
"SUBSURFACE CONTROL" refers to the data provided by wells previously
drilled in the area of an exploratory prospect. Such existing subsurface data in
the form of logs and cores provide a geologist with a valuable starting point in
generating a prospect and serve to "control" or limit the geologist's
interpretation of the subsurface strata by providing a factual starting point.
"3-D SEISMIC" means the application of powerful computer workstations and
sophisticated software applied to seismic data acquired from a dense pattern of
shot points to create three-dimensional displays of sub-surface formations.
Extensive arrays of listening devices gather thousands of times more detail than
regular seismic surveys.
"UNDEVELOPED ACREAGE" means lease acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
"WORKING INTEREST" means the operating interest under an oil and gas
lease which gives the owner the right to drill, produce and conduct operating
activities on the property and a share of production, subject to all royalties,
overriding royalties and other burdens and also subject to all costs of
exploration, development and operations and risks associated therewith.
ITEM 3. LEGAL PROCEEDINGS
Texoil is involved in litigation incidental to the conduct of its business,
none of which management believes is, individually or in the aggregate, material
to the Company's consolidated financial condition of results of operations. A
summary of such legal proceedings is as follows:
(1) Cause No. 94-7447-278-06; Earnest H. Cannon, et al v. J. R. Parten, et
al in the 278th Judicial District Court of Madison County, Texas. The Plaintiffs
sued certain former mineral Lessees and an affiliated pipeline company and
subsequently included Cliffwood Production Co., and the Madison County Energy
Limited Partnership for breach and cancellation of certain mineral leases,
mineral trespass, surface trespass, trespass damage to the mineral estate,
trespass injury to the surface estate, non-payment of royalty, and
relinquishment of rights-of-way. Cliffwood Production Co., which is a
wholly-owned subsidiary of Cliffwood Oil & Gas Corp., entered into a settlement
agreement; however, Plaintiff has not caused the suit to be dismissed.
(2) Cause No. 99-93557; Mobil Oil Corporation v. Cliffwood Production Co.,
Texoil Company, and SG Interests V, Ltd., in the 55th Judicial District Court of
Harris County, Texas. The Plaintiff sued defendants for non-payment of
$442,884.62 in joint interest billings plus interest and attorney's fees. The
amount is in dispute because it includes charges for periods in which the
defendants did not own the properties, charges which management believes are in
excess of the Council on Petroleum Accounting
17
<PAGE>
Standards (COPAS) guidelines and charges which have not been properly supported
as required by COPAS in underlying joint operating agreements.
There can be no assurance that legal proceedings will be resolved in a
manner favorable to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on December 11,
1998. The items of business noticed and transacted at the Meeting were: (i) to
elect a Board of seven Directors to serve until the next annual Meeting of
Stockholders and until their successors are elected and qualified; (ii) to
appoint Arthur Andersen LLP as independent public accountants and (iii) to
consider and act upon such other business as may properly be presented to the
meeting or any adjournment thereof. A total of 39,285,094 shares of the
Company's Common Stock, par value $.01 per share, were issued and outstanding as
of October 30, 1998, the record date for determining the stockholders entitled
to notice of, and the number of shares entitled to vote at the Meeting as a
class. The holders of 35,162,972 shares of Common Stock were represented at the
Meeting in person or by proxy. These shares were voted as follows:
PRESENT SHARES
FOR WITHHELD NOT VOTING
------------ -------- --------------
ELECTION OF DIRECTORS:
Frank A. Lodzinski............... 35,159,680 3,292 0
Jerry M. Crews................... 35,159,680 3,292 0
Michael A. Vlasic................ 35,159,680 3,292 0
Robert E. LaJoie................. 35,159,680 3,292 0
Thomas A. Reiser................. 35,159,680 3,292 0
Gary J. Milavec.................. 35,159,680 3,292 0
T. W. Hoehn III.................. 35,159,680 3,292 0
Appointment of Accountants....... 35,159,814 514 2,644
18
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table lists high and low sales prices for the years 1997,
1998 and for the first quarter of 1999 (through March 24, 1999) of the Common
Stock, Class A Warrants and Class B Warrants. The Common Stock trades publicly
in the NASDAQ Small-Cap Market under the symbols "TXLI". Both the Common Stock
and Warrants trade on the Boston Stock Exchange.
<TABLE>
<CAPTION>
TXLI TXLIW TXLIZ
------------ ------------ ------------
HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter...................... 1 7/8 1 1/16 1/2 1/4 1/8 1/32
Second Quarter..................... 2 1/16 1 5/16 1/2 3/8 1/32 1/32
Third Quarter...................... 1 11/16 1 5/16 1/4 1/4 1/32 1/32
Fourth Quarter..................... 1 9/16 31/32 15/32 3/16 1/16 1/32
1998
First Quarter...................... 1 3/8 15/16 5/32 1/32 1/32 1/32
Second Quarter..................... 1 1/4 15/16 1/64 1/64 -- --
Third Quarter...................... 1 1/4 13/32 -- -- -- --
Fourth Quarter..................... 1 5/16 1/2 -- -- -- --
1999
First Quarter...................... 1 3/32 17/32 -- -- -- --
</TABLE>
As of March 24, 1999, the Company's Common Stock, Class A Warrants and
Class B Warrants were held by approximately 898, 17 and 18 holders of record,
respectively. No trades occurred for outstanding warrants subsequent to the
second quarter of 1998. The warrants expire in May 1999. During 1998 the share
price of the Company's Common Stock declined to less than $1.00 per share, which
is the NASDAQ minimum share price for continued listing. The Company could be
de-listed by NASDAQ. The warrants were delisted by NASDAQ, but all expire May
26, 1999.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
intend to pay a dividend in the foreseeable future. The terms of the Credit
Agreement and the RIMCO Agreement also prohibit the payment of dividends. The
payment of future dividends on Common Stock, if any, will be reviewed
periodically by the Company's Board of Directors and will depend upon, among
other things, the Company's financial condition, funds available from
operations, the amount of anticipated capital and other expenditures, the
Company's future business prospects and any restrictions imposed by the
company's present or future bank credit arrangements, subordinated notes or any
series of preferred stock.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the Merger Agreement, on December 31, 1997, the Company issued
25,632,159 shares of Common Stock to former Cliffwood shareholders and warrants
and options to issue up to 9,203,470 shares of Common Stock to former Cliffwood
warrant and option holders in exchange for all of the outstanding shares,
warrants and options of Cliffwood. This issuance was made in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act") and
Regulation D of the Securities and Exchange Commission. Two former warrant
holders exercised warrants and were issued 2,022,000 shares of Common Stock in
1998; accordingly, remaining warrants and options held by former Cliffwood
warrant and option holders total 7,181,470 at December 31, 1998.
Also pursuant to the Merger Agreement, on December 31, 1997, the Company
sold 7.875% Convertible Subordinated General Obligation Notes in the principal
amount of $10.0 million to the RIMCO Lenders. This sale was made in reliance on
Section 4(2) of the Securities Act. These notes are convertible
19
<PAGE>
into Common Stock under the terms of the RIMCO Agreement. See "Item 1.
Description of Business -- RIMCO Financing".
On May 4, 1998, the Company issued 898,000 shares of common stock to
limited partners in connection with the acquisition of certain oil & gas
properties from an affiliated partnership (a subsidiary of Texoil served as
General Partner).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto, reflected in the
Index to Consolidated Financial Statements commencing on page F-1.
FORWARD-LOOKING INFORMATION
This annual report on Form 10-KSB, and in particular this management's
discussion and analysis of financial condition and results of operations,
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report and this section of this report including, without
limitation, statements regarding the Company's business strategy, plans,
objectives, expectations, intent, and beliefs of management related to current
or future operations are forward-looking statements. Such statements are based
on certain assumptions and analyses made by management of the Company in light
of its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes to be appropriate.
The forward-looking statements included in this report are subject to a number
of material risks and uncertainties including assumptions about the pricing of
oil and gas, assumptions about operating costs, operations continuing as in the
past or as projected by independent engineers, the ability to generate and take
advantage of acquisition opportunities and numerous other factors. A detailed
discussion of important factors that could cause actual results to differ
materially from the Company's expectations are discussed herein under the
captions "Item 1. Description of Business", "Item 2. Description of
Property", and "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations". Forward-looking statements are not
guarantees of future performance and actual results; therefore, developments and
business decisions may differ materially from those envisioned by such
forward-looking statements.
MERGER -- CHANGE IN MANAGEMENT, CONTROL AND BUSINESS STRATEGY
As discussed in the Notes to the Consolidated Financial Statements included
elsewhere in this annual report, the Company underwent a substantial change in
ownership, management, voting control, assets and business strategy as a result
of a recapitalization and Merger with Cliffwood. For financial reporting
purposes, the Merger was accounted for as a reverse acquisition of Texoil by
Cliffwood. Accordingly, all information included in this annual report,
including the historical consolidated financial statements, is that of
Cliffwood. Also, management's discussion and analysis of financial condition and
results of operations presented herein relate to the activities of Cliffwood.
Since the Merger, the Company has pursued a different business strategy which
includes a more diversified program including acquisitions, re-engineering,
development and exploration. The Company made several acquisitions in 1998 and
further implemented its development and exploration programs, culminating with a
significant acquisition of the Sonat properties in the fourth quarter of the
year. As described herein, management intends to continue to pursue its strategy
and anticipates that additional acquisition opportunities will become available
as a result of depressed prices.
GENERAL
Texoil is an independent oil & gas company engaged in the acquisition and
development of oil and gas reserves through an active and diversified program
which includes purchases of reserves, re-engineering, development and
exploration activities, currently focused in Texas, South Louisiana and the
Texas Gulf Coast.
20
<PAGE>
As further discussed herein, future growth in assets, earnings, cash flows
and share values are dependent upon the Company's ability to acquire, discover
and develop commercial quantities of oil and gas reserves that can be produced
at a profit and assemble an oil and gas reserve base with a market value
exceeding its finding and production costs. Product prices, particularly the
price of crude oil, have dropped significantly during 1998 and, in the opinion
of management, cannot be reasonably expected to increase to 1996-1997 levels in
the short term. The industry-wide reduction in prices has adversely affected
revenues and net cash flows of the Company, as well as most companies in the
industry, particularly those whose assets were concentrated in oil reserves.
Furthermore, reduced cash flows have adversely affected the capital budgets of
major oil companies and independents. Such depressed industry conditions have
led to certain contractions among many companies including, among others,
work-force reductions, reorganizations, capital budget decreases, and
elimination or deferral of new ventures. Such industry conditions may adversely
affect Texoil's ability to solicit industry partners to participate in projects
originated by Texoil on a promoted basis.
In the opinion of Texoil management, however, current industry conditions
may result in opportunities for companies that can effectively compete for
cost-efficient capital and deploy a business strategy that results in growth.
Costs of labor and certain drilling and field products and services have
declined. In addition, major companies and large independents may continue or
expand divestitures of "non-core" properties as they reorganize, downsize and
attempt to streamline business operations. Smaller companies may be forced to
sell assets that were acquired based on higher product prices, or upon
anticipated development activities which may not be economically attractive at
current price levels. Lastly, companies may choose or be forced to liquidate,
consolidate or merge to reduce costs and improve shareholder value.
Accordingly, Texoil's management has developed a corporate action plan and
intends to acquire, discover and develop oil and gas reserves, aggressively
pursue corporate acquisitions and mergers and achieve continued growth. In
addition management continues to focus on reducing operating and administrative
costs on a per unit basis. The plan is merely an expansion and adaptation of the
business plan which was conceived and implemented by management in early 1996,
and has resulted in significant growth to date. See "Impact of Changing Prices
and Costs" and "Corporate Efforts to Offset Declining Prices" below. Other
elements of the action plan are as follows:
(1) Further diversify and enhance the portfolio of proved properties.
In the short term, focus on natural gas reserves that can
favorably impact operating ratios and cash flows. Acquire
properties with long term, development and exploration potential.
(2) Expand the Company's drilling (development and exploration)
programs and increase its direct participation, but continue to
solicit industry or institutional partners on a promoted basis.
(3) Continue cost-containment efforts directed toward controlling and
reducing per-unit operating and general and administrative costs.
(4) Selectively seek asset or corporate acquisitions and mergers for
cash or Texoil shares.
(5) Increase equity and long-term financing through available means,
whether through direct placement of securities or through
acquisition activities.
(6) Selectively employ additional technical and management personnel
(as earnings and cash flows permit) with a reasonable incentive
program based on achievement of goals.
While the impact and success of this action plan cannot be predicted with
any accuracy, management's goal is to replace production and further increase
its reserve base at an acquisition or finding cost that will yield current
revenues, cash flows, profits and share appreciation, and will further position
the Company for additional growth when prices recover.
RECENT SIGNIFICANT PROPERTY ACQUISITION
The Company closed a purchase of nine proved oil and gas fields from Sonat
on October 30, 1998. In the opinion of management, the acquisition is a
significant event for the Company, consistent with its
21
<PAGE>
business strategy and action plan discussed above. The acquisition increased
estimated proved gas reserves by 148% and oil reserves by 25%. As a result of
the Sonat acquisition and other acquisitions and development activities which
occurred in 1998, the Company's gas reserves increased by 223% and oil reserves
increased by 96%, net of 1998 production, over prior year-end levels.
Furthermore, 1998 gas and oil production increased 108% and 103%, respectively,
over 1997 levels. Based on independent engineering evaluations, absent
unforeseen events, the Company projects gas production to increase by
approximately 141% and oil production to increase by 43%, respectively, in 1999
over 1998 levels. Cash flows from Company properties are estimated to increase
approximately $4.8 million in 1999 -- based on 1998 average prices. The
projected level of cash flows is approximately 111% greater than 1998. The Sonat
properties, being the largest acquisition of the year, were acquired as proved
producing properties with anticipated future development and drilling potential.
Texoil is the operator of seven fields and receives certain operating fees in
addition to cash flows from production. The Sonat acquisition favorably impacts
the Company's gas to oil reserve ratio from approximately 25% gas to 40% gas and
more favorably impacts the oil and gas production ratio from 25% gas to 45% gas,
based on independent engineering reports and expected production. Management
believes the impact on revenues and cash flows will be positive and will improve
the short-term earnings outlook for 1999, even considering continued low prices
and the related increase in financing costs.
OIL & GAS PROPERTIES
The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under the full-cost method, all costs of acquisition,
exploration and development of oil and gas reserves are capitalized separately
for each cost center (generally defined as a country). Capitalized balances are
referred to as the "Full-Cost Pool" and are further classified as evaluated or
unevaluated. Evaluated costs are those where proved reserves have been
determined or where the property has been impaired or abandoned. Such costs are
subject to depletion, depreciation and amortization expense ("DD&A").
Unevaluated costs are not subject to DD&A and generally require additional
geological, geophysical and/or engineering evaluation prior to management's
decision to drill, develop or abandon such properties. When such properties are
evaluated, capitalized costs will be transferred to an evaluated status and
included in the calculation of DD&A. Depletion expense is calculated using the
units of production method based on the ratio of current production to total
proved recoverable oil and natural gas reserves. The units of production are
applied to a cost base which includes net capitalized evaluated costs plus an
estimate of costs to be incurred in the development of non-producing reserves
("undeveloped reserves"). Under the full-cost method, a write-down of oil and
gas properties must be charged to operations if net capitalized costs at the end
of each quarterly reporting period exceed the estimated discounted future net
revenues of proved oil and natural gas reserves, using current oil and gas
prices and costs, held constant over the life of the properties, plus the lower
of cost or fair value of unevaluated properties, both on an after-tax basis (the
"full cost ceiling").
Capitalized costs include payroll and related costs of technical personnel
which are directly attributable to the Company's oil and gas acquisition,
exploration and development activities. Amounts capitalized for the years ended
December 31, 1998 and 1997 were $640,000 and $340,000, respectively.The Company
capitalizes interest attributable to oil and natural gas properties which are
not subject to amortization and are in the process of being evaluated. Included
in unevaluated capitalized costs for the years ended December 31, 1998 and 1997,
are interest costs of $395,000 and $70,000, respectively.
At the end of 1998, the Company's full cost ceiling exceeded net
capitalized costs by approximately $5.4 million. However, a write-down was
recorded in the second quarter of 1998, and is reflected in the 1998 results of
operations. During 1998, decreases in the discounted present value of proved
reserves resulting from price reductions were offset by additional quantities of
proved developed and undeveloped reserves resulting from the Company's
acquisition and development program, the Sonat Acquisition and technical
evaluation and substantiation of certain proved undeveloped reserves. Net
capitalized costs could exceed the full cost ceiling in future periods due to
downward revisions to estimates of proved reserve quantities, further declines
in oil and gas prices, increases in operating costs, unsuccessful exploration
and development activities, impairment of unevaluated properties or other
factors which cannot be reasonably
22
<PAGE>
predicted by the Company. Once recorded, a write-down of oil and gas properties
cannot be reversed at a later date, even if estimated reserve quantities or oil
and gas prices subsequently increase. Accordingly, the $1.2 million write-down
recorded in the second quarter of 1998 could not be reversed at year-end.
Management believes that independent reserve estimates, which represent the
basis for calculating limitations on capital costs, are reasonable using SEC
prescribed guidelines, under present operating conditions and circumstances.
However, reserve estimates and forecasts are inherently imprecise and,
therefore, subject to significant future changes.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997.
The Company recorded a net loss of $886,000 and net income of $638,000 for
twelve months ended December 31, 1998 and 1997, respectively. The $1.5 million
decrease in the Company's comparative net income resulted primarily from the
following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas sales.................... $ 2,823
Lease operating and workover
expenses........................... (2,144)
Production taxes..................... (214)
General and administrative
expenses -- net (378)
Depletion, depreciation and
amortization expense ("DD&A").... (1,590)
Writedown of oil & gas properties.... (1,208)
Interest expense -- net.............. (614)
Other income -- net.................. 410
Provision for income taxes........... 1,391
-----------------------
$(1,524)
=======================
The following discussion applies to the changes shown above.
The $2.8 million or 45% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of properties during 1998. The increase in
production volume was offset by a significant decrease in oil prices, as shown
in the table presented immediately below.
YEAR ENDED
PERCENT DECEMBER 31,
INCREASE --------------------
(DECREASE) 1998 1997
---------- --------- ---------
Gas Production (Mcf)................. 108% 1,468 707
Oil Production (Bbls)................ 103% 518 255
Barrel of oil equivalent (BOE) 105% 763 373
Average Price Gas (per Mcf).......... (10%) $ 1.90 $ 2.11
Average Price Oil (per Bbl).......... (34%) $ 12.29 $ 18.50
Average Price per BOE................ (29%) $ 12.04 $ 17.07
Lease operating expenses and workover costs increased $2.1 million or 69%.
On a unit-of-production, barrel of oil equivalent ("BOE") basis, costs were
actually reduced 12%. The dollar increase is a result of the acquisition and
development of oil and gas properties in 1998. On a BOE basis, production
volumes increased 105% over the prior year. Accordingly, lease operating
expenses increased primarily as a result of additional production volumes. The
Company expects further reductions to lease operating expenses on a BOE basis in
1999 as a result of the Sonat Acquisition and field re-engineering and
development activities. Production taxes increased by $214,000 or 67% due to
increased production volumes and revenues.
23
<PAGE>
General and administrative costs increased $378,000 or 36%. The percentage
increase in general and administrative expenses was considerably less than the
increases in production and revenues as a result of both rigorous cost
containment efforts and production increases. On a BOE basis, general and
administrative expenses actually were reduced by 34% in 1998 over 1997 levels.
The dollar increase is comprised primarily of increases in management, operating
and administrative staffing associated with the Company's growth. The Company
must attract and retain competent management, technical and administrative
personnel to pursue its business strategy and fulfill its contractual
obligations.
The $1.6 million or 127% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties. Capitalized costs
included in the Full-Cost Pool and subject to DD&A were $42.9 million and $16.0
million at December 31, 1998 and 1997, respectively. In addition, estimated
future development costs associated with proved undeveloped reserves in the
amount of $14.6 million and $5.3 million at December 31, 1998 and 1997,
respectively, were included in the DD&A calculations. The ratio of current year
production to total estimated proved reserves (unit of production rate) was 4.9%
in 1998 as compared to 5.6% in the prior year.
The write-down of oil and gas properties in the amount of $1.2 million
represents a non-cash charge to operating expenses, required pursuant to SEC
rules. This write-down was largely the result of a significant downward movement
in oil prices in the second quarter of 1998. The write-down reduces the carrying
cost of assets to the full-cost ceiling as prescribed by SEC rules. Although
management and most industry participants believe the current prices will
improve in the future, such current prices, without the benefit of anticipated
price recovery, must be used in the ceiling test calculations. See "Impact of
Changing Prices and Costs" below.
Interest expense increased by $614,000 primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $982,000 in
1998 and is expected to be $2.3 million in 1999; however, the Company plans to
replace some debt with equity and, therefore, reduce projected interest expense.
Other income increased $410,000 in 1998 principally due to increased
operations overhead reimbursements, engineering consulting fees and interest
income.
The provision for income taxes decreased by $1.4 million due to the
recognition of an income tax benefit for the year-ended December 31, 1998, in
the amount of $1.0 million or 53% of the pre-tax loss. The Company recorded a
net deferred tax asset in 1998 of $788,000 (which had the effect of reducing the
reported net loss) because the future utilization of income tax benefits is more
likely than not, considering projections of future taxable income and cash flows
based on independently prepared reserve reports.
IMPACT OF PROPERTY ACQUISITIONS AND DEVELOPMENT
Acquisitions and development of the oil and gas properties in 1998 is
expected to increase revenues by approximately $6.7 million in 1999, and net
cash flows from Company properties by approximately $4.8 million, based solely
on estimated production from proved producing reserves. These estimates assume
the average prices realized in 1998 will be realized in 1999 and further assume
a reduction of approximately $1.40 per BOE in total Company operating expense
(from $5.71 to $4.31 per BOE). The projected reduction in per BOE operating
expenses is consistent with the prior performance of the Company and is a direct
result of the Sonat Acquisition (which results in a higher ratio of gas
production with lower operating expenses per BOE), re-engineering and
development activities and cost-containment efforts. These estimates are
exclusive of any projected cash flows from additional development and drilling
activities. Estimates are based on independent reserve reports prepared by third
parties in connection with required year-end reporting and planned Company
activities. The Company does not expect net general and administrative expenses
to increase significantly in 1999 as a result of 1998 activity. The anticipated
increase in direct general and administrative expenses is approximately $300,000
per year, with most of the increase being attributable to new business
development activities. The Company financed its activities largely with bank
debt and, accordingly, gross interest expense is expected to increase by
approximately $1.3 million on an annual basis.
24
<PAGE>
Based on independent engineering studies, cash flows could increase as a
result of the development of non-producing reserves through workovers,
recompletions and enhancements to production facilities and through development
drilling. In addition, net cash flows could be favorably affected by price
improvements and additional reductions to per-unit operating costs. No assurance
can be given, however, that the Company will be able to successfully and
economically develop additional reserves.
IMPACT OF CHANGING PRICES AND COSTS
Texoil's revenues and the carrying value of its oil and gas properties are
subject to significant change due to changes in oil and gas prices. As
previously mentioned, oil prices have declined appreciably during 1998 and
remained at low historical levels through the end of 1998. Average oil prices in
1998 were 34% and 46% lower than 1997 and 1996, respectively. Management expects
low oil prices to prevail in 1999. Gas prices have also softened. Texoil's
revenues have increased despite these significant reductions in prices. Should
prices continue to fall or fail to increase to levels which will facilitate
repayment of debt and reinvestment of cash flow to replace current production,
the Company could experience difficulty in continuing its growth, developing its
assets and attracting additional capital. The Company believes that oil prices
have bottomed out and could rebound within the next year. The Company has
maintained positive cash flows including its financing and administrative costs.
Low oil prices have caused many in the industry to reduce capital spending,
which in turn affects the Company's ability to attract partners for Company
sponsored exploration and development activities and the terms of such
participation. Thus far, the Company has generally been able to attract partners
and expects to participate in the drilling of six to eight wells in 1999.
However, prolonged low prices could adversely affect certain projects and the
Company may be required to withdraw certain prospects from the market.
Although prices have declined to levels which have not existed in the past
decade, the costs of field labor and services have not declined proportionately.
While the Company has benefitted from some general industry cost declines, such
costs could increase in the future.
CORPORATE EFFORTS TO OFFSET DECLINING PRICES
Early in the second quarter of 1998, in an effort to mitigate the adverse
effect of low oil prices, the Company implemented numerous cost-saving programs
designed to reduce operating and administrative costs and enhance net revenues
during this difficult period in the industry. Rather than impose staff
reductions of technical and other personnel, the Company chose to implement a
salary reduction program, defer salary increases and retain its current level of
staffing. As a result, the Company has not lost any of its staff. In addition,
the Company has taken steps to reduce certain occupancy and office expenses.
Certain salaries were restored to prior levels in connection with the Sonat
Acquisition, but annual increases continue to be deferred. While the reductions
have been difficult, staff morale remains high and the Company has remained
committed to its goals.
In addition to general and administrative savings, the Company has further
implemented programs designed to reduce operating expenses and has deferred
certain expenditures associated with lower revenue producing activities and
projects. The Company has continued, however, to pursue projects that can add
economic producing reserves, enhance current production levels and lower
recurring operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through cash flow from operating activities, its bank
credit facility, sale of non-strategic assets, various means of corporate and
project finance and ultimately through the issuance of additional securities. In
addition, the Company intends to continue to subsidize drilling activities
through the sale of participations to industry partners on a promoted basis,
whereby the Company will earn working interests in reserves and production
greater than its proportionate capital cost.
25
<PAGE>
RIMCO FINANCING
On December 31, 1997, Texoil entered into the RIMCO Agreement and issued
7.875% Convertible Subordinated General Obligation Notes in the principal amount
of $10 million to the RIMCO Lenders ("Convertible Notes"). The financing
matures on December 31, 1999, or upon a change in control. The Maturity Date is
subject to certain extensions. At any time prior to the Maturity Date,
outstanding indebtedness is convertible into Texoil Common Stock at a conversion
price of $1.75 per share, subject to anti-dilution adjustments. Texoil may
convert all of the outstanding indebtedness under the Convertible Notes into
Common Stock if the average closing price per share during a period of 20
consecutive trading days equals or exceeds 130% of the conversion price. If on
December 31, 1999, cash availability of the Company (as defined below) and its
subsidiaries is less than the principal and accrued and unpaid interest
outstanding under the Convertible Notes, the RIMCO Lenders can be required to
convert the outstanding principal and accrued and unpaid interest into Texoil
Common Stock, if the average market price exceeds $1.05 per share.
Alternatively, if the market price of the common stock is less than $1.05, the
RIMCO Lenders can elect to extend the maturity by approximately 18 months or
convert at market price. Cash Availability is generally defined as bank
borrowing capacity plus cash, and other working capital less current liabilities
and an amount equal to six months operating expenses. The Company granted
registration rights to the holders of the Convertible Notes upon conversion of
debt related to shares issued. Management believes that it can achieve a share
price which will result in a conversion to common stock or refinance these
notes.
The indebtedness under the RIMCO Agreement is subject to the terms of a
subordination agreement among the RIMCO Lenders, Comerica Bank -- Texas, N. A.
(as agent for itself and another lender), Cliffwood Oil & Gas Corp., Cliffwood
Energy Company and Cliffwood Production Co., whereby indebtedness under the
RIMCO Agreement is subordinated in right of payment and the RIMCO Lenders are
subject to restrictions on their right to exercise remedies. The subordination
provisions do not affect the ability to convert indebtedness into Common Stock
of Texoil.
CREDIT FACILITY
At December 31, 1998, the Company had available borrowing capacity of $2.4
million in accordance with a revolving credit agreement ("Credit Agreement")
with a bank, which can be used to finance property acquisitions and temporary
working capital requirements. The borrowing base is redetermined annually, or
more often, at the request of the Company. As of November 1, 1998, a $28 million
borrowing base was established. The Company intends to refinance its bank debt
through a corporate offering of securities in 1999 that may provide longer term
financing than presently available under its credit facility. No assurance can
be given, however, that the Company will be able to refinance its debt.
CASH FLOW FROM OPERATING ACTIVITIES
For the year ended December 31, 1998, the Company's net cash flow provided
by operating activities was $1.6 million down $1.1 million from the prior year.
These decreases are directly attributable to the reduction in oil and gas prices
and the use of cash to reduce current liabilities. The Company expects 1998
acquisitions and development activities to increase cash flows from operating
activities significantly in 1999.
26
<PAGE>
CAPITAL EXPENDITURES
The Company's net oil and gas capital expenditures for the years ended
December 31, 1998 and 1997, are as follows:
CAPITAL EXPENDITURES
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
($000'S)
Acquisition of properties:
Evaluated properties............ $ 25,704 $ 10,514
Unevaluated properties.......... 3,069 4,618
--------- ---------
$ 28,773 $ 15,132
========= =========
Capital expenditures for 1998 were financed principally with the proceeds
of the RIMCO financing obtained on December 31, 1997, and additional bank
borrowings. On October 30, 1998, the Company closed an acquisition of oil and
gas properties from Sonat Exploration Company for approximately $17.1 million.
Other capital expenditures included the acquisitions of incremental interests in
fields previously acquired by the Company, new acquisitions and re-engineering
and development expenditures.
The Company expects to make additional capital expenditures during 1999 to
complete the interpretation of 3-D seismic data in its Raceland and Greens Lake
prospects and to maintain and acquire additional leases. In addition, the
Company expects to make pre-drilling capital expenditures in 1999 in connection
with its Joint Venture with Bechtel Exploration Company. The Company expects to
fund approximately 10% to 20% of net drilling and completion expenditures. The
Company will enjoy a larger share of well ownership as a result of interests
earned in connection with the sale of prospects. Generally carried and
reversionary interests are expected to increase ownership to more than 25%.
Pending incremental cash flows or financing, the Company may retain additional
interests or elect to drill additional prospects.
Based solely on its existing portfolio of properties and projects,
including the recent acquisitions of the Sonat properties, the Company expects
to incur $5.0 million of capital expenditures in 1999, as follows:
($000'S)
--------
Texoil prospects
Land, geological &
geophysical.................... $ 550
Drilling........................ 850
Bechtel Joint Venture prospects
Land, geological &
geophysical.................... 600
Drilling........................ 720
Development of proved properties
Re-engineering, facilities...... 680
Well recompletions.............. 1,100
Drilling........................ 500
--------
$ 5,000
========
The Company believes that it will have sufficient capital available from
its credit facility, cash flows from operating activities, sale of certain
proved properties and sale of drilling participations to industry partners to
fund the above listed capital expenditures. Certain of the projected capital
expenditures are discretionary and can be deferred, reduced or eliminated. Many
development opportunities are held by producing leases and can be deferred
indefinitely, while certain prospects are subject to lease maintenance
requirements which, if not drilled, could result in additional land costs or
potential losses of leases. However, management believes projected expenditures
will result in increased production and cash flows
27
<PAGE>
and increases in reserve value and will further expose the Company to
potentially significant upside from exploration.
The Company cannot predict with accuracy the level of capital expenditures
it may incur in 1999 in connection with acquisitions and development of new
producing properties; however, management has set a goal of $20 million for the
acquisition and development of new properties. This goal will require additional
corporate or project financing to be obtained by the Company.
In connection with the acquisition of properties from an affiliated
partnership, in May of 1998 the Company formed a new partnership, being the
Cliffwood Acquisition 1998 Limited Partnership ("Partnership") for acquisition
and development activities. The Company has a Partnership interest equal to 15%,
which increases to 60% when the limited partners recoup their investment plus a
specified rate of return. Capital available from the Partnership results in a
greater ability to compete for acquisitions. In addition, the Company believes
that funds available from traditional sources of equity, debt and project
financing and from its demonstrated ability to acquire industry partners will
further expand its ability to pursue strategic corporate and property
acquisitions. No assurance can be given, however, that the Company will attract
the capital necessary to accomplish these stated goals.
PRE-MERGER TAX NET OPERATING LOSS CARRYFORWARDS
Prior to the Merger, Texoil had approximately $8.8 million of tax net
operating loss ("NOL") carryforwards at December 31, 1997, which begin to
expire in the year 2000. Additionally, approximately $2.4 million in depletion
carryforwards and $52,000 of investment tax credit ("ITC") carryforwards
remained at December 31, 1997. Section 382 of the Internal Revenue Code of 1986,
as amended, limits the availability of the NOL and ITC carryforwards if there is
a change of ownership of more than 50% of the Company within a retroactive
three-year period. Due to the Merger and change in ownership, the Company will
be limited in its future utilization of the NOL and ITC carryforwards to an
amount equal to the product of the Federal long-term tax-exempt bond rate
prescribed by the Internal Revenue Service and the fair market value of the
Company immediately prior to the time of the ownership change.
YEAR 2000 COMPLIANCE
The Company has conducted a review of and will continue to review its
software applications for Year 2000 issues. None of the software applications
utilized by the Company were developed internally and all have been acquired and
routinely updated since early 1996. The Company uses a PC based networked
hardware configuration with widely utilized, accepted and supported software
applications for its basic operating and office support functions. The primary
software applications used by the Company for its oil and gas activities are its
accounting, land, production management, engineering and interpretative
exploration software. All such systems were purchased from third party vendors,
who are responsible for their maintenance and support, pursuant to the terms of
license and use agreements. The most critical systems referred to above are the
accounting, land and production systems. Other systems are primarily analytical
tools which facilitate and support engineering and geological projects. Based on
reviews and inquiries conducted by Company personnel and resultant
representations by software vendors, the Company believes its primary software
applications are Year 2000 compliant. Accordingly, the Company does not expect
to incur any material costs to modify, upgrade or replace its basic business
systems over and above ongoing requirements to expand systems, as required by
growth and operations. However, the Company is not able nor does it possess the
technical expertise to conduct a comprehensive review of programs and systems
purchased from and supported by third parties; therefore, the Company cannot
guarantee that it will not incur problems with such software and business
applications.
Although the Company does not expect Year 2000 issues to have a material
impact on its internal operations, it is possible that such issues could
adversely affect customers, suppliers and joint venture partners, with the
possibility of an adverse impact on the Company. Major issues include, (i) the
ability of the Company's customers to accurately and timely measure and pay for
quantities of oil and gas production delivered, (ii) the ability of the
Company's vendors and suppliers to accurately invoice for services and products
and to properly process and account for payments received, (iii) the ability of
non-operating
28
<PAGE>
partners in Company operated properties to process and pay their share of joint
interest billings, as rendered and due, and (iv) the ability of operators, where
the Company is a non-operating participant, to disburse net revenue and render
joint interest billings to the Company. As part of its basic operating
practices, the Company believes it currently has adequate internal controls and
procedures in place to account for and monitor material aspects of the above
described activities. As Year 2000 approaches, the Company intends to take
additional steps to determine the Year 2000 readiness of third parties and to
implement additional procedures as it deems reasonably necessary, to account for
and take actions necessary to minimize potential problems resulting from third
party customers, vendors and partners outside of the control of the Company. In
the opinion of management, the single most significant issue is the timely
receipt of payment for oil and gas volumes sold. The majority of the Company's
production is from operated properties where the Company sells field production
to a relatively small number of purchasers. The Company can readily account for
production volumes and prices and aggressively pursue collection. The effect of
problems associated with third parties, if any, cannot be controlled by the
Company and the potential financial impact cannot be estimated with any
accuracy. Such matters could have a material impact on the Company.
ITEM 7. FINANCIAL STATEMENTS
See page F-1 for Index to Consolidated Financial Statements.
ITEM 8. CHANGES IN REGISTRANT'S ACCOUNTANTS
PREVIOUS INDEPENDENT ACCOUNTANTS
Texoil dismissed BDO Seidman LLP ("BDO") as its principal independent
accountants on March 4, 1998.
The reports of BDO on the Company's financial statements for the last two
fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor
was such opinion qualified or modified as to uncertainty, audit scope or
accounting principles, except that it was modified as to uncertainty as follows:
"The Company has suffered recurring operating losses and has a working
capital deficit that raise substantial doubt about its ability to meet
future expenditure obligations necessary to fully evaluate and develop
its oil and gas properties and to continue as a going concern. The
consolidated financial statements do not reflect any adjustments that
might result from the outcome of these uncertainties. In this regard the
Company entered into the financing arrangement described in NOTE 4 in
order to meet its working capital requirements and to pursue its
exploration opportunities. Despite the Company's successful efforts to
obtain initial financing for its 1997 exploratory drilling program there
can be no assurance that such financing will be sufficient to fully fund
the drilling program or that the results of drilling operations will be
successful."
The initial decision to change accountants was approved by the Company's
Audit Committee.
In connection with its audits for the two most recent fiscal years and
subsequent interim period preceding the replacement of BDO, the Company had no
disagreements with BDO on any matter of accounting principles or practices,
financial statement disclosure, or audit scope or procedure, which disagreements
if not resolved to the satisfaction of BDO would have caused them to make
reference thereto in their report on the financial statements for such years.
NEW INDEPENDENT ACCOUNTANTS
Texoil engaged Arthur Andersen LLP as its independent public accountants as
of March 4, 1998. Arthur Andersen LLP was formerly the independent public
accountants for Cliffwood Oil & Gas Corp. Texoil did not consult Arthur Andersen
LLP on any accounting, audit or financial reporting issue during its two
previous fiscal years or through March 4, 1998. The selection of Arthur Andersen
LLP as independent public accountants was ratified by a shareholder vote at the
annual meeting held on December 11, 1998.
29
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors are elected for a term of one
year and serve until their successors are elected and qualified. All executive
officers hold office until their successors are elected and qualified.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Frank A. Lodzinski (1)................. 49 Chairman of the Board, President,
Chief Executive Officer and
Director
Jerry M. Crews (1)..................... 48 Executive Vice President,
Secretary and Director
T.W. Hoehn, III........................ 48 Director
Robert E. LaJoie (1), (2), (3) 73 Director
Gary J. Milavec (2).................... 37 Director
Thomas Reiser (2), (3)................. 47 Director
Michael A. Vlasic (1).................. 38 Director
- ------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
FRANK A. LODZINSKI has been Chairman of the Board, President, Chief
Executive Officer and a Director of the Company since the Merger. He has been
President and a Director of Cliffwood since he founded a predecessor entity and
commenced operations in February 1996. From January 1992 to February 1995 he
served as President and a Director of Hampton Resources Corporation, a public
corporation which he co-founded. From February 1995, when Hampton was sold to
Bellwether Exploration Company, to February 1996, he was self-employed and was a
consultant to Bellwether Exploration Company. From 1984 to 1992, Mr. Lodzinski
was engaged in the oil and natural gas business through Energy Resource
Associates, Inc., a closely-held Texas corporation which he owned and
controlled. Prior to 1984, he was employed in public accounting with Arthur
Andersen LLP and in various capacities with independent oil and gas companies.
He is a Certified Public Accountant and holds a BSBA degree from Wayne State
University.
JERRY M. CREWS has been an Officer and Director of the Company since the
Merger and was an Officer and Director of Cliffwood since April 1996. For the
preceding 12 years he was an Officer of Citation Oil & Gas Corp., and was
responsible for all production operations. His experience includes acquisitions,
drilling and development operations in most of the producing basins of the
United States. Prior experience was with Conoco and Lear Petroleum. He holds a
B.S. in Petroleum Engineering from Texas A&M University.
T. W. HOEHN, III has been a Director of the Company since 1984. He is
President and General Manager of Hoehn Motors, Inc., a multi-line automobile
agency located in Carlsbad, California, where he has been employed since 1975.
He is a graduate of Stanford University.
ROBERT E. LAJOIE has been a Director of the Company since the Merger and
was a Director of Cliffwood since July 1996. Mr. LaJoie retired in 1977 and is a
private investor with more than forty years experience in the oil and natural
gas, real-estate and food services industries. He is a graduate of the
University of Michigan.
GARY J. MILAVEC has been a Director of the Company since September 1996,
and served as its Secretary from October 1996 until December 31, 1997. He is a
Managing Director of RIMCO and has been active in its investment management and
corporate finance activities since October 1990. Mr. Milavec received a B.A. in
Geology from the University of Rochester, an M.S. in Geology from the University
of
30
<PAGE>
Oklahoma, and an M.B.A. from the University of Houston. He is also a Director of
Universal Seismic Associates, Inc.
THOMAS A. REISER has been a Director of the Company since the Merger and
was a Director of Cliffwood since April 1996. For more than the past five years
he has served as Chairman and President of Technical Risks, Inc., a private
insurance brokerage firm which he founded. He is a graduate of the College of
William and Mary.
MICHAEL A. VLASIC has been a Director of the Company since the Merger and
was a Director of Cliffwood since July 1996. For more than the past five years,
he has been a principal with Vlasic Investments L.L.C. He is a graduate of Brown
University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d) during 1998, and Forms 5 and
amendments thereto furnished to the Company with respect to 1997, the Company is
not aware of any director, officer, or beneficial owner of more than 10% of any
class of equity securities of the Company registered pursuant to Section 12 of
the Securities Exchange Act of 1934 that failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) of the Exchange
Act during such year, except for the following. The Form 5 for T. W. Hoehn, III
for transactions occurring in August 1998 was filed on March 26, 1999.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation for the years ended
December 31, 1998 and 1997, for Mr. Frank A. Lodzinski and for Mr. Ruben Medrano
for the years ended December 31, 1997.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS SECURITIES PAYOUTS
---------------------------------------------- ------------ UNDERLYING -------
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS(#) PAYOUTS
- ------------------------------------- --------- --------- --------- ------------ ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank A. Lodzinski................... 1998 $ 58,500 -- -- -- -- --
Chairman of the 1997 -- -- -- -- -- --
Board, President and Chief
Executive Officer (1)
Ruben Medrano........................ 1997 $ 72,940 $ 10,000 $ 18,235(3) -- -- --
Former President 1996 $ 67,700 -- $ 28,800(3) -- -- --
and Chief Executive
Officer (2)
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- ------------------------------------- ------------
<S> <C>
Frank A. Lodzinski................... --
Chairman of the --
Board, President and Chief
Executive Officer (1)
Ruben Medrano........................ --
Former President --
and Chief Executive
Officer (2)
</TABLE>
- ------------
(1) As a result of the Merger, Mr. Lodzinski became Chairman of the Board,
President, Chief Executive Officer, and Director on December 31, 1997.
(2) Mr. Medrano resigned as President and Chief Executive Officer effective
December 31, 1997.
(3) See "Stock Compensation Plans."
STOCK COMPENSATION PLANS
The Company's Board of Directors adopted the 1996 Stock Compensation Plan
in June 1996 and the 1995 Stock Compensation Plan in July 1995. Pursuant to the
plans, shares of common stock were issued to certain individuals in recognition
of their reduced cash compensation during 1997 and 1996 and for reimbursement of
certain expenses. The Company recognized compensation expense in the years the
shares were issued, based on the fair market value of such shares.
CLIFFWOOD OPTIONS
Prior to the Merger, Cliffwood Oil & Gas Corp., had options to purchase
573,000 shares of Cliffwood Class A common stock issued under the Cliffwood Oil
& Gas Corp., 1997 Stock Option Plan and the Cliffwood Oil & Gas Non-Employee
Director Stock Option Plan. Pursuant to the Merger Agreement, these
31
<PAGE>
options were canceled and replaced by options to purchase 6.74 shares of Common
Stock for every share that could have been bought under the old Cliffwood
options. Therefore, following the Merger, Texoil issued options to purchase
3,862,020 shares of Common Stock to former Cliffwood option holders.
OPTION GRANTS
Certain options were granted to current executive officers of the Company
(who were officers of Cliffwood), in 1997. The following table sets forth
additional information with respect to these stock option grants:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL NUMBER OF
CLIFFWOOD OPTIONS/SARS TEXOIL
SHARES EXERCISE GRANTED TO SHARES EXERCISE
UNDERLYING OR BASE EMPLOYEES IN UNDERLYING OR BASE
OPTIONS PRICE FISCAL YEAR OPTIONS PRICE
NAME GRANTED(#) ($/SHARE) 1997 GRANTED(1) ($/SHARE) EXPIRATION DATE
- ------------------------------------- ---------- --------- ------------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Frank A. Lodzinski................... 100,000 $3.50 21.1% 674,000 $ .52 August 12, 2007
Francis M. Mury...................... 90,000 $3.50 18.9% 606,600 $ .52 August 12, 2007
Jerry M. Crews....................... 90,000 $3.50 18.9% 606,600 $ .52 August 12, 2007
Peggy C. Simpson..................... 35,000 $3.50 7.4% 235,900 $ .52 August 12, 2007
Mandel C. Selber..................... 25,000 $3.50 53.0% 168,500 $ .52 August 12, 2007
Ralph D. Hollingshead................ 22,000 $3.50 42.0% 134,800 $ .52 August 12, 2007
</TABLE>
- ------------
(1) Represents options previously granted by Cliffwood that were replaced by
options to purchase Texoil Common Stock.
OPTIONS EXERCISED AND YEAR-END VALUES
The following table sets forth information regarding outstanding employee
options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Frank A. Lodzinski................... 449,333 224,667 $ 17,973 $8,987
Francis M. Mury...................... 404,400 202,200 $ 16,176 $8,088
Jerry M. Crews....................... 404,400 202,200 $ 16,176 $8,088
Peggy Simpson........................ 157,267 78,633 $ 6,291 $3,145
Mandel Selber........................ 112,333 56,167 $ 4,493 $2,247
Ralph Hollingshead................... 89,867 44,933 $ 3,595 $1,797
</TABLE>
EMPLOYMENT AGREEMENT
Pursuant to the Merger, Mr. Lodzinski is employed under an agreement
pursuant to which he is entitled to an annual salary of $90,000, subject to
increases at the discretion of the Board of Directors, and a bonus at the sole
discretion of the Board of Directors. The employment agreement also provides for
the grant of options to purchase Common Stock. This employment agreement expires
January 1, 2001.
DIRECTOR COMPENSATION
Directors who are not employed by the Company are authorized to be paid a
fee of $1,000 for each meeting of the Board of Directors attended (including
committee meetings, if any, held in conjunction therewith). Director fees were
waived in 1998, due to industry conditions. The Company reimburses each director
for his actual and necessary expenses reasonably incurred in connection with
attending meetings of the Board and its committees. Several directors have
waived expense reimbursements in 1998.
32
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, the number of shares
of the Company's equity securities owned by (i) each person known by the Company
(based on publicly-available filings with the Commission) to be the holder of
more than five percent of its voting securities, (ii) each director and each
executive officer of the Company, whose total annual salary and bonus exceeded
$100,000, and (iii) all of the Company's directors and executive officers as a
group. Unless otherwise indicated, each holder has sole voting and investment
power with respect to the shares of capital stock owned by such holder.
NAME OF BENEFICIAL OWNER
(ADDRESS INDICATED IF NOT A DIRECTOR AMOUNT AND NATURE OF
OR AN OFFICER) BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------- -------------------- ----------------
CLASS A COMMON STOCK:
Frank A. Lodzinski, Director,
President and Chief Executive
Officer............................ 8,928,725(1) 22.3%
Michael A. Vlasic, Director.......... 8,380,628(2) 21.1%
Jerry M. Crews, Director, Executive
Vice President and Secretary....... 2,053,813(3) 5.2%
Robert E. LaJoie, Director........... 977,300(4) 2.5%
T. W. Hoehn III, Director............ 623,431 1.6%
Thomas A. Reiser, Director........... 402,153(5) 1.0%
All Directors and Executive Officers
as a group (7 persons)............. 13,083,714(6) 32.0%
RIMCO................................ 10,540,303(7) 23.4%
600 Travis Street, Suite No. 6875
Houston, Texas 77002
The Lincoln National Life Insurance
Company............................ 5,282,475(8) 12.9%
200 East Berry Street
Ft. Wayne, Indiana 46802
First Union Capital Partners, Inc.... 3,375,621(9) 8.4%
1001 Fannin, Suite 2255
Houston, Texas 77002
V&C Energy Limited Partnership....... 8,268,295(10) 20.9%
710 Woodward
Bloomfield Hills, Michigan 45304
Vlasic Investments, L.L.C............ 8,380,628(11) 21.1%
710 Woodward
Bloomfield Hills, Michigan 45304
Encap Investments, Inc............... 2,567,225 6.5%
1100 Louisiana, Suite No. 3150
Houston, Texas 77002
- ------------
(1) Includes 7,931,295 shares of Common Stock and 337,000 shares of Common
Stock underlying presently exercisable warrants beneficially owned through
V&C Energy Limited Partnership, of which Energy Resource Associates, Inc.,
("ERA") a Texas corporation owned by and controlled by Mr. Lodzinski, is
a general partner. Mr. Lodzinski disclaims any beneficial ownership of
shares held by V&C Energy Limited Partnership. Includes 449,333 shares of
Common Stock underlying presently exercisable options owned by Mr.
Lodzinski. Excludes 224,667 shares of Common Stock underlying options owned
by Mr. Lodzinski that are not presently exercisable.
(2) Includes 7,931,295 shares of Common Stock and 337,000 shares of Common
Stock underlying presently exercisable warrants beneficially owned through
V&C Energy Limited Partnership, of which Vlasic Investments L.L.C.
("Vlasic Investments") is the limited partner. Mr. Vlasic is the Managing
Director of Vlasic Investments. Mr. Vlasic disclaims any beneficial
ownership of shares held by V&C Energy Limited Partnership. Includes
112,333 shares of Common Stock underlying presently exercisable options
assigned by Mr. Vlasic to Vlasic Investments. Excludes 56,167 shares of
Common Stock underlying options assigned by Mr. Vlasic to Vlasic
Investments that are not presently exercisable.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
33
<PAGE>
(3) Includes 404,400 shares of Common Stock underlying presently exercisable
options owned by Mr. Crews. Excludes 202,200 shares of Common Stock
underlying options owned by Mr. Crews that are not presently exercisable.
(4) Includes 842,500 shares held by Robert E. LaJoie, as General Partner to a
family limited partnership, and 134,800 shares underlying presently
exercisable options owned by Mr. LaJoie. Excludes 67,400 shares of Common
Stock underlying options owned by Mr. LaJoie that are not presently
exercisable.
(5) Includes 112,333 of Common Stock underlying presently exercisable options
owned by Mr. Reiser. Excludes 56,167 shares of Common Stock underlying
options owned by Mr. Reiser that are not presently exercisable.
(6) Excludes Gary J. Milavec, who has been a director of Texoil since September
1996. Although Mr. Milavec does not own any Common Stock, he is a vice
president of RIMCO Associates, Inc., which is the General Partner of RIMCO
and the indirect holder of 4,826,017 shares of Common Stock and debt
presently convertible into 5,714,286 shares of Common Stock. Mr. Milavec
disclaims any beneficial ownership of said shares.
(7) Includes 5,714,286 shares of Common Stock underlying presently convertible
notes.
(8) Includes 1,760,825 shares of Common Stock underlying presently exercisable
warrants.
(9) Includes 1,128,950 shares of Common Stock underlying presently exercisable
warrants.
(10) Includes 337,000 shares of Common Stock underlying presently exercisable
warrants.
(11) Includes 7,931,295 shares of Common Stock and 337,000 shares of Common
Stock underlying presently exercisable warrants beneficially owned through
V&C Energy Limited Partnership, of which Vlasic Investments is the limited
partner. Mr. Vlasic is the Managing Director of Vlasic Investments. Mr.
Vlasic disclaims any beneficial ownership of shares held by V&C Energy
Limited Partnership. Includes 112,333 shares of Common Stock underlying
presently exercisable options assigned by Mr. Vlasic to Vlasic Investments.
Excludes 56,167 shares of Common Stock underlying options assigned by Mr.
Vlasic to Vlasic Investments that are not presently exercisable.
CHANGE IN CONTROL
Pursuant to the Merger Agreement, sixty-two former Cliffwood shareholders
were issued shares of Texoil's common stock, par value $.01 (the "Texoil Common
Stock"), equal to approximately 70% of Texoil's outstanding shares. Texoil's
Board of Directors was restructured so that five Texoil directors (T. W. Hoehn
Jr., Walter L. Williams, William F. Seagle, Joe C. Richardson Jr. and Ruben
Medrano) resigned and the remaining members of the Texoil Board of Directors
filled the resulting vacancies with five candidates nominated by Cliffwood's
Board of Directors. The current members of the Texoil Board of Directors are:
Frank A. Lodzinski, Jerry M. Crews, Michael A. Vlasic, Robert E. LaJoie and
Thomas A. Reiser, all of whom have been directors of Cliffwood, and Gary J.
Milavec and T. W. Hoehn, III, both formerly directors of Texoil. Upon closing
the Merger, Frank A. Lodzinski, the President and Chief Executive Officer of
Cliffwood, became the President, Chairman of the Board and Chief Executive
Officer of Texoil, and Jerry M. Crews, the Secretary and Executive
Vice-President of Cliffwood, became the Secretary and Executive Vice President
of Texoil.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In conjunction with the Merger, the Company repaid $1.1 million in
non-convertible notes to T.W. Hoehn, Jr., a Director of the Company until
December 31, 1997, and Opal Air, Inc., and affiliate of T. W. Hoehn, Jr. Also
pursuant to the Merger Agreement, $5.1 million in convertible notes were
converted into 5.5 million shares of Common Stock.
34
<PAGE>
The holders of these notes were Directors and affiliates of Directors of
the Company. The conversions are set forth in the table below.
NAME OF HOLDER AMOUNT SHARES ISSUED
- ---------------------------------------- ------------ -------------
T. W. Hoehn, Jr......................... $ 295,720 369,650
T. W. Hoehn, III........................ $ 265,128 331,412
William F. Seagle....................... $ 50,986 63,733
RIMCO(a)................................ $ 4,570,278 4,826,017
- ------------
(a) Gary J. Milavec, a Director of the Company, is a Vice President of RIMCO.
In addition, the Company and RIMCO entered into a Note Purchase Agreement
on December 31, 1997, pursuant to which the RIMCO Lenders provided the Company
with $10 million in new financing. See Item 1. "Description of
Business -- Recent Developments" and Item 6. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- RIMCO Financing."
The Company is the operator for certain properties and prospects where
RIMCO or affiliates have a direct or indirect interest as follows:
(1) The Company is the operator and direct owner of a 12% working
interest in the East and West Refugio prospects located in Refugio County,
Texas. Certain affiliates of RIMCO also have direct working interests in
these prospects.
(2) The Company is providing certain operating and administrative
services, for a monthly fee, to an affiliate of RIMCO related to the
operation of certain fields located in Montana and North Dakota.
All operating and management fees charged by the Company to related parties
are arms-length and based on rates for comparable services prevailing in the
industry.
In May 1998 the Company acquired certain properties from the Cliffwood
Acquisition 1996 Limited Partnership, an affiliated partnership, in which the
Company owned a 10% interest. Proceeds to Limited Partners was $4.5 million cash
and 898,000 shares of common stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2.1 -- Agreement and Plan of Merger, by and
between Comet Entertainment, Inc., Comet
Acquisition Subsidiary, Inc., and Texoil
Company, dated as of November 4, 1992
(incorporated by reference to Exhibit
2.1 to Item 13 of Form 10-KSB dated
December 31, 1997).
2.2 -- Agreement and Plan of Merger, dated
December 31, 1997, by and among Texoil,
Inc., Texoil Acquisition, Inc., and
Cliffwood Oil & Gas Corp. (incorporated
by reference to Exhibit 2.1 to Item 7 of
Form 8-K filed on January 8, 1998).
3.1 -- Restated Articles of Incorporation of
Texoil, Inc., as amended (incorporated
by reference to Exhibit 3.1 to Form 8-K,
dated September 6, 1996, reporting the
RIMCO Financing).
3.2 -- Amendments to Articles of Incorporation
of Texoil, Inc., as amended (filed herewith).
3.3 -- Amended and Restated Bylaws of Texoil,
Inc., as amended (incorporated by
reference to Exhibit 3.2 to Item 13 of
Form 10-KSB dated December 31, 1997.
3.4 -- Amended Bylaws of Texoil, Inc., as
amended (filed herewith).
4.1 -- Form of Warrant Agreement between
Texoil, Inc., as Issuer and First
Interstate Bank of Texas, N.A. as
Warrant Agent, dated May 26, 1994
(incorporated by reference to Exhibit
4.1 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.2 -- Specimen certificate for Class A Warrant
(incorporated by reference to Exhibit
4.2 to Item 13 of Form 10-KSB dated
December 31, 1997).
35
<PAGE>
4.3 -- Specimen certificate for Class B Warrant
(incorporated by reference to Exhibit
4.3 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.4 -- Specimen certificate for Underwriters
Class A Warrant (incorporated by
reference to Exhibit 4.4 to Item 13 of
Form 10-KSB dated December 31, 1997).
4.5 -- Specimen certificate for Underwriters
Class B Warrant (incorporated by
reference to Exhibit 4.5 to Item 13 of
Form 10-KSB dated December 31, 1997).
4.6 -- Specimen certificate for shares of
Common Stock, par value $.01 per share
(incorporated by reference to Exhibit
4.6 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.7 -- Note Purchase Agreement, dated December
31, 1997, by and among Texoil, Inc., and
Resource Investors Management Company
(incorporated by reference to Exhibit
5.1 to Form 8-K filed on January 8,
1998).
4.8 -- Form of the Texoil, Inc., 7.875%
Convertible Subordinated General
Obligation Note (incorporated by
reference to Exhibit 5.2 to Form 8-K
filed on January 8, 1998).
4.9 -- Amended and Restated Stock Ownership and
Registration Rights Agreement among
Texoil, Inc., and RIMCO Partners, L.P.,
RIMCO Partners, L.P. II, RIMCO Partners,
L.P. III, and RIMCO Partners, L.P. IV,
dated December 31, 1997 (incorporated by
reference to Exhibit 5.5 to Form 8-K
filed on January 8, 1998).
4.10 -- Guaranty Agreement dated December 31,
1997, by and among Cliffwood Oil & Gas
Corp., and RIMCO Partners, L.P., RIMCO
Partners, L.P. II, RIMCO Partners, L.P.
III, and RIMCO Partners, L.P. IV,
(incorporated by reference to Exhibit
5.3 to Form 8-K filed on January 8,
1998).
4.11 -- Guaranty Agreement dated December 31,
1997, by and among Texoil Company and
RIMCO Partners, L.P., RIMCO Partners,
L.P. II, RIMCO Partners, L.P. III, and
RIMCO Partners, L.P. IV (incorporated by
reference to Exhibit 5.4 to Form 8-K
filed on January 8, 1998).
4.12 -- Stock Purchase Warrant for 225,000
shares of Cliffwood Common Stock to
EnCap Equity 1996 Limited Partnership
(incorporated by reference to Exhibit
10.26 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.13 -- Stock Purchase Warrant for 75,000 shares
of Cliffwood Common Stock to Energy
Capital Investment Company (incorporated
by reference to Exhibit 10.27 to Item 13
of Form 10-KSB dated December 31, 1997).
4.14 -- Stock Purchase Warrant for 50,000 shares
of Cliffwood Class A Common Stock to V&C
Energy Limited (incorporated by
reference to Exhibit 10.29 to Item 13 of
Form 10-KSB dated December 31, 1997).
4.15 -- Common Stock and Warrant Purchase
Agreement between Cliffwood Oil & Gas
Corp., and First Union Capital Partners,
Inc., dated as of May 30, 1997
(incorporated by reference to Exhibit
10.30 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.16 -- Stock Purchase Warrant for 167,500
shares of Cliffwood Class B Common Stock
to First Union Capital Partners, Inc.
(incorporated by reference to Exhibit
10.31 to Item 13 of Form 10-KSB dated
December 31, 1997).
4.17 -- Registration Rights Agreement dated May
4, 1998, by and among Texoil, Inc.,
EnCap Equity 1996 Limited Partnership
and Energy Capital Investment Company
PLC (incorporated by reference to
Exhibit 2.3 filed with Form 8-K on May
12, 1998).
4.18 -- Common Stock and Warrant Purchase
Agreement between Cliffwood Oil & Gas
Corp., and Belleview 1992 Income Fund
L.P. dated as of August 4, 1997 (in-
corporated by reference to Exhibit 10.20
with Form 10-KSB filed on April 8,
1998).
4.19 -- Common Stock and Warrant Purchase
Agreement between Cliffwood Oil & Gas
Corp., and First Union Capital Partners,
Inc., dated as of May 30, 1997
(incorporated by reference to Exhibit
10.30 with Form 10-KSB filed on April 8,
1998).
4.20 -- First Amendment to Note Purchase
Agreement dated as of October 29, 1998,
by and between Texoil, Inc., and RIMCO
Partners, L.P., RIMCO Partners, L.P. II,
RIMCO Partners, L.P. III and RIMCO
Partners, L.P. IV (filed herewith).
36
<PAGE>
4.21 -- Subordination Agreement dated December
30, 1997, by and among Comerica Bank-
Texas, N.A. ("Agent"), RIMCO Partners,
L.P., RIMCO Partners, L.P. II, RIMCO
Partners, L.P. III and RIMCO Partners,
L.P. IV ("Subordinated Lenders") and
Cliffwood Oil & Gas Corp., Cliffwood
Energy Company and Cliffwood Production
Co. ("Borrowers") (filed herewith).
4.22 -- First Amendment to Subordination
Agreement dated as of October 30, 1998,
by and among Comerica-Bank Texas, N.A.
("Agent"), RIMCO Partners, L.P., RIMCO
Partners, L.P. II, RIMCO Partners, L.P.
III, RIMCO Partners, L.P. IV
("Subordinated Lenders") and Cliffwood
Oil & Gas Corp., Cliffwood Energy
Company and Cliffwood Production Co.
("Borrowers") (filed herewith).
4.23 -- Fifth Amendment to Amended and Restated
Credit Agreement dated as of June 12,
1998, by and among Cliffwood Oil & Gas
Corp., Cliffwood Energy Company,
Cliffwood Production Co., Comerica
Bank-Texas, as Agent, et al (filed
herewith).
4.24 -- Sixth Amendment to Amended and Restated
Credit Agreement dated as of October 29,
1998, by and among Cliffwood Oil & Gas
Corp., Cliffwood Energy Company,
Cliffwood Production Co., Comerica
Bank-Texas, as Agent, et al (filed
herewith).
10.1 -- Agreement dated as of December 31, 1992
by and between Texas Meridian Resources
Exploration, Inc., and Texoil Company
(incorporated by reference to Exhibit
10.1 to Item 13 of Form 10-KSB dated
December 31, 1997).
10.2 -- Acquisition and Distribution Agreement
dated May 4, 1998, by and between
Texoil, Inc., Cliffwood Oil & Gas Corp.,
and Cliffwood Acquisition 1996 Limited
Partnership (incorporated by reference
to Exhibit 2.1 filed with Form 8-K on
May 12, 1998).
10.3 -- Form of Non-Qualified Stock Option
Agreement entered into by and between
Texoil, Inc., and each of John L. Graves
and Joe C. Richardson, Jr. dated April
16, 1993 (incorporated by reference to
Exhibit 10.2 to Item 13 of Form 10-KSB
dated December 31, 1997).
10.4 -- Agreement, dated September 20, 1994,
between Texoil Company and 3DX Technol-
ogies, Inc., (incorporated by reference to
Exhibit 10.4 to Item 13 of Form 10-KSB
dated December 31, 1997.)
10.5 -- 1994 Stock Option Plan, dated July 25,
1994 (incorporated by reference to
Exhibit 10.5 to Item 13 of Form 10-KSB
dated December 31, 1997).
10.6 -- May 1998 Agreement in Respect of
Agreement of Limited Partnership dated
May 4, 1998, by and among Cliffwood Oil
& Gas Corp., EnCap Equity 1996 Limited
Partnership and Energy Capital
Investment Company PLC (incorporated by
reference to Exhibit 2.2 filed with Form
8-K on May 12, 1998).
10.7 -- Non-Qualified Stock Option Agreement,
dated July 26, 1994, between Texoil,
Inc., and Ruben Medrano (incorporated by
reference to Exhibit 10.7 to Item 13 of
Form 10-KSB dated December 31, 1997).
10.8 -- Non-Qualified Stock Option Agreement
dated May 2, 1996, between Texoil, Inc.,
and Ruben Medrano (incorporated by
reference to Exhibit 10.20 to Form
10-KSB filed on March 31, 1997).
10.9 -- First Amended and Restated Agreement of
Limited Partnership dated May 4, 1998,
by and among Cliffwood Oil & Gas Corp.,
EnCap Equity 1996 Limited Partnership
and Energy Capital Investment Company
PLC (incorporated by reference to
Exhibit 2.5 filed with Form 8-K on May
12, 1998).
10.10 -- Non-Qualified Stock Option Agreement
dated June 20, 1996, between Texoil,
Inc., and William F. Seagle
(incorporated by reference to Exhibit 10.21
to Form 10-KSB filed on March 31, 1997)
10.11 -- Standard Office Building Lease
Agreement, dated January 14, 1997,
between Radler Enterprises Texas, Inc.,
and Cliffwood Oil & Gas Corp.
(incorporated by reference to Exhibit
10.17 to Item 13 of Form 10-KSB dated
December 31, 1997).
10.12 -- First Amendment of Standard Office
Building Lease Agreement, dated January
14, 1997, between Radler Enterprises
Texas, Inc., and Cliffwood Oil & Gas
Corp. (incorporated by reference to
Exhibit 10.18 to Item 13 of Form 10-KSB
dated December 31, 1997).
37
<PAGE>
10.13 -- Co-Sale Agreement dated May 4, 1998, by
and among Cliffwood Oil & Gas Corp.,
Cliffwood Acquisition 1998 Limited
Partnership, EnCap Equity 1996 Limited
Partnership and Energy Capital
Investment Company PLC (incorporated by
reference to Exhibit 2.6 with Form 8-K
on May 12, 1998).
10.14 -- Purchase and Sale Agreement, dated as of
April 1, 1997, between Belleview 1992
Income Fund, L.P., and Cliffwood Oil &
Gas Corp. (incorporated by reference to
Exhibit 10.19 to Item 13 of Form 10-KSB
dated December 31, 1997).
10.15 -- Stock Purchase Warrant for 13,750 shares
of Cliffwood Class A Common Stock to
Michael J. Foy (incorporated by
reference to Exhibit 10.21 to Item 13 of
Form
10-KSB dated December 31, 1997).
10.16 -- Stock Purchase Warrant for 261,250
shares of Cliffwood Class A Common Stock
to Lincoln National Life Insurance
Company (incorporated by reference to
Exhibit 10.22 to Item 13 of Form 10-KSB
dated December 31, 1997).
10.17 -- Agreement of Limited Partnership for
Cliffwood Acquisition--1996 Limited
Partnership, dated September 27, 1996
(incorporated by reference to Exhibit
10.23 to Item 13 of Form 10-KSB dated
December 31, 1997).
10.18 -- Letter Agreement, dated July 21, 1997,
between Cliffwood Oil & Gas Corp., and
Energy Resource Associates, Inc., as
general partner of V&C Energy Limited
Partnership (incorporated by reference
to Exhibit 10.28 to Item 13 of Form
10-KSB dated December 31, 1997).
10.19 -- Agreement by and among Cliffwood
Exploration Company, Cliffwood
Production Co., Bechtel Exploration
Company and Blue Moon Exploration
Company, dated as of June 30, 1997
(incorporated by reference to Exhibit
10.32 to Item 13 of Form
10-KSB dated December 31, 1997).
10.20 -- Executive Employment Agreement, dated
January 1, 1998, by and among Texoil,
Inc., and Frank A. Lodzinski
(incorporated by reference to Exhibit
2.2 to Form 8-K filed on January 8,
1998).
10.21 -- Cliffwood Oil & Gas Corp., 1997 Stock
Option Plan (incorporated by reference
to Exhibit 10.34 to Item 13 of Form
10-KSB dated December 31, 1997).
10.22 -- Form of Incentive Stock Option Plan
Agreement (incorporated by reference to
Exhibit 10.35 to Item 13 of Form 10-KSB
dated December 31, 1997).
10.23 -- Cliffwood Oil & Gas Corp., 1997
Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit
10.36 to Item 13 of Form 10-KSB dated
December 31, 1997).
10.24 -- Form of Non-Employee Director Stock
Option Agreements (incorporated by
reference to Exhibit 10.37 to Item 13 of
Form 10-KSB dated December 31, 1997).
16.1 -- 16.1 Letter dated March 9, 1998, from
BDO Seidman LLP to the Commission
(incorporated by reference to Exhibit
16.1 to Form 8-K filed on March 9,
1998).
21.1 -- Following are the Company's
subsidiaries:
<TABLE>
<CAPTION>
OTHER NAME UNDER WHICH JURISDICTION OF
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION/ORGANIZATION
- ---------------------------------------- ---------------------------- --------------------------
<S> <C> <C>
Cliffwood Oil & Gas Corp................ None Texas
Cliffwood Production Co................. None Texas
Cliffwood Energy Company................ None Texas
Cliffwood Exploration Company........... None Texas
Cliffwood Acquisition --
1998 Limited Partnership.............. None Texas
Cliffwood-Blue Moon Joint Venture,
Inc................................... None Texas
Texoil Company.......................... None Tennessee
</TABLE>
27.1 -- Financial Data Schedule (filed
herewith).
38
<PAGE>
(B) REPORTS ON FORM 8-K
-- A report on Form 8-K reporting acquisition of producing properties
was filed on November 13, 1998.
-- A report on From 8-K/A reporting on the audited historical statements
of revenues and direct operating expenses attributable to the Sonat
Properties and unaudited pro forma financial information of Texoil
adjusted for the Sonat Properties was filed on January 8, 1999.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TEXOIL, INC.
/s/ FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT
Date: March 29, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE(S) DATE
- -------------------------- --------------------------------- ---------------
/s/ FRANK A. LODZINSKI President, Chief Executive March 29, 1999
FRANK A. LODZINSKI Officer, Chairman of The Board
and Director (Principal
Executive Officer)
/s/ JERRY M. CREWS Executive Vice President March 29, 1999
JERRY M. CREWS Secretary and Director
/s/ T. W. HOEHN III Director March 29, 1999
T. W. HOEHN III
/s/ ROBERT E. LAJOIE Director March 29, 1999
ROBERT E. LAJOIE
/s/ GARY J. MILAVEC Director March 29, 1999
GARY J. MILAVEC
/s/ THOMAS A. REISER Director March 29, 1999
THOMAS A. REISER
/s/ MICHAEL A. VLASIC Director March 29, 1999
MICHAEL A. VLASIC
40
<PAGE>
TEXOIL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets as of
December 31, 1998 and December 31,
1997............................... F-3
Consolidated Statements of Income for
the years ended December 31, 1998
and 1997........................... F-4
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 1998
and 1997........................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31,
1998 and 1997...................... F-6
Notes to Consolidated Financial
Statements......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Texoil, Inc.:
We have audited the accompanying consolidated balance sheets of Texoil,
Inc. (a Nevada corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texoil, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 22, 1999
F-2
<PAGE>
TEXOIL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
--------- ---------
Assets
Current Assets:
Cash and cash equivalents....... $ 423 $ 4,059
Accounts receivable and other... 4,045 3,444
Accounts receivable -- related
party.......................... -- 60
Drilling advances............... 368 --
Other current assets............ 74 65
--------- ---------
Total current assets....... 4,910 7,628
Property, plant and equipment, at
cost:
Oil and natural gas properties
(full-cost method)
Evaluated properties....... 42,933 16,021
Unevaluated properties..... 6,479 4,618
Office and other equipment...... 637 424
--------- ---------
50,049 21,063
Less -- accumulated depreciation,
depletion and amortization......... (5,330) (1,370)
--------- ---------
Net property, plant and equipment.... 44,719 19,693
--------- ---------
Other assets, net.................... 673 463
Deferred tax asset................... 788 --
--------- ---------
Total assets............... $ 51,090 $ 27,784
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities.................... $ 2,791 $ 4,207
Current portion -- long-term
debt............................ 2,633 --
Revenue royalties payable....... 1,497 1,887
--------- ---------
Total current
liabilities.................. 6,921 6,094
--------- ---------
Long-term debt....................... 22,867 58
Convertible subordinated notes....... 10,000 10,000
Deferred tax liability............... -- 215
Commitments and contingencies (Note
10)
Stockholders' equity:
Series A preferred stock -- $.01
par value with liquidation
preference of $100 per share,
10,000,000 shares authorized,
none issued or outstanding at
December 31, 1998 and 1997..... -- --
Common stock -- $.01 par value;
60,000,000 shares authorized;
39,295,094 and 36,587,000
shares issued and outstanding
at December 31, 1998 and 1997,
respectively................... 393 367
Additional paid-in capital........... 10,789 10,044
Retained earnings.................... 120 1,006
--------- ---------
Total stockholders'
equity....................... 11,302 11,417
--------- ---------
Total liabilities and
stockholders' equity......... $ 51,090 $ 27,784
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1998 1997
-------------- --------------
Revenues
Oil and gas sales............... $ 9,190 $ 6,367
Operator and management fees.... 890 683
Interest and other.............. 276 73
-------------- --------------
Total revenues............. $ 10,356 $ 7,123
-------------- --------------
Costs and Expenses...................
Lease operating................. 5,118 2,809
Workover........................ 129 294
Production taxes................ 535 321
General and administrative...... 1,434 1,056
Depreciation, depletion and
amortization................... 2,839 1,249
Writedown of oil and gas
properties..................... 1,208 --
Interest, net................... 982 368
-------------- --------------
Total costs and expenses... 12,245 6,097
-------------- --------------
Income (loss) before income taxes.... (1,889) 1,026
Deferred income tax benefit
(provision)........................ 1,003 (388)
-------------- --------------
Net income (loss).................... $ (886) $ 638
============== ==============
Basic net income (loss) per share.... $ (.02) $ .04
============== ==============
Basic weighted average shares........ 38,412,969 17,975,930
============== ==============
Diluted net income (loss) per
share.............................. $ (.02) $ .03
============== ==============
Diluted weighted average shares...... 38,412,969 19,392,259
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... 15,219 $ 152 -- $-- $ 2,094 $ 368 $ 2,614
Issuances of shares.................. 8,047 81 2,246 22 4,812 -- 4,915
Issuance of warrants................. -- -- -- -- 119 -- 119
Conversion of Class B common stock to
Class A common stock............... 2,246 22 (2,246) (22 ) -- -- --
Issuance of Texoil, Inc. shares to
effect the business combination.... 11,075 112 -- -- 3,019 -- 3,131
Net income........................... -- -- -- -- -- 638 638
------ ------ ------ ------ ---------- --------- -------
Balance at December 31, 1997......... 36,587 $ 367 -- $-- $ 10,044 $ 1,006 $11,417
Issuance of shares................... 2,708 26 -- -- 745 -- 771
Net loss............................. -- -- -- -- -- (886) (886)
------ ------ ------ ------ ---------- --------- -------
Balance at December 31, 1998......... 39,295 $ 393 -- $-- $ 10,789 $ 120 $11,302
====== ====== ====== ====== ========== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
---------- ----------
Cash flows from operating activities:
Net income (loss).................... $ (886) $ 638
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation, depletion and
amortization................... 2,839 1,249
Writedown of oil and gas
properties..................... 1,208 --
Deferred income tax provision
(benefit)...................... (1,003) 388
Accounts receivable and other... (601) (1,120)
Accounts receivable -- related
party.......................... 60 126
Other assets, net............... (307) (499)
Accounts payable and accrued
liabilities.................... (1,416) 1,725
Accounts payable -- related
party.......................... -- (192)
Revenue royalties payable....... (390) 326
---------- ----------
Net cash provided (used in)
by operating
activities.............. (496) 2,641
---------- ----------
Cash flows from investing activities:
Additions to oil and gas
properties..................... (28,369) (7,619)
Office and other equipment...... (213) (243)
---------- ----------
Net cash used in investing
activities.............. (28,582) (7,862)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common
stock.......................... -- 2,614
Proceeds from long-term debt and
other.......................... 25,450 19,200
Repayments of long-term debt.... (8) (12,821)
---------- ----------
Net cash provided by
financing activities.... 25,442 8,993
---------- ----------
Net increase (decrease) in cash and
cash equivalents................... (3,636) 3,772
Cash and cash
equivalents -- beginning of
period............................. 4,059 287
---------- ----------
Cash and cash equivalents -- end of
period............................. $ 423 $ 4,059
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................... $ 1,084 $ 404
========== ==========
Income taxes............... $ -- $ 28
========== ==========
Oil and gas properties purchased
by issuance of Class A Common
Stock.......................... $ 771 $ 2,300
========== ==========
Texoil net assets purchased by
conversion of Class A Common
Stock.......................... $ -- $ 3,131
========== ==========
Conversion of Texoil convertible
debt into Texoil Common
Stock.......................... $ -- $ 5,100
========== ==========
Oil and gas properties purchased
by issuance of warrants........ $ -- $ 119
========== ==========
Warrants issued for stock
issuance services provided..... $ -- $ 70
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BUSINESS COMBINATION
On December 31, 1997, pursuant to the terms of a definitive plan of merger
("Merger Agreement" or "Merger") and a new financing arrangement, Texoil,
Inc. ("Texoil" or the "Company"), a Nevada corporation, formed a wholly
owned subsidiary, Texoil Acquisition, Inc., which acquired all of the
outstanding common shares of Cliffwood Oil & Gas Corp. ("Cliffwood"), a Texas
corporation. Immediately before the Merger, Cliffwood had approximately
3,802,991 shares of common stock outstanding. Texoil issued 6.74 previously
authorized but unissued common shares for each outstanding share of Cliffwood
stock, for a total issuance of approximately 25,632,159 shares. As a result,
Cliffwood became a wholly-owned subsidiary of Texoil. Throughout the
accompanying consolidated financial statements all Cliffwood historical shares
of common stock, stock options and stock warrants have been retroactively
restated to reflect this 6.74 to 1 exchange ratio.
As a result of the Merger, the former stockholders of Cliffwood acquired,
as of December 31, 1997, 70% of Texoil outstanding common stock and thus voting
control, while the existing stockholders of Texoil own approximately 11,075,000
shares, or 30% of such common stock. Accordingly, for financial reporting
purposes, the Merger is accounted for as a reverse acquisition of Texoil by
Cliffwood. Because the former Cliffwood stockholders control 70% of the
outstanding common stock of Texoil, Cliffwood is treated as the accounting
acquiror, while Texoil is the legal acquiror.
The acquired Texoil assets ("Texoil Net Assets") were recorded at fair
value using the purchase method of accounting, as required by generally accepted
accounting principles. Such assets consisted of cash, oil and gas properties,
certain mineral leases, options and three dimensional ("3-D") seismic data
with an estimated fair value of approximately $3.1 million. Management believes
the recorded basis of the Texoil Net Assets included in the consolidated
financial statements was appropriate because (1) the fair value of the
underlying net assets acquired can be readily determined, with reasonable
precision, using valuation procedures common in the oil and gas industry, (2)
there is limited trading activity in Company shares, (3) common stock issued to
affect the business combination and recapitalization substantially exceeds the
trading volume of shares in the marketplace and the number of shares outstanding
prior to the business combination, (4) shares issued are restricted in their
marketability, (5) limitations on capitalized costs exist for proved oil and gas
properties pursuant to regulations of the Securities and Exchange Commission,
and (6) costs allocated to unproved properties should not exceed their fair
value. See Note 2 for "Unaudited Pro Forma Financial Information" related to
the Merger.
BASIS OF PRESENTATION
ORGANIZATION: Texoil operates a single business segment involved in the
acquisition, development and production of, and exploration for, crude oil,
natural gas and related products primarily in Texas, Louisiana and Oklahoma. The
accompanying consolidated financial statements include the historical accounts
of Cliffwood and its wholly-owned subsidiaries, Cliffwood Energy Company
("CEC"), Cliffwood Production Co. ("CPC"), and Cliffwood Exploration Company
("CEXCO"), as of and for the years ended December 31, 1998 and 1997. A
predecessor company to Cliffwood was incorporated in 1993 and was solely owned
by the president of Cliffwood. No significant operations commenced until
February 1996 with the acquisition of CEC and, effective May 1, 1996, the
predecessor entity was recapitalized and changed its name to Cliffwood Oil & Gas
Corp. The Cliffwood wholly-owned subsidiaries are all collectively referred to
herein as "Texoil" or the "Company", unless otherwise specified. All events
described or referred to as prior to December 31, 1997, relate to Cliffwood, as
the accounting acquiror.
F-7
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEETS: The acquired Texoil Net Assets are included at fair value
in the accompanying December 31, 1997, consolidated balance sheet, the effective
date of the Merger.
STATEMENTS OF INCOME: The 1997 consolidated statement of income is the
historical consolidated statement of income for Cliffwood. Earnings per share
has been retroactively restated to reflect the exchange ratio reflected in the
Merger Agreement. As the Merger was effective as of December 31, 1997, there is
no net income or net loss related to the acquired Texoil Net Assets included in
the accompanying 1997 consolidated statement of income.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated. The Company accounts for its investment in an associated oil
and gas partnership (see Note 11) using the proportionate consolidation method,
whereby the Company's proportionate share of the partnership's assets,
liabilities, revenues and expenses is included in the appropriate
classifications in the accompanying consolidated financial statements.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of all demand deposits and funds
invested in highly liquid instruments with an original maturity of three months
or less.
OIL AND NATURAL GAS PROPERTIES
The Company follows the full-cost method of accounting whereby all costs
associated with property acquisition, exploration and development activities are
capitalized. Included in capitalized costs for 1998 and 1997 are $640,000 and
$340,000 of payroll and related costs of technical personnel, respectively,
which are directly attributable to exploration and development activities. Costs
associated with evaluated properties or projects are amortized using the
units-of-production method based on petroleum engineers' estimates of
unrecovered proved oil and natural gas reserves. The costs of unevaluated
properties are excluded from amortization until they are fully evaluated.
Interest is capitalized on oil and natural gas properties which are not subject
to amortization and are in the process of being evaluated. Included in
capitalized costs for 1998 and 1997 are interest costs of $395,000 and $70,000,
respectively. Proceeds from the sale of properties are accounted for as
reductions to capitalized costs unless such sales result in a significant change
in the relationship between capitalized costs and proved reserves, in which case
gain or loss is recognized.
Impairment of capitalized costs of oil and gas properties is assessed for
each cost center, determined on a country-by-country basis. The Company's only
active cost center since inception has been the United States of America. To the
extent that capitalized costs of oil and gas properties, net of accumulated
depreciation, depletion and amortization and related deferred income taxes,
exceed the discounted future net revenues of estimated proved oil and gas
reserves plus the lower of cost or fair value of unevaluated properties, net of
income tax effects, such excess is charged to operations as an impairment of oil
and gas properties. A write-down of $1.2 million was recorded in the second
quarter of 1998 and is reflected in the 1998 consolidated statement of income.
F-8
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OFFICE AND OTHER PROPERTY
Acquisitions, renewals and improvements of office and other property are
capitalized; maintenance and repairs are expensed. Depreciation deductions are
calculated using the straight-line method over the assets' estimated useful
lives of five years.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed based on the weighted
average shares of common stock outstanding. Net income (loss) per share
computations to reconcile basic and diluted net income (loss) for the years 1998
and 1997 consist of the following (in thousands except per share data):
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
Net income (loss)....................... $ (886) $ 638
Basic weighted average shares........... 38,413 17,976
Effect of dilutive securities (1):
Warrants........................... -- 1,085
Options............................ -- 134
Awards............................. -- 182
Convertible notes.................. -- 15
Diluted weighted average shares......... 38,413 19,392
Per common share net income (loss):
Basic.............................. $ (.02) $ .04
Diluted............................ $ (.02) $ .03
- ------------
(1) A weighted average year-to-date number of options to purchase 737,768 shares
of common stock and warrants to purchase 5,119,450 shares of common stock
were outstanding during 1998, but were not included in the computation of
diluted per share income (loss) from continuing operations because these
options and warrants would result in an anti-dilutive per share amount. A
weighted average year-to-date number of warrants to purchase 231,372 shares
of common stock were outstanding during 1997 but were not included in the
computation of the diluted per share income from continuing operations
because the warrants' exercise prices were greater than the average market
price of the common shares.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Reference is made to Note
5, "Stock Options, Performance Awards and Stock Warrants", for a summary of
the pro forma effects of SFAS No. 123, "Accounting for Stock Based
Compensation" on the Company's results of operations for 1998 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable and
payable and revenue royalties payable are estimated to approximate their fair
values due to the short maturities of these instruments. The Company's long-term
debt obligations bear interest at floating market rates, so carrying amounts and
fair values are approximately the same.
INTEREST RATE SWAP AGREEMENT
In November 1998, the Company entered into an interest rate swap agreement
with a major financial institution. This swap hedges the interest costs
associated with $12.0 million of the Company's outstanding
F-9
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bank indebtedness and was made to protect against higher future interest rates.
The net amounts funded monthly pursuant to this swap are included in Interest
Expense on the consolidated statement of income.
INCOME TAXES
The Company provides for income taxes using the asset and liability method,
under which a deferred income tax liability or asset is recognized by applying
the enacted statutory rates to differences between the financial reporting basis
and the tax basis of assets and liabilities. The effect on deferred income taxes
of a change in tax laws or tax rates is recognized during the period of
enactment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Oil and
gas reserve estimates, which are the basis for units-of-production depletion and
limitations on capitalized costs, are inherently imprecise and are expected to
change as future information becomes available.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement requires the reporting of comprehensive income which
includes net income plus all other changes in equity during the period. The
Company adopted this statement during1998, but did not incur any items of other
comprehensive income in 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
statement requires the reporting of expanded information of a company's
operating segments. It also expands the definition of what constitutes an
entity's operating segments. The Company adopted this statement during 1998, but
currently operates in a single segment; domestic oil and gas exploration and
production.
In June 1998 the Financial Accounting Standards Board issued SFAS Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows the gains and losses on derivatives to offset related results on the
hedged item either in the income statement or in the statement of stockholders'
equity, and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The statement
is effective for fiscal years beginning after June 15, 1999. The Company is
currently evaluating the new standard but has not yet determined the impact it
will have on its financial position and results of operations.
F-10
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2: UNAUDITED PRO FORMA FINANCIAL INFORMATION
THE MERGER
Selected results of operations on a pro forma basis giving effect to the
Merger as if it took place on January 1, 1997, are as follows (in thousands,
except per share data):
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
Revenues............................. $ 8,410
========
Net income........................... $ 807
========
Basic income per share............... $ 0.02
========
Basic weighted average shares
outstanding........................ 36,526
========
Diluted income per share............. $ 0.02
========
Diluted weighted average shares
outstanding........................ 40,772
========
Adjustments reflected in the historical results to estimate the above pro
forma results of operations for the year-ended 1997 include adjustments to (1)
reduce general and administrative expenses for the effects of actual personnel
reductions implemented subsequent to the Merger, (2) recalculate depreciation,
depletion and amortization based on the combined reserves and production of
Texoil and Cliffwood and to eliminate the historical provision for impairment of
oil and gas properties recorded in 1997 by Texoil, (3) interest expense related
to debt issued in connection with the Merger, (4) interest expense on
convertible debt which was converted as a result of the Merger, (5) eliminate
preferred dividends on securities converted to common stock as a condition of
the Merger (no preferred stock dividends by Texoil were declared subsequent to
June 30, 1996 and (6) recalculate the provision for income taxes.
The unaudited pro forma amounts do not purport to be indicative of the
results of operations that would have been reported had the reverse acquisition
occurred as of January 1, 1997, or that may be reported in the future.
THE SONAT ACQUISITION
On October 30, 1998, the Company closed on a significant acquisition of oil
and gas properties in South Texas and Louisiana from Sonat Exploration Company
(Sonat properties) at a purchase price of approximately $17.1 million, net of
post-closing adjustments. The acquisition was accounted for using the purchase
method of accounting, with substantially all of the costs being allocated to oil
and gas properties. The activities of the acquired Sonat properties were
included in results of operations beginning November 1, 1998.
F-11
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected results of operations on a pro forma basis giving effect to the
acquisition as if it took place on January 1, 1997 are as follows (in thousands,
except per share data):
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
Revenues............................. $ 20,093 $ 24,604
========= =========
Net income........................... $ 871 $ 6,118
========= =========
Basic income per share............... $ .02 $ .34
========= =========
Basic weighted average shares
outstanding.......................... 38,413 17,976
========= =========
Diluted income per share............. $ .02 $ .32
========= =========
Diluted weighted average shares
outstanding.......................... 42,035 19,392
========= =========
Adjustments reflected in the historical results to estimate the above pro
forma results of operations for the years-ended December 31, 1998 and 1997
include adjustments to (1) increase operator fees pursuant to operating
agreements associated with acquired properties, (2) recalculate depreciation,
depletion and amortization based upon combined historical production, reserves
and cost basis, (3) reflect interest expense for borrowings under the increased
and amended credit facility at an estimated average annual interest rate of 8.0%
for 1998 and 7.5% for 1997 and (4) adjust income tax expense as a result of the
acquisition.
The unaudited pro forma amounts do not purport to represent what the
results of operations would have been had the acquisition of the Sonat
properties occurred on such date, or to project the Company's results of
operations for any future period.
NOTE 3: CREDIT AGREEMENT
In September 1996, the Company entered into a revolving credit agreement
(Credit Agreement) with a bank to finance property acquisitions and for
temporary working capital requirements. The Credit Agreement, as amended,
provides up to $50 million in available borrowings limited by a borrowing base
(as defined in the Credit Agreement) which was $28 million and $10 million at
December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997,
borrowings outstanding under the Credit Agreement were $25.5 million and
$50,000, respectively. The borrowing base is redetermined annually by the bank
pursuant to the Credit Agreement (or more frequently at the option of the
Company) and is reduced over a five-year period on a straight-line basis.
The Credit Agreement provides for an annual facility fee of 1/4% of the
initial borrowing base and on any increases thereto, and it also provides for
monthly interest payments at the lender's prime rate plus 1/2%. As part of
amendments to the Credit Agreement, the Company arranged a London Interbank
Offering Rate ("LIBOR") option at 1.75-2.25% over the LIBOR rate, at differing
borrowing levels. The average interest rate paid to the lender was 8.0% in 1998
and 9.0% in 1997. The Company has granted first mortgages, assignments of
production, security agreements and other encumbrances on its oil and gas
properties to the lender, as collateral, pursuant to the Credit Agreement.
Under the terms of the Credit Agreement, up to $500,000 is available under
the borrowing base for the issuance of letters of credit. At December 31, 1998
and 1997, $115,455 and $124,955, respectively, was reserved for the issuance of
letters of credit.
The Credit Agreement contains covenants which, among other things, restrict
the payment of dividends on any security, limit the amount of consolidated debt,
limit the Company's ability to make certain loans and investments, and require
that the Company remain in compliance with certain covenants of the Credit
Agreement.
F-12
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated maturities of long-term debt, assuming the present borrowing base
is unchanged as of December 31, 1998, are $2.6 million in 1999 and $22.9 million
in 2000. Management expects the maturity date to be extended based upon periodic
borrowing base reviews in accordance with the Credit Agreement.
NOTE 4: CONVERTIBLE SUBORDINATED NOTES
On December 31, 1997, the Company entered into a Note Purchase Agreement
(the "RIMCO Agreement") with four limited partnerships of which RIMCO is the
controlling general partner (the "RIMCO Lenders"). Under the RIMCO Agreement,
the RIMCO Lenders agreed to provide $10 million in financing and Texoil issued
7.875% Convertible Subordinated General Obligation Notes in the principal amount
of $10 million (the "Convertible Notes") which will mature December 31, 1999
("Maturity Date"), subject to extension pursuant to the terms of the RIMCO
Agreement. Interest is payable on the first day of each month beginning February
1, 1998. All outstanding principal plus all accrued and unpaid interest are due
and payable on the Maturity Date or upon a "Change of Control" as defined in
the RIMCO Agreement.
At any time prior to the Maturity Date, indebtedness outstanding under the
Convertible Notes is convertible by the holders, in whole or in part, into
Texoil common stock at a conversion price equal to $1.75 per share, subject to
anti-dilution adjustments. Texoil can convert all of the outstanding
indebtedness under the Convertible Notes if the average closing price per share
during a period of 20 consecutive trading days equals or exceeds 130% of the
conversion price ($2.275). If, on December 31, 1999, cash availability of Texoil
and its subsidiaries, as defined in the RIMCO Agreement, is less than the
principal and accrued and unpaid interest outstanding under the Convertible
Notes, the RIMCO Lenders can be required to convert the outstanding principal
and accrued and unpaid interest into Texoil common stock if the market price is
greater than 60% of the conversion price ($1.05). Alternatively, if the market
price is less than $1.05, then the RIMCO Lenders may elect to convert to common
shares at the market price or extend the maturity date by approximately 18
months. The Convertible Notes would have been included on an "as-if-converted"
basis within the diluted net income per common share calculation, if the Company
had earned net income, as these notes may be converted at any time at the option
of the holder. The Convertible Notes were classified as long-term in the
accompanying consolidated balance sheet as a result of the terms of the
agreement, which require an extension of the maturity date in the event the
Company does not have the cash availability to redeem the Notes and the Notes
are not converted to equity.
The indebtedness under the RIMCO Agreement is subject to the terms of the
subordination agreement among the RIMCO Lenders, Comerica Bank -- Texas, N. A.
(as agent for itself and certain other lenders), Texoil, Inc., Cliffwood Oil &
Gas Corp., Cliffwood Energy Company and Cliffwood Production Co. under which
indebtedness under the RIMCO Agreement is subordinated in right of payment and
the RIMCO Lenders are subject to restrictions on their right to exercise
remedies under the RIMCO Agreement. The subordination provisions do not affect
the ability to convert indebtedness under the RIMCO Agreement into common stock
of Texoil. The Company granted the holders of the Convertible Notes certain
registration rights in respect of shares of Texoil common stock issuable upon
conversion of debt under the Convertible Notes.
NOTE 5: STOCK OPTIONS, PERFORMANCE AWARDS AND STOCK WARRANTS
Pursuant to the terms and conditions of the Merger Agreement, the Company
assumed obligations associated with Cliffwood's 1997 Stock Option Plan and for
outstanding warrants to purchase common stock, based on the same exchange ratio
(6.74 for 1) as Texoil shares were issued for Cliffwood shares. Accordingly, the
disclosures set forth below for Cliffwood options and warrants are converted to
post-merger amounts outstanding.
F-13
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND PERFORMANCE AWARDS
In 1997, Cliffwood adopted an Incentive Stock Option Plan and a
Non-employee Director Stock Option Plan. During 1997, pursuant to these plans,
the Cliffwood Board granted to certain employees and non-employee directors of
Cliffwood options for 3,019,520 and 842,500 shares of common stock,
respectively. All options granted have an exercise price of $.52 per share and
vest over a three-year period. The following summarizes information with regard
to the Cliffwood stock option plan for the years-ended December 31, 1998 and
1997 (shares in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 3,862 $.52 -- --
Granted............................ -- -- 3,862 $.52
Exercised.......................... -- -- -- --
Forfeited.......................... -- -- -- --
-------- -------- -------- --------
Outstanding at end of year......... 3,862 $.52 3,862 $.52
======== ======== ======== ========
</TABLE>
The following table summarizes information for the options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
NUMBER OF AVERAGE WEIGHTED NUMBER OF WEIGHTED
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 LIFE IN YEARS PRICE AT 12/31/98 PRICE
- ---------------------------------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.52.................................... 3,862 2 $.52 2,574 $.52
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. APB Opinion No. 25 generally
does not require compensation costs to be recorded on options which have
exercise prices at least equal to the fair value of the underlying common stock
on the date of grant. The 181,980 performance awards granted are compensatory
under APB Opinion No. 25. During 1997, the Cliffwood Board granted certain
employees 181,980 shares of Class A Common Stock as performance awards to be
earned over a three year period beginning January 1, 1997. The shares were
issued in 1998, subject to agreements with such employees whereby any unearned
shares will be surrendered if the employee resigns or is terminated on or before
January 1, 2000. The Company will recognize approximately $93,000 of
compensation expense related to these awards, $31,000 of which was recognized in
each of 1998 and 1997.
F-14
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation costs for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans, consistent with the optional accounting method prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
1998 1997
--------- ---------
Net income (loss)....................... As reported $ (886) $ 638
Pro forma (1,002) 522
Basic earnings (loss) per share......... As reported $ (.02) $ .04
Pro forma (.03) .03
Diluted earnings (loss) per share....... As reported $ (.02) $ .03
Pro forma (.03) .03
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1997: risk-free interest rates ranging from 5.9% to 6.1%; dividend yield of 0%;
0% stock price volatility due to the non-public status of the Company during
1997; and an expected option life of three years. The weighted-average fair
value of options granted during 1997 was $.54 per option, for options granted at
fair market value. Since no new options were issued in 1998, no additional
Black-Scholes model was necessary.
STOCK WARRANTS
In connection with the formation of Cliffwood Acquisition 1996 Limited
Partnership ("CALP 96" or the "Partnership", see Note 11) and concurrent
with the joint acquisition of certain oil and gas properties on September 27,
1996, the Company issued warrants to certain limited partners of CALP 96 for the
purchase of 2,022,000 shares of Cliffwood Common Stock, at an exercise price of
$.19 per share. The fair value of the warrants was estimated by management to be
$396,000, based on a valuation of partnership reversionary interests and further
corroborated by a valuation of the Company's common stock, immediately before
and after the subject transaction, with each such valuation calculated by
management using common industry methodologies. The warrants are included in EPS
using the treasury stock method. This warrant value was reflected as an addition
to proved oil and natural gas properties and additional paid-in capital in the
Company's 1996 consolidated financial statements.
Cliffwood issued warrants to purchase common stock in connection with
certain financing activities and purchases of assets consummated in 1997. The
table set forth below lists such warrants, the exercise prices and the dates of
issuance. All warrants issued and outstanding expire five years after the date
of issuance.
<TABLE>
<CAPTION>
ISSUED EXERCISE DATE OF FMV AT DATE
WARRANTS PRICE ISSUANCE OF GRANT PRICE
------------ -------- --------- --------------
<S> <C> <C> <C> <C>
First Union Capital Markets Inc...... 1,128,950 $.63 06/01/97 $.0623
Lincoln National Life Insurance
Co................................. 1,760,825 $.63 08/04/97 $.0534
V & C Energy Limited Partnership..... 337,000 $.67 08/05/97 $.0534
Michael J. Foy....................... 92,675 $.63 08/04/97 $.0534
</TABLE>
The fair value of each warrant grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1997; risk-free interest rates ranging from 6.1% to 6.5%; dividend yield of 0%;
0% stock price volatility due to the non-public status of the Company during
1997 and an expected warrant life of five years. The weighted average fair value
of warrants granted during 1997 was $3.62 per option, for warrants granted at
fair market value. Such values were reflected as an addition to
F-15
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluated oil and natural gas properties and additional paid-in capital in the
accompanying consolidated financial statements.
No stock options, performance awards or warrants were exercised during 1998
or 1997.
NOTE 6: STOCKHOLDERS' EQUITY
Under the terms of the Merger Agreement, Texoil issued 6.74 shares of
common stock, par value $.01 per share ("Common Stock") for every share of
issued and outstanding Cliffwood Class A common stock and Class B common stock,
resulting in the issuance of approximately 25,632,159 shares of Texoil Common
Stock, or approximately 70% of the shares of Texoil Common Stock outstanding at
December 31, 1997. In addition, in 1997 Texoil issued replacement warrants and
options to holders of Cliffwood warrants and options representing obligations to
issue, upon exercise of such replacement warrants or options, up to 9,203,470
shares of Texoil Common Stock. The "Issuance of Texoil, Inc., shares to effect
the business combination" caption included in the accompanying consolidated
statement of stockholders' equity represents the common shares issued to the
existing stockholders of Texoil. The fair value of the net assets acquired from
such former stockholders was approximately $3.1 million.
During 1998, the Company issued 2,708,094 shares of Class A Common Stock. A
total of 898,000 shares were issued in connection with the purchase of certain
oil and gas properties. The remainder of the shares were issued as performance
awards and in exchange for the surrender of Cliffwood warrants.
NOTE 7: INCOME TAXES
The following table shows the components of the Company's income tax
provision (benefit) (in thousands):
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Deferred:
Federal......................... $ (654) $ 358
State........................... (54) 30
Change in deferred tax asset
valuation allowance............. (295) --
--------- ---------
$ (1,003) $ 388
========= =========
A reconciliation of taxes computed at the corporate federal income tax rate
to the reported income tax provision (benefit) is as follows (in thousands):
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Statutory Federal income tax
provision (benefit)................ $ (654) $ 358
State income tax provision
(benefit).......................... (54) 30
Change in deferred tax asset
valuation allowance................ (295) --
--------- ---------
Income taxes as reported............. $ (1,003) $ 388
========= =========
F-16
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the components of the Company's net deferred tax
asset or liability (in thousands):
AS OF
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Deferred tax liabilities:
Net oil and gas property costs
expensed for tax, but
capitalized for financial
statements.................... 1,385 315
--------- ---------
Deferred tax liability..... 1,385 315
--------- ---------
Deferred tax asset:
Net operating loss
carryforward.................. 4,389 4,052
Credit carryforwards............ 59 52
Statutory depletion
carryforwards................. 1,068 813
Valuation allowance............. (3,343) (4,817)
--------- ---------
Deferred tax asset......... 2,173 100
--------- ---------
Net deferred tax asset
(liability)................... $ 788 $ (215)
========= =========
Section 382 of the Internal Revenue Code of 1986 (Section 382), as amended,
limits the availability of the Net Operating Loss ("NOL") and Investment Tax
Credit ("ITC") carryforwards if there is a change of ownership of more than
50% of the Company within a retroactive three-year period. Due to the Merger
Agreement and change in ownership, the Company will be limited in its future
utilization of the NOL and ITC carryforwards to an amount equal to the product
of the federal long-term tax-exempt bond rate prescribed by the Internal Revenue
Service and the fair market value of the Company immediately prior to the time
of the ownership change. Therefore, in 1997 the Company recorded a valuation
allowance against its deferred tax assets to reflect the estimated portion for
which realization is uncertain.
At December 31, 1998, the Company's NOL, depletion, and tax credit
carryforwards were approximately $11.1 million, $2.8 million, and $59,000,
respectively, of which the NOL's begin to expire in 2000. In the fourth quarter
of 1998 the Company adjusted its valuation allowances to recognize a net
deferred tax asset of $788,000 because realization of a portion of the
carryforwards are now considered by management to be more likely than not. The
related determination of future income tax benefits considered projections of:
(1) future taxable income and expense items, including those whose timing and
income tax treatment are within the control of the Company, (2) cash flows from
proved oil and gas properties based on independently prepared reserve reports
(including the effects of the recent Sonat properties acquisition), (3)
expiration periods and the effects of Internal Revenue Service Section 382 and
separate return limitations which apply to portions of the net operating loss
carryforwards acquired in the Merger, (4) statutory depletion and investment tax
credit carryforwards and (5) other factors deemed by management to be relevant.
This determination could be changed in future periods as economic conditions
(primarily oil and gas sales prices) change, or the Company's financial and
income tax basis and carryforward positions change.
NOTE 8: INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement to manage the
exposure to interest rate risk caused by its floating rate credit facility. At
December 31, 1998, the Company had one interest rate swap agreement outstanding
with a commercial bank, having a total notional principle amount of $12 million.
This agreement effectively fixes the Company's interest rate on this portion of
its debt to a 5.25% LIBOR rate plus 1.75% to 2.25%, as stipulated in the Credit
Agreement.
F-17
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the interest rate swap instrument was $4,812 at December
31, 1998. The Company is exposed to credit loss in the event of non-performance
by the other party to the interest rate swap agreement. However, the Company
does not anticipate non-performance by the counterparty.
NOTE 9: CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss which the Company would record
if its customers failed to perform pursuant to the contractual terms. The
Company's two largest customers are large multinational companies. In addition,
the Company transacts business with independent oil producers, crude oil trading
companies and a variety of other entities. The Company's credit policy and the
relatively short duration of receivables mitigate the risk of uncollected
receivables.
Accounts receivable for oil and natural gas sales from five customers
amounted to 51% and 58% of the outstanding balance at December 31, 1998 and
1997, respectively. Sales to three customers accounted for 33% and 49% of oil
and natural gas revenues for 1998 and 1997, respectively. No other purchaser of
the Company's products accounted for as much as 10% of total sales during 1998
or 1997.
NOTE 10: COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Minimum future lease commitments in connection with office space and
equipment leased by the Company are: $80,916 in 1999, $6,743 in 2000, and zero
thereafter. Rental payments made under the terms of current agreements totaled
$72,165 and $61,945 in 1998 and 1997, respectively. In addition, the Company
paid rents in the total amount of $75,412 under a lease obligation resulting
from the Merger. This obligation terminated September 30, 1998. No such payments
were made in 1997. The Company has entered into various commitments and
operating agreements related to substantially all of its oil and natural gas
properties. It is management's belief that such commitments will be met without
a significant adverse impact on the Company's financial position or results of
operations.
CONTINGENCIES
No significant legal proceedings are pending which are expected to have a
material adverse effect on the Company. The Company is unaware of any potential
claims or lawsuits involving environmental, operating or corporate matters which
are expected to have a material adverse effect on the Company's financial
position or results of operations.
NOTE 11: RELATED-PARTY TRANSACTIONS
INVESTMENT IN PARTNERSHIP
In May 1998, the Company acquired all of the properties of the CALP 1996
Limited Partnership and formed a new Partnership, the Cliffwood 1998 Acquisition
Partnership ("CALP"). The Partnership is a limited partnership formed to
acquire interests in oil and gas properties. Generally, the Company funds
fifteen percent (15%) of the Partnership's capital requirements and may earn up
to sixty percent (60%) of Partnership cash flows, predicated upon achieving the
recovery of invested funds plus a specified rate of return for the limited
partners. In accordance with certain agreements, the Company must offer the
Partnership 30% of future acquisitions sponsored by the Company up to the
Partnership capital limit of $15 million. The Company uses the proportionate
consolidation method of accounting for this investment.
F-18
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MANAGEMENT
The Company entered into certain transactions with management, including
Frank A. Lodzinski, President. A summary of related-party transactions is as
follows:
Energy Resource Associates, Inc. ("ERA"), a Texas corporation, is solely
owned and controlled by Mr. Lodzinski. ERA is also the General Partner of the
V&C Energy Limited Partnership ("V&C") which has participated with Cliffwood
in several of its acquisitions, at cost. In September 1997, V&C sold certain oil
& gas properties to the Company for $2.5 million in cash, 100,000 shares of
Cliffwood stock and 50,000 warrants to purchase Cliffwood common stock at a
price of $4.50 per share.
INVESTMENT IN JOINT VENTURE
The Company maintains a majority interest in Cliffwood-Blue Moon Joint
Venture, Inc. (CBJV). The objective of the Joint Venture is to generate and
lease exploratory, exploitation and development prospects, using fully
integrated 3-D seismic data along with well control, engineering and other data,
thereby reducing drilling risk. Of these prospects, the Company generally
intends to retain a 10% to 30% interest in all prospects and sell the rest to
industry or other partners.
RESOURCE INVESTORS MANAGEMENT COMPANY (RIMCO)
Gary J. Milavec, Vice President of RIMCO, is a member of the Company's
Board of Directors. In connection with the Merger, RIMCO provided $10 million of
financing to the Company as described in Note 4 to these financial statements.
NOTE 12: SUBSEQUENT EVENTS
HEDGING TRANSACTIONS
With the objective of reducing the risks associated with the volatility of
oil and gas prices, the Company entered into a commodity price swap transaction
with First Union National Bank, effective February 1, 1999. The notional
quantity of the contract is 100,000 MMBtu per month, referenced at delivered
spot gas prices -- Houston Ship Channel with a strike price of $2.17 per MMBtu.
The termination date of the contract is October 31, 1999. A similar price swap
transaction was also entered into for the period February 1, 2000, through
October 31, 2000, at a strike price of $2.16 per MMBtu.
F-19
<PAGE>
TEXOIL, INC.
SUPPLEMENTARY OIL & GAS INFORMATION
COSTS INCURRED IN OIL & GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
($000'S)
Acquisition of properties:
Evaluated....................... $ 23,703 $ 9,608
Unevaluated..................... 3,069 4,618
Exploration costs.................... 420 --
Development costs.................... 1,581 906
--------- ---------
Total costs incurred............ $ 28,773 $ 15,132
========= =========
CAPITALIZED COSTS RELATING TO OIL & GAS PRODUCING ACTIVITIES
DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
($000'S)
Evaluated properties................. $ 42,933 $ 16,021
Unevaluated properties............... 6,479 4,618
--------- ---------
$ 49,412 $ 20,639
Less: Accumulated depreciation,
depletion and amortization......... 5,138 1,292
--------- ---------
Net capitalized costs........... $ 44,274 $ 19,347
========= =========
The projects represented by unevaluated properties and associated costs
were undergoing exploration or evaluation activities or are projects in which
the Company intends to commence such activities in the future. Of the
approximately $6.5 million in net unevaluated property costs at December 31,
1998, that are being excluded from the amortizable base, $3.1 million was
incurred in 1998, and $3.4 million was incurred in 1997. The Company will begin
to amortize these costs when proved reserves are established or an impairment is
determined. The Company believes this determination will occur in 24 to 36
months.
See accompanying notes to supplementary information.
F-20
<PAGE>
TEXOIL, INC.
SUPPLEMENTARY OIL & GAS INFORMATION
RESERVE QUANTITY INFORMATION
YEARS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
--------------- ---------------
OIL GAS OIL GAS
MBBL MMCF MBBL MMCF
----- ------ ----- ------
Proved reserves:
Beginning of year.................. 4,703 11,622 1,684 4,622
Acquisitions.................... 4,539 26,374 2,798 7,538
Extensions, discoveries and
improved recovery............. 327 1,350 136 302
Revisions of previous
estimates..................... 246 (163) 340 (133)
Production...................... (518) (1,468) (255) (707)
Sales of reserves in-place...... (84) (156) -- --
----- ------ ----- ------
End of year........................ 9,213 37,559 4,703 11,622
===== ====== ===== ======
Proved developed reserves
End of year........................ 7,341 28,643 4,138 7,294
===== ====== ===== ======
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW RELATING TO PROVED OIL & GAS RESERVES
DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---------- ----------
($000'S)
Future cash inflows.................. $ 168,967 $ 105,530
Future production and development
costs
Production costs and taxes...... (76,648) (53,940)
Development and abandonment..... (14,563) (5,338)
Future income tax expenses........... (27,233) (10,909)
---------- ----------
Future net cash flows................ 50,523 35,343
Discount at 10% per annum............ (19,829) (14,823)
---------- ----------
Standardized measure of discounted
future net cash flow............... $ 30,694 $ 20,520
========== ==========
Standardized measure before
income taxes................... $ 46,191 $ 27,116
========== ==========
See accompanying notes to supplementary information.
F-21
<PAGE>
TEXOIL, INC.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN RELATING
TO PROVED OIL AND GAS RESERVES
YEARS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows during 1998 and 1997:
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
($000'S)
Standardized measure of discounted
future net cash flows,
beginning of year..................... $ 20,520 $ 12,759
Purchases of reserves................... 32,682 14,828
Extensions, discoveries and improved
recovery, net of costs................ 3,163 1,095
Revisions of previous quantity
estimates............................. 566 2,575
Net changes in prices and production
costs................................. (12,279) (7,228)
Changes in estimated future development
costs................................. (2,254) (228)
Development costs incurred during period
that reduced future
development costs..................... 536 208
Sales of oil and gas produced during
period, net of production costs....... (3,537) (2,874)
Net change in income taxes.............. (8,900) (1,613)
Sales of reserves....................... (530)
Accretion of discount................... 2,712 1,774
Other (changes in production rates,
timing and other)..................... (1,985) (776)
--------- ---------
Standardized measure of discounted
future net cash flows, end of year.... $ 30,694 $ 20,520
========= =========
See accompanying notes to supplementary information.
F-22
<PAGE>
TEXOIL, INC.
NOTES TO SUPPLEMENTARY OIL AND GAS INFORMATION
(UNAUDITED)
1. PRESENTATION AND RESERVE DISCLOSURE INFORMATION
Reserve disclosure information is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 69 ("SFAS 69"),
"Disclosures About Oil and Gas Producing Activities".
2. DETERMINATION OF PROVED RESERVES
The estimate of the Company's proved reserves were determined by
independent petroleum engineers in accordance with the provisions of SFAS 69 and
applicable rules of the Securities and Exchange Commission. The estimates of
proved reserves are inherently imprecise and are continually subject to revision
based on production history, results of additional exploration and development
and other factors. Estimated future cash flows were computed by applying prices
of oil and gas received by the Company at the end of the indicated periods to
estimated future production of proved reserves, less estimated future
development and production costs, which were estimated based on current costs.
3. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves and the changes of standardized measure of
discounted future net cash flows relating to proved oil and gas reserves were
prepared in accordance with the provisions of SFAS 69. Future cash inflows are
computed as described in Note 2 above by applying current prices to year-end
quantities of proved reserves. Future production and development costs are
computed estimating the expenditures to be incurred in developing and producing
the oil and gas reserves at year-end, based on year-end costs and assuming
continuation of existing economic conditions.
Future income tax expenses are calculated by applying the year-end U.S. tax
rate to future pre-tax cash inflows relating to proved oil and gas reserves,
less the tax basis (including any applicable net operating loss carryforwards)
of oil and gas properties involved. Future income tax expenses give effect to
permanent differences and tax credits and allowances relating to the proved oil
and gas reserves.
Future net cash flows are discounted at a rate of 10% annually (pursuant to
SFAS 69) to derive the standardized measure of discounted future net cash flows.
This calculation does not necessarily represent an estimate of fair market value
or the present value of such cash flows since future prices and costs can vary
substantially from year-end and the use of a 10% discount figure is arbitrary.
F-23
EXHIBIT 3.2
RESTATED ARTICLES OF INCORPORATION (AMENDMENTS)
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
TEXOIL, INC.
1. The name of the corporation is Texoil, Inc. (the "CORPORATION".)
2. The Board of Directors of the Corporation has adopted resolutions (i)
proposing amendments to the Articles of Incorporation of the Corporation, (ii)
declaring the advisability of such proposed amendments, and (iii) submitting the
proposed amendments to the stockholders of the Corporation entitled to vote for
the consideration thereof.
3. The Articles of Incorporation of the Corporation, as amended, are
hereby amended by deleting the language contained in Article 4 in its entirety
and substituting the following therefore;
"ARTICLE 4"
The total number of shares that the Corporation shall have
authority to issue is 60,000,000 common shares with a par value of $.01 per
share and 10,000,000 preferred shares with a par value of $.01 per share.
The shares of preferred stock authorized hereby may, when
authorized for issuance by the Board of Directors of this Corporation, be issued
in a series having such designations, powers, preferences, rights and
limitations, and on such terms and conditions as the Board of Directors may from
time to time determine including the rights, if any, of the holders thereof with
respect to voting, dividends, redemption, liquidation and conversion.
Any and all shares of the stock of this Corporation of any class
shall be paid in as the Board of Directors may designate and as provided by law,
in cash, real or personal property, option to purchase, or any other valuable
right or thing, for the uses and purpose of the Corporation, and said shares of
stock when issued in exchange therefore shall thereupon and thereby become and
be fully paid, the same as though paid for in cash, and shall be nonassessable
forever; and the judgment of the Board of Directors of the corporation
concerning the value of the property, right or thing acquired in purchase or
exchange for stock shall be conclusive. No stockholder shall, whether common or
preferred, have any pre-emptive rights.
4. The Corporation currently has a total of 50,000,000 shares of Common
Stock authorized, of which 36,707,618 shares of Common Stock are outstanding and
entitled to vote on the amendment herein. A total of 24,090,976 shares voted for
this amendment, being a majority of the issued and outstanding shares. The
Corporation has 10,000,000 shares of Series A Preferred stock authorized, of
which none is issued and outstanding. The majority of the stockholders of the
Corporation have adopted the amendment herein set forth by written consent in
accordance with Section 78.320 of the Nevada Revised Statutes and Section 1.9 of
the bylaws of the Corporation, as amended.
33
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to the Articles of Incorporation of Texoil, Inc. to be executed by
Frank A. Lodzinski, its President and Jerry M. Crews, its Secretary, this 27th
day of May, 1998.
TEXOIL, INC.
/S/ FRANK A. LODZINSKI
Frank A. Lodzinski, President
ATTEST:
/S/ JERRY M. CREWS
Jerry M. Crews, Secretary
STATE OF TEXAS )
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me, on the 27th day of
May, 1998, by Frank A. Lodzinski, President, and Jerry M. Crews, Secretary, of
Texoil, Inc., a Nevada corporation, on behalf of the corporation.
/S/ SHIRLEY R. DUDERSTADT
Notary Public in and for
The State of Texas
34
EXHIBIT 3.4
RESTATED BYLAWS (AMENDMENTS)
ARTICLE VII
INDEMNIFICATION, INSURANCE
AND OTHER FINANCIAL ARRANGEMENTS
SECTION 7.1 INDEMNIFICATION.
(a) The Corporation shall indemnify any officer, director, employee or
other agent of the Corporation who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except an action by or
in the right of the Corporation, by reason of the fact that he or she is or was
a director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(whether or not for profit), against expenses, including attorneys' fees, fees
of consultants or experts, accounting fees, expert witness fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by that
person in connection with the action, suit or proceedings if he or she acted in
good faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Corporation, and with respect to any
criminal action or proceeding, has no reasonable cause to believe that the
conduct was unlawful.
(b) The Corporation shall indemnify any officer, director, employee or
other agent who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (whether or not for profit), against expenses, including
amounts paid in settlement and attorneys' fees, fees of consultants or experts,
accounting fees, expert witness fees and other expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action or suit if he or she acted in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation. Indemnification may not be made for any claim, issue or matter as
to which such a person has been adjudged by a court of competent jurisdiction
after exhaustion of all appeals therefrom, to be liable to the Corporation or
for amounts paid in settlement to the Corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines, upon application, that in view of all of the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
(c) The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, and that, with respect
to any criminal action or proceedings, he or she had reasonable cause to believe
that the conduct was unlawful.
35
<PAGE>
(d) Any indemnification under subsections (a) and (b) of this Section
7.1, unless ordered by a court or advanced pursuant to subsection (e) of this
Section 7.1, must be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances. In the event that such person
determines that a request for indemnification is appropriate, the person must
send written notice to the Corporation to request indemnification, and include
reasonable detail of the expenses incurred. The Corporation shall have thirty
(30) days to make the determination of the propriety of the indemnification. The
determination must be made:
(i) by the affirmative vote of a majority of disinterested
stockholders, whether or not the total number of disinterested stockholders is
sufficient for a quorum under state law or these bylaws;
(ii) By the Board of Directors by majority vote of a quorum
(which must be a minimum of two [2] directors) consisting of directors who were
not parties to the act, suit or proceeding;
(iii) If a majority vote of a quorum (which must be a minimum of
two [2] directors) consisting of directors who were not parties to the act, suit
or proceeding so orders, by independent legal counsel in a written opinion; or
(iv) If a minimum quorum of two (2) directors who were not
parties to the act, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
(v) If the Corporation determines that indemnification is not
appropriate, or fails to make a determination within thirty (30) days, such
person shall have an immediate right to file a cause of action against the
Corporation, at law or in equity, to determine or enforce such person's right
under these Bylaw provisions.
(e) The Corporation shall advance the expenses of such person incurred
in defending a civil or criminal action, suit or proceeding as they are incurred
and in advance of a final disposition of the action, suit or proceeding, whether
or not such person is actually named a defendant or respondent in a proceeding,
within thirty (30) days after receipt by the Corporation, sent via receipted
delivery service to the attention of the President and Secretary of the
Corporation at the address set forth above, of notice of a request for
advancement of expenses pursuant to this Agreement and the Bylaws of the
Corporation, which must include an undertaking by or on behalf of such person to
repay amounts advanced if it is ultimately determined by a court of competent
jurisdiction that such person is not entitled to be indemnified by the
Corporation pursuant to the terms hereof. The undertaking to repay must be
accepted by the Corporation regardless of the creditworthiness of such person at
the time of the delivery of the undertaking.
(f) The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this Section 7.1:
(i) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the Articles of
Incorporation or any Bylaw, agreement, vote of stockholders or disinterested
directors, insurance policy or otherwise, for either an action in his
36
<PAGE>
or her official capacity or an action in another capacity while holding his or
her office, except that indemnification, unless ordered by a court pursuant to
subsection (b) of this Section 7.1 or for the advancement of expenses made
pursuant to subsection (e) of this Section 7.1.
(ii)Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
(g) Any change or amendment in these Bylaws that would adversely affect
the rights granted to the indemnified person shall be prospective only and shall
not be operative to adversely affect any rights of any person entitled to
indemnification hereunder.
SECTION 7.2 INSURANCE. The Corporation may purchase and maintain
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (whether or not for profit) for any liability asserted against him
and liability and expenses incurred by him in his capacity as a director,
officer, employee or agent, or arising out of his status as such, whether or not
the Corporation has the authority to indemnify him against such liability and
expenses.
SECTION 7.3 OTHER FINANCIAL ARRANGEMENTS.
(a) The other financial arrangements which may be made by the
Corporation pursuant to Section 7.2 may include, but are not limited to, the
following:
(i) The creation of a trust fund.
(ii) The establishment of a program of self-insurance.
(iii) The securing of its obligation of indemnification by
granting a security interest or other lien on any assets of the Corporation.
(iv) The establishment of a letter of credit, guaranty or surety.
(b) No financial arrangement made pursuant to this Section 7.3 may
provide protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable for intentional
misconduct, fraud or a knowing violation of law, except with respect to the
advancement of expenses or indemnification ordered by a court.
(c) Any insurance or other financial arrangement made on behalf of a
person pursuant to this Section may be provided by the Corporation or any other
person approved by the Board of Directors, even if all of the other person's
stock or other securities is owned by the Corporation.
SECTION 7.4 GENERAL. In the absence of intentional misconduct, fraud or
a knowing violation of law:
(a) The decision of the Board of Directors as to the propriety of the
terms and conditions of any insurance or other financial arrangement made
pursuant to Sections 7.2 or 7.3 and the choice of
37
<PAGE>
the person to provide the insurance or other financial arrangement is
conclusive; and
(b) The insurance or other financial arrangement:
(i) Is not void or voidable; and
(ii) Does not subject any director approving it to personal
liability for his action, even if a director approving the insurance or other
financial arrangement is a beneficiary of the insurance or other financial
arrangement.
38
EXHIBIT 4.20
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
This First Amendment to Note Purchase Agreement (this "First Amendment")
dated as of October 29, 1998 is between TEXOIL, INC., a Nevada corporation (the
"COMPANY"), and RIMCO PARTNERS, L.P., a Delaware limited partnership, RIMCO
PARTNERS, L.P. II, a Delaware limited partnership, RIMCO PARTNERS, L.P. III, a
Delaware limited partnership, and RIMCO PARTNERS, L.P. IV, a Delaware limited
partnership (collectively, the "NOTEHOLDERS").
PRELIMINARY STATEMENTS
A. The Company and the Noteholders have heretofore entered into that
certain Note Purchase Agreement dated December 31, 1997 (the "NOTE AGREEMENT").
B. The Company and the Noteholders now desire to amend the Note Agreement
with respect to the matters set forth herein.
C. Capitalized terms used herein shall have the respective meanings
described thereto in the Note Agreement unless herein defined or the context
shall otherwise require.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the Company and the Noteholders agree as follows:
SECTION 1. AMENDMENT.
Section 10.03(a) of the Note Agreement is hereby amended in its entirety
to read as follows:
"(a) its Current Assets, at any time, to be less than the sum of (i)
its Current Liabilities as at such date, minus (ii) any portion of such Current
Liabilities consisting of amounts owing on the Notes or the Senior Debt; or"
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
2.1 The Company represents and warrants to the Noteholders that:
(a) this First Amendment has been duly authorized, executed and
delivered by it and this First Amendment constitutes the legal, valid and
binding obligation of the Company enforceable against it in accordance
with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally;
-1-
<PAGE>
(b) The Note Agreement, as amended by this First Amendment,
constitutes the legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles relating to or limiting creditors'
rights generally;
(c) the execution, delivery and performance by the Company of this
First Amendment (i) has been duly authorized by all requisite corporate
action and, if required, shareholder action, (ii) does not require the
consent or approval of any governmental or regulatory body or agency, and
(iii) will not (A) violate (1) any provision of law, statute, rule or
regulation or its certificate of incorporation or bylaws, (2) any order of
any court or any rule, regulation or order of any other agency or
government binding upon it, or (3) any provision of any material
indenture, agreement or other instrument to which it is a party or by
which its properties or assets are or may be bound, or (B) result in a
breach or constitute (alone or with due notice or lapse of time or both) a
default under any such indenture, agreement or other instrument;
(d) as of the date hereof and after giving effect to this First
Amendment, no Default or Event of Default has occurred which is
continuing; and
(e) all representations and warranties contained in Article V of the
Note Agreement and in the other Transaction Documents are true and correct
in all material respects with the same force and effect as if made by the
Company on and as of the date hereof.
SECTION 3. CONDITIONS TO EFFECTIVENESS OF THIS FIRST AMENDMENT.
3.1 This First Amendment shall become effective upon execution and
delivery by all parties hereto.
SECTION 4. PAYMENT OF NOTEHOLDERS' COUNSEL FEES AND EXPENSES.
4.1 The Company agrees to pay upon demand, the reasonable fees and
expenses of Andrews & Kurth L.L.P., counsel to the Noteholders, in connection
with the negotiation, preparation, approval, execution and delivery of this
First Amendment.
SECTION 5. MISCELLANEOUS.
5.1 This First Amendment shall be construed in connection with and as part
of the Note Agreement, and except as modified and expressly amended by this
First Amendment, all terms, conditions, and covenants contained in the Note
Agreement, the Notes and the other Transaction Documents are hereby ratified and
shall be and remain in full force and effect.
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5.2 Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this First Amendment
may refer to the Note Agreement without making specific reference to this First
Amendment but nevertheless all such references shall include this First
Amendment unless the context otherwise requires.
5.3 The descriptive headings of the various Sections or parts of this
First Amendment are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
5.4 This First Amendment shall be governed by and construed in accordance
with New York law.
IN WITNESS WHEREOF, the Company and the Noteholders have caused this First
Amendment to be duly executed and delivered by their duly authorized
representatives as of the date first above written.
TEXOIL, INC.
By: /S/ FRANK A. LODZINSKI
Name: FRANK A. LODZINSKI
Title: PRESIDENT
RIMCO PARTNERS, L.P.,
RIMCO PARTNERS, L.P. II,
RIMCO PARTNERS, L.P. III, AND
RIMCO PARTNERS, L.P. IV
By:RESOURCE INVESTORS MANAGEMENT COMPANY
LIMITED PARTNERSHIP, THEIR GENERAL
PARTNER
By:RIMCO ASSOCIATES, INC.,
ITS GENERAL PARTNER
By: /S/ GARY MILAVEC
Gary Milavec
Vice President
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EXHIBIT 4.21
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 30th day
of December, 1997, by and among Comerica Bank-Texas, N.A., as Agent for the
Senior Creditors (defined below) ("AGENT"), RIMCO Partners, L.P., RIMCO
Partners, L.P. II, RIMCO Partners, L.P. III, and RIMCO Partners, L.P. IV (each a
"SUBORDINATE LENDER" and collectively, the "SUBORDINATED LENDERS"), Cliffwood
Oil & Gas Corp. ("Cliffwood"), Cliffwood Energy Company ("CEC") and Cliffwood
Production Company ("CPC") (Cliffwood, CEC and CPC, together with their
successors and assigns, the "Borrowers") and the other Loan Parties (defined
below) and is made for the express benefit of the Senior Creditors.
RECITALS
WHEREAS, Senior Creditors have made, or in the future may make, credit
accommodations available to one or more of the Loan Parties; and
WHEREAS, Subordinate Lenders have made, or in the future may make, credit
accommodations available to one or more of the Loan Parties.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and the provisions
set forth herein, $10 in hand paid and other good and valuable considerations,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. DEFINITIONS. (a) For purposes of this Agreement, the following
terms used herein shall have the following meanings:
"BORROWER" means one of the Borrowers, and its successors and
assigns, including any estate created or other successor arising in or in
connection with any Proceeding.
"BORROWERS" has the meaning assigned to it in the initial paragraph
of this Agreement and includes any estate created or other successor
arising in or in connection with any Proceeding.
"COLLATERAL" shall mean any and all property which now constitutes
or hereafter will constitute collateral or other security for payment of
the Senior Debt pursuant to the Senior Loan Documents.
"ENFORCEMENT NOTICE" means a notice that states that a default or an
event of default under any provision of the Subordinate Loan Documents has
occurred and that Subordinate Creditor desires to take enforcement action
as a consequence thereof.
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"LOAN DOCUMENTS" means this Agreement, the Senior Loan Documents and
the Subordinate Loan Documents.
"LOAN PARTY" means each Borrower and any affiliates of each Borrower
(and their respective successors and assigns) who now or hereafter
executes and delivers any guaranties or security documents in favor of any
Senior Creditor with respect to Senior Debt or in favor of Subordinated
Creditor with respect to Subordinate Debt.
"PROCEEDING" shall mean any (a) insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment,
composition or other similar proceeding relating to any Loan Party or any
of their respective properties, whether under any bankruptcy,
reorganization or insolvency law or laws, federal or state, or any law,
federal or state, relating to relief of debtors, readjustment of
indebtedness, reorganization, composition or extension, (b) proceeding for
any liquidation, liquidating distribution, dissolution or other winding up
of any Loan Party, voluntary or involuntary, whether or not involving
insolvency or bankruptcy proceedings, (c) assignment for the benefit of
creditors of any Loan Party or (d) other marshalling of the assets of any
Loan Party.
"PROCEEDS" shall have the meaning assigned to it under the Texas
Uniform Commercial Code, shall also include "products" (as defined in the
Texas Uniform Commercial Code), and, in any event, shall include (a) any
and all proceeds of any insurance, indemnity, warranty, letter of creditor
or guaranty or collateral security payable to any grantor from time to
time with respect to any of the Collateral, (b) any and all payments (in
any form whatsoever) made or due and payable to the owner of the
Collateral from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of
the Collateral by any governmental body, authority, bureau or agency (or
any person acting under color of governmental authority) and (c) any and
all other amounts from time to time paid or payable under or in connection
with any of the Collateral.
"SENIOR CREDITOR" means, individually, one of the lenders to the
Borrowers pursuant to the Senior Loan Documents and, collectively, all of
the lenders, together with any and all other present or future holders of
all or part of the Senior Debt, and their respective successors and
assigns. As of the date hereof, Comerica Bank-Texas and First Union
National Bank are the Senior Creditors.
"SENIOR DEBT" shall mean and include (a) all indebtedness,
obligations and liabilities of any Loan Party under Senior Loan Documents,
including all principal, interest (including interest accruing subsequent
to, and interest that would have accrued but for, the filing of any
petition under any bankruptcy, insolvency or similar law or the
commencement of any Proceeding), expenses, fees, reimbursements,
indemnities, interest rate protection agreements, hedge and swap
obligations, commodity hedging contracts, and other amounts payable
thereunder, in each case whether now or hereafter arising, direct or
indirect, primary or secondary, joint, several or joint and several,
liquidated or, unliquidated, final or contingent, and whether incurred as
maker, endorser, guarantor or otherwise; (b) the principal amount of and
interest (including but not limited to post-petition interest) on all
other indebtedness, obligations, and liabilities of every nature of each
Borrower to Senior Creditors or any or
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some of them, or to any other person, firm or entity (including but not
limited to a Borrower) if a Senior Creditor has a participation or other
interest in such indebtedness, obligations or liabilities to such other
person, created directly or indirectly, acquired by assignment or
otherwise, absolute or contingent, joint or several, liquidated or
unliquidated, due or not due, contractual or tortious, secured or
unsecured, for a Senior Creditor's own account or as agent for others,
whether now existing or hereafter arising or incurred, whether presently
contemplated by the parties and whether incurred by the Borrower as
principal, maker, surety, endorser, guarantor or otherwise (including but
not limited to any indebtedness, obligations, and liabilities existing on
the date hereof); and (c) any and all amendments, modifications,
extensions, renewals, refinancings, replacements or refundings of any of
such indebtedness, obligations or liabilities; PROVIDED, HOWEVER, that the
principal portion of Senior Debt (including notional amounts of swap and
hedging transactions, but after giving effect to netting provisions) shall
not exceed $35,000,000. To the extent any payment on any Senior Debt,
whether by or on behalf of a Borrower, as proceeds of security or
enforcement of any right of setoff or otherwise, is recovered by or
required to be paid over to a Borrower or a receiver, trustee in
bankruptcy, liquidating trustee, agent or other person in a Proceeding,
such Senior Debt or any part thereof originally intended to be satisfied
by such payment shall be deemed to be reinstated and outstanding as if
such payment had not occurred. All outstanding Senior Debt shall be and
remain Senior Debt for all purposes of this Agreement, regardless of
whether it is subordinated in any Proceeding.
"SENIOR LOAN DOCUMENTS" shall mean all instruments, documents and
agreements now or hereafter executed by or on behalf of one or more of the
Borrowers for the benefit of Agent or any Senior Creditor, or some or all
of them.
"SUBORDINATE CREDITOR" means, individually and collectively,
Subordinate Lenders and all other present or future holders of all or part
of the Subordinate Debt, and their respective successors and assigns.
"SUBORDINATE DEBT" shall mean and include all indebtedness,
obligations and liabilities of any Loan Party (including Texoil, Inc.) to
the Subordinate Creditor, including all principal, interest (including
post-petition interest accrued or principal sums advanced subsequent to
the filing of any petition under any bankruptcy, insolvency or similar
law), put rights, expenses, fees, reimbursements, indemnities and other
amounts payable thereunder, in each case whether now or hereafter arising,
direct or indirect, primary or secondary, joint, several or joint and
several, liquidated or unliquidated, final or contingent and whether
incurred as a maker, endorser, guarantor or otherwise.
"SUBORDINATE LOAN DOCUMENTS" shall mean all instruments, documents
and agreements now or hereafter executed by or on behalf of one or more of
the Borrowers or Texoil, Inc. for the benefit of Subordinate Creditor, or
some or all of them.
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(b) GENERAL RULES. References to various agreements in this Section 1 include
any and all amendments, modifications, renewals, extensions, substitutions,
restatements, replacements and amendments and restatements with respect thereto.
Section 2. GENERAL. Notwithstanding any provision of the Subordinate Loan
Documents, the Subordinate Debt is and shall be subordinate and junior in right
of payment, to the extent and in the manner provided in this Agreement, to the
prior payment in full in cash or cash equivalents of all Senior Debt, and each
Subordinate Creditor, by acceptance thereof, whether upon original issuance,
transfer, assignment or exchange, agrees to be bound by the provisions of this
Agreement.
Section 3. SUBORDINATION IN THE EVENT OF CERTAIN DEFAULTS. Subordinated
Creditor and each Loan Party agree as follows:
(a) If, from time to time, any default in the payment on account of
any principal of or interest on, or any other amounts owing in respect of any
Senior Debt (whether at maturity or at a date fixed for prepayment or by
declaration, acceleration or otherwise) occurs or exists, then (i) the rights of
Subordinate Creditor to receive any payments or other distributions with respect
to the Subordinate Debt shall be suspended from and after the date of such
default, and (ii) no payment or distribution of any character, whether in cash
or cash equivalents, securities or other property (other than as permitted in
Section 3(c) below) shall be made by any Loan Party, or received or accepted by
Subordinate Creditor, on account of the Subordinate Debt until the Senior Debt
is paid in full or all defaults are cured.
(b) If, from time to time, any default, other than a payment
default, under the Senior Loan Documents occurs or exists, then (i) the rights
of Subordinate Creditor to receive any payments or other distributions with
respect to the Subordinate Debt shall be suspended from and after the date that
Subordinate Creditor receives a notice to suspend payments under the Subordinate
Debt (a "STOP PAYMENT NOTICE"), and (ii) no payment or distribution of any
character, whether in cash or cash equivalents, securities or other property
(other than as permitted in Section 3(c) below) shall be made by any Loan Party,
or received or accepted by Subordinate Creditor from any Loan Party, on account
of the Subordinate Debt, or in respect of the redemption, retirement, purchase
or other acquisition thereof, unless and until such default shall have been
cured or waived or 179 days shall have elapsed since the date upon which
Subordinate Creditor received such Stop Payment Notice, whichever is earlier,
unless a payment default is then outstanding (including as a result of
acceleration of the Senior Debt following a non-payment default in which event
Section 3(a) shall govern); provided, however, that the Senior Creditors shall
not be entitled to send a Stop Payment Notice for a period of 179 days after the
expiration of a Stop Payment Notice unless an Enforcement Notice shall have been
given.
(c) Notwithstanding the foregoing, nothing herein shall prevent
Subordinate Creditor from converting its Subordinated Debt to common stock
equity of Texoil, Inc. as provided in the Subordinate Loan Documents prior to
the commencement of a Proceeding and retaining the
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same free of the provisions of this Agreement. The effect of any conversion or
attempted conversion after the commencement of a Proceeding is governed by
Section 4 hereof.
Section 4. SUBORDINATION IN THE EVENT OF INSOLVENCY, ETC. In the event and
during the continuance of any Proceeding, Subordinated Creditor and each Loan
Party agree that all Senior Debt shall first be finally and irrevocably paid in
full in cash or cash equivalents before any payment or distribution of any
character, whether in cash or cash equivalents, securities or other property
(including securities that are subordinate and junior in right of payment to the
payment of Senior Debt to at least the extent provided for in this Agreement)
shall be made, received or accepted for or on account of any Subordinate Debt.
In the event of any Proceeding, any payment or distribution in any such
Proceeding of any kind or character, whether in cash or cash equivalents,
securities or other property which would otherwise (but for this Agreement) be
payable or deliverable in respect of any Subordinate Debt shall be paid or
delivered by the person making such distribution or payment, whether a trustee
in bankruptcy, receiver, assignee for the benefit of creditors, liquidating
trustee or agent, or otherwise, directly to Agent for the benefit of Senior
Creditors, for application in payment of the Senior Debt in accordance with the
priorities then existing among such holders, to the extent necessary to pay in
full all Senior Debt then remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of Senior Debt. Subordinate
Creditor may appear and be heard on any matter relating to Subordinate
Creditor's claim, but Subordinate Creditor agrees that it shall not (a) vote in
favor of any plan of reorganization that would cause Subordinate Creditor to be
paid ahead of any Senior Creditor in violation of the provisions of this
Agreement, or (b) seek to assert rights contrary to the provisions of this
Agreement.
Section 5. STANDSTILL. Subordinate Creditor agrees not to accelerate the
maturity of the Subordinate Debt or to exercise or enforce any rights or
remedies under the Subordinate Loan Documents with respect to a default or
otherwise to collect or seek to collect the Subordinate Debt (including by way
of example and not of limitation, upon the occurrence of a Change in Control (as
defined in the Subordinate Loan Documents) unless it gives the Agent an
Enforcement Notice and until the latest of occur of: (a) 45 days following
receipt by the Agent of the Enforcement Notice, (b) expiration of 135 days after
receipt of a Stop Payment Notice delivered to Subordinate Creditor within 45
days after receipt by the Agent of an Enforcement Notice and (c) any payment
defaults on the Senior Debt are cured. The failure to make a payment of
principal of, interest on, or fees, costs or expenses relative to any of the
Subordinate Debt by reason of any provision of this Agreement shall not be
construed as preventing the occurrence of a default or event of default with
respect to such Subordinate Debt. Nothing in this Section 5 affects the
provisions and agreements of any Loan Party or Subordinate Creditor found in
Sections 3 or 4 hereof.
Section 6. PAYMENTS NOTWITHSTANDING. No payment or distribution of any
character, whether in cash, cash equivalents, securities or other property
(including securities which are subordinate and junior in right of payment to
the payment of Senior Debt to at least the extent provided for in this
Agreement) to which Subordinate Creditor would have been entitled except for the
provisions of this Agreement and that shall have been made to or for the account
of any Senior Creditor shall, as between each Loan Party and its creditors
(other than Agent and Senior Creditors),
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be deemed to be a payment or distribution by such Loan Party to or for the
account of Senior Creditors, and from and after the payment in full in cash or
cash equivalents of all Senior Debt, Subordinate Creditor shall be subrogated to
all rights of Senior Creditors to receive any further payments or distribution
applicable to the Senior Debt until the principal of and interest on the
Subordinate Debt shall be paid in full, and no such payment or distribution made
pursuant to such rights of subrogation to Subordinate Creditor that otherwise
would be payable or distributable to or for the account of Agent or Senior
Creditors or any or some of them shall, as between each Loan Party and its
creditors (other than Subordinate Creditor), be deemed to be a payment or
distribution by such Loan Party to Subordinate Creditor or on account of the
Subordinate Debt.
Section 7. NO PREJUDICE OR IMPAIRMENT. The provisions of this Agreement
are solely for the purposes of defining the relative rights of Agent and Senior
Creditors, on the one hand and Subordinate Creditor, on the other hand. Neither
Agent nor any Senior Creditor shall be prejudiced in the right to enforce
subordination of the Subordinate Debt by any act or failure to act by any Loan
Party or anyone in custody of its assets or property. Nothing herein shall
impair, as between each Loan Party and Subordinate Creditor, the obligation of
such Loan Party, which is unconditional and absolute, to pay to Subordinate
Creditor the principal of and interest on the Subordinate Debt as and when the
same shall become due in accordance with their terms, nor shall anything herein
prevent Subordinate Creditor from exercising all remedies otherwise permitted by
applicable law upon default under the Subordinate Loan Documents, subject,
however, to the provisions of this Agreement and the rights of Agent and each
Senior Creditor to the extent provided herein. Nothing contained in this Section
7 (or elsewhere in this Agreement) shall limit the right of Agent or any Senior
Creditor to recover from Subordinate Creditor any payments prohibited by this
Agreement, including any payments or other distributions made during the
existence of a payment default on the Senior Debt (regardless of whether
Subordinate Creditor has any notice or knowledge thereof at the time of such
payment or distribution).
Section 8. TURNOVER OF PAYMENTS. If any payment, distribution or security
(including securities which are subordinate and junior in right of payment to
the payment of Senior Debt to at least the extent provided for in this
Agreement), or the proceeds of any thereof, shall be collected or received by
Subordinate Creditor in contravention of any of the terms of this Agreement and
prior to the irrevocable payment in full in cash or cash equivalents of Senior
Debt at the time outstanding, the holder thereof will forthwith deliver such
payment, distribution, security or proceeds (with the endorsement, without
recourse or warranty, of Subordinate Creditor where necessary) to Agent for the
benefit of Senior Creditors and, until so delivered, the same shall be held in
trust by such holder as the property of Senior Creditors. If Subordinate
Creditor fails to make any endorsement required under this Agreement, Agent and
each Senior Creditor, and their respective officers and employees on their
behalf, are hereby irrevocably appointed as attorneys-in-fact (coupled with an
interest) for the Subordinate Creditor to make such endorsement in Subordinate
Creditor's name. Without limiting the foregoing, in the event any payment on the
Senior Debt is recovered by or required to be paid over to a Loan Party or any
receiver, trustee in bankruptcy, liquidating trustee, agent or other person in
any Proceeding, any payments made by a Loan Party to Subordinate Creditor shall
be held in trust for Agent and Senior Creditors and immediately remitted to
Agent for the benefit of Senior Creditors upon demand.
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Section 9. PRIORITIES REGARDING COLLATERAL. Any and every lien and
security interest in the Collateral in favor of or held for the benefit of Agent
or any Senior Creditor has and shall have priority over any lien or security
interest that Subordinate Creditor now has or may hereafter acquire in the
Collateral notwithstanding any statement or provision contained in the
Subordinate Loan Documents or otherwise to the contrary and irrespective of the
time or order of filing or recording of financing statements, deeds of trust,
mortgages or other notices of security interests, liens or assignments granted
pursuant thereto, and irrespective of anything contained in any filing or
agreement to which any party hereto or its respective successors and assigns may
now or hereafter be a party, and irrespective of the ordinary rules for
determining priorities under the Uniform Commercial Code or under any other law
governing the relative priorities of secured creditors. Subordinate Creditor has
no Collateral, and shall not seek or take from any Loan Party Collateral for the
Subordinate Debt.
Section 10. COMPROMISE OF CLAIMS. Until the Senior Creditor has received
indefeasible payment in full in cash or cash equivalents of all of the Senior
Debt, the Subordinate Creditor agrees that the Senior Creditor may at any time
and from time to time, without the Subordinate Creditor's consent, and without
notice to the Subordinate Creditor, do any one or more of the following in the
Senior Creditor's sole and absolute discretion: (a) renew, accelerate, extend
the time for payment of, or increase the Senior Debt beyond the amount permitted
in the definition thereof found in this Agreement and any or all of the
obligations of any Loan Party, of any guarantors of any Loan Parties, or of any
other party at any time directly or contingently liable for the payment of any
of the Senior Debt; (b) grant any other indulgence to any Loan Parties, or any
other person in respect of any or all of the Senior Debt or any other matter;
(c) amend, alter, waive, or change in any respect whatsoever any term or
provision relating to any or all of the Senior Debt, including the rate of
interest thereon, or the Senior Loan Documents; (d) substitute or add, or take
any action or omit to take any action which results in the release of any one or
more endorsers or guarantors of all or any part of the Senior Debt; (e) apply
any sums received from a Loan Party, any guarantor, endorser, or cosigner, or
from the disposition of any Collateral or security, to any indebtedness
whatsoever owing from such person or secured by such Collateral or security, in
such manner and order as Agent determines in its sole discretion, and regardless
of whether such indebtedness is part of the Senior Debt, is secured, or is due
and payable; (f) permit a Loan Party to use proceeds of the Collateral for any
purpose; (g) make loans or advances to a Loan Party secured in whole or in part
by the Collateral or refrain from making any such loans or advances; (h) accept
partial payments of, compromise or settle, refuse to enforce, or release all or
any parties to, any or all of the Senior Debt; (i) settle, release (by operation
of law or otherwise), compound, compromise, collect or liquidate any of the
Senior Debt or the Collateral in any manner permitted by applicable law; (j)
accept, release, waive, surrender, enforce, exchange, modify, impair or extend
the time for the performance, discharge or payment of, any and all property of
any kind securing any or all of the Senior Debt or any guaranty of any or all of
the Senior Debt, or on which Agent or any Senior Creditor at any time may have a
lien, or refuse to enforce its rights or make any compromise or settlement or
agreement therefor in respect of any or all of such property, (k) fail to
perfect any Collateral and (l) take or fail to take any action the consequence
of which would be to release a surety or guarantor of the Senior Debt. Neither
Agent nor any Senior Creditor is under nor shall any of them hereafter be under
any obligation to marshal any assets in favor of the
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Subordinate Creditor, or against or in payment of any or all of the Senior Debt,
and may proceed against any of the Collateral in such order and manner as it
elects. Notwithstanding the foregoing, the Borrowers and the Senior Creditors
agree that they will not extend the final maturity of the Senior Debt without
the prior written consent of the Subordinate Creditor.
Section 11. BENEFIT OF AGREEMENT; AMENDMENTS OF CERTAIN DOCUMENTS; ETC.
This Agreement shall constitute a continuing offer to all persons who, in
reliance upon such provisions, become a Senior Creditor, and such provisions are
made for the benefit of such Senior Creditor and each of them may enforce such
provisions. Acceptance and notice of acceptance hereof by any Senior Creditor
are expressly waived. The provisions of the Subordinate Loan Documents may not
be altered, amended or modified in any respect that adversely affects Senior
Creditor or violates the terms of the Senior Loan Documents as such documents
are in effect as of the date of such amendment or modification without each
Senior Creditor's written consent. Neither Agent or any Senior Creditor nor
Subordinate Creditor shall have any obligation to preserve rights in the
Collateral against any prior parties or to marshal any of the Collateral for the
benefit of any person. No failure to exercise, and no delay in exercising on the
part of any party hereto, any right, power or privilege under this Agreement
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided in this Agreement are cumulative and shall not be
exclusive of any rights or remedies provided by law. Any agreements, documents
or instruments which at any time evidence the Subordinate Debt or any part
thereof shall state that payment thereunder is subject to the terms and
provisions of this Agreement. If Subordinate Creditor should fail to file a
proof of claim on account of the Subordinate Debt in any Proceeding within 30
days before the expiration of the time period within which creditors must file
their proofs of claim, Subordinate Creditor agrees that Agent may file such
claim in the Subordinate Creditor's place and stead, and as Subordinate
Creditor's attorney-in-fact (coupled with an interest) for such purposes for the
term of this Agreement.
Section 12. REPRESENTATIONS AND WARRANTIES; ETC. Each of the parties
hereto hereby represents and warrants that (a) it has full power, authority and
legal right to make and perform this Agreement, and (b) this Agreement is its
legal, valid and binding obligation, enforceable against it in accordance with
its terms.
Section 13. AMENDMENT. Neither this Agreement nor any of the terms hereof
may be amended, waived, discharged or terminated unless such amendment, waiver,
discharge or termination is in writing signed by Agent and Subordinate Creditor.
Section 14. SUCCESSORS AND ASSIGNS. This Agreement, and the terms,
covenants and conditions hereof, shall be binding upon and inure to the benefit
of the parties hereto, and their respective successors and assigns. Subordinate
Creditor and Agent (on behalf of the Senior Creditors) further agree between
themselves and solely for their own collective benefit, that if a Borrower is in
the process of refinancing all or a portion of the Senior Debt with a new lender
or lenders, and if the party who wishes to be refinanced makes a request of the
other parties hereto,
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Subordinate Creditor shall agree to enter into a new, substitute agreement with
the new lender; PROVIDED, HOWEVER, that if any such new, substitute agreement
shall be in a form (other than with appropriate date, name and address changes),
and contain such terms and conditions other than as provided herein, the form,
terms and conditions of such new, substitute agreement shall be acceptable to
the party whose financial accommodations to Borrowers are not being refinanced;
and PROVIDED, FURTHER, HOWEVER, that in no circumstances shall the party hereto
whose financial accommodations to a Borrower are not being refinanced be
obligated to enter into such an agreement if the substitute agreement deprives
it of any material right, privilege or benefit accorded to it hereunder.
Section 15. GOVERNING LAW. This Agreement will be construed in accordance
with and governed by the law of the State of Texas.
Section 16. NOTICES. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration or other communication shall or
may be given to or served upon any of the parties by another, or whenever any of
the parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration, or other communication shall be in writing (including by telegraph,
telecopier or telex) and shall be deemed to have been duly given and received,
for purposes hereof, when personally delivered, with receipt acknowledged, or
three days after being deposited (with first class postage pre-paid) in the
United States mail, certified, return receipt requested, or, in the case of
telegraphic notice, when delivered to the telegraph company, or in the case of
telex notice, when sent, answer back received, or in the case of telecopy
notice, when sent to the number set forth below, addressed as follows:
If to Agent: Comerica Bank-Texas
P.O. Box 4167
Houston, Texas 77210-4167
Attn: Mr. James W. Kimble
Fax No.: (713) 722-6514
With a courtesy copy to: Michael W. Hilliard, Esq.
Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-2199
Fax No. 214/745-5390
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If to Subordinate Creditor: Resource Investors Management Company
Suite 6875
600 Travis Street
Houston, Texas 77002
Attn: Gary Milavec
Fax No. 713/247-0730
With a courtesy copy to: Resource Investors Management Company
22 Waterville Road
Avon, Connecticut 06001
Attn: David Whitney
Fax No. 860/678-9382
If to a Loan Party: Cliffwood Oil & Gas Corp.
110 Cypress Station Drive, Suite 220
Houston, Texas 77090
Attn: Mr. Frank A. Lodzinski
Fax No.: (713) 537-9920
with a copy to: Cliffwood Energy Company
110 Cypress Station Drive, Suite 220
Houston, Texas 77090
Attn: Mr. Frank A. Lodzinski
Fax No.: (713) 537-9920
and
Cliffwood Production Co.
110 Cypress Station Drive, Suite 220
Houston, Texas 77090
Attn: Mr. Frank A. Lodzinski
Fax No.: (713) 537-9920
or at such address as may be substituted by notice given as herein provided. The
giving of any notice required hereunder may be waived in writing by the party
entitled to receive such notice. Failure or delay in delivering copies of any
notice, demand, request, consent, approval, declaration or other communication
to the persons designated above to receive courtesy copies shall in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.
Section 17. ATTORNEYS' FEES. In the event of any action based upon or
arising out of this agreement, the prevailing party shall be entitled to recover
from the non-prevailing party all
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<PAGE>
out-of-pocket costs, fees and reasonable expenses incurred in connection
therewith, including without limitation reasonable attorneys' fees.
Section 18. ADDITIONAL DOCUMENTATION. Each party hereto hereby agrees to
execute such additional documents and instruments and take such further actions
as may be reasonably required to carry out the purposes and intent of this
Agreement.
Section 19. CONSTRUCTION; INTERPRETATION. Each party hereto has cooperated
in the drafting and preparation of this Agreement, and as a result this
Agreement shall not be construed against any party. Whenever the context
requires, all words used in the singular will be construed to have been used in
the plural, and vice versa. The captions of the sections of this Agreement are
for convenience only and do not define or limit any terms or provisions. The
word "include(s)" means "include(s) without limitation" and the word "including"
means "including but not limited to." Time is of the essence in the performance
of this Agreement. If any provision of this Agreement shall for any reason be
determined by a court of competent jurisdiction, and sustained on appeal, if
any, to be unenforceable in any respect, such enforceability shall not affect
any other provisions hereof, and this Agreement shall be construed if such
unenforceable provision had not been contained herein; provided, if any
provision of this Agreement shall be unenforceable by reason of a final judgment
of a court of competent jurisdiction based upon such court's ruling, and
sustained on appeal, if any, that such provision is unenforceable because of the
unenforceable degree or magnitude of the obligation imposed thereby, such
unenforceable obligation shall be reduced in magnitude or degree by the minimum
amount necessary in order to provide the maximum degree or magnitude of rights
which are enforceable, and this Agreement shall be automatically and
retroactively amended accordingly to contain such maximum degree or magnitude of
such obligation which is enforceable, rather than the more burdensome but
enforceable original obligation. As used herein, "unenforceable" is used in the
broadest and most comprehensive sense and includes the concepts of void and
voidable.
Section 20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 21. WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT
HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND
EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
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<PAGE>
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
Section 22. SURETY ISSUES, ETC. The Subordinate Creditor hereby waives and
agrees not to assert against Agent or any Senior Creditor any rights which a
guarantor or surety could exercise (including any rights under Chapter 34 of the
Texas Business and Commerce Code), but nothing in this Agreement shall make or
constitute the Subordinate Creditor a guarantor or surety, and the Subordinate
Creditor hereby waives the right, if any, to require that any Senior Creditor
marshal or otherwise require any Senior Creditor to proceed to dispose of or
foreclose upon collateral in any manner or order. Advances are senior and
superior in right of payment to the Subordinate Debt even if made after a Senior
Creditor has notice of default in the Subordinate Debt and/or irrespective of
whether any such advance is objected to by Subordinate Creditor. No Senior
Creditor shall be responsible to ascertain compliance with the Subordinate Loan
Documents or be liable if Senior Debt is incurred in violation thereof.
Section 23. REINSTATEMENT IN CERTAIN EVENTS. The provisions of this
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of any of the Senior Claims is rescinded or must
otherwise be returned by any Senior Creditor or any or some of them upon the
insolvency, bankruptcy or reorganization of a Borrower or otherwise, all as
though such payment had not been made.
Section 24. REPRESENTATIONS AND WARRANTIES OF SUBORDINATE CREDITORS. Each
Subordinate Creditor represents and warrants (a) that it has not relied and will
not rely on any representation or information of any nature made by or received
from the Agent or any of the Senior Creditors relative to any Loan Party in
deciding to extend credit to a Loan Party or to execute this Agreement; (b)
that, as of the date hereof, the outstanding amount of the Subordinate Debt is
$10,000,000, and only interest is payable until maturity; (c) that it is the
legal and beneficial owner of the Subordinate Debt; (d) that it has not
heretofore assigned or transferred any of the Subordinate Debt, any interest
therein or any collateral or security pertaining thereto; and (e) that it has
not heretofore given, and will not give hereafter, any subordination to any
other person, firm or entity in respect of the Subordinate Debt if the effect
thereof would be to alter, limit or otherwise impair the benefits of this
Agreement conferred on the holders of Senior Debt.
Section 25. REPRESENTATION AND COVENANT OF AGENT. The Agent represents
that the Commitment Termination Date under the Senior Loan Documents is August
4, 2000. Senior Creditors will not amend Section 6.8 of Amended and Restated
Credit Agreement constituting one of the Senior Loan Documents without the prior
written consent of the Subordinate Creditor.
SECTION 26. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER
DOCUMENTS AND INSTRUMENTS CONTEMPLATED HEREBY OR
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<PAGE>
THEREBY, OR PERTAINING HERETO OR THERETO, REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREE MENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 27. DESCRIPTIVE HEADINGS. Descriptive headings of the several
sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
[Balance of page intentionally left blank]
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<PAGE>
Executed, delivered and effective as of the date first above written.
SUBORDINATE CREDITOR: SENIOR CREDITOR:
RIMCO PARTNERS, L.P., COMERICA BANK-TEXAS, N.A., as Agent
RIMCO PARTNERS, L.P. II,
RIMCO PARTNERS, L.P. III, and
RIMCO PARTNERS, L.P. IV, By:/S/ JAMES KIMBLE
James W. Kimble
By: Resource Investors Management Assistant Vice President
Company Limited Partnership,
their general partner LOAN PARTIES:
By:RIMCO Associates, Inc., CLIFFWOOD OIL & GAS CORP.
its general partner
By:/S/ A. L. JORDEN By:/S/ FRANK A. LODZINSKI
Name: A. L. Jorden Name: Frank A. Lodzinski
Title: Vice President Title: President
CLIFFWOOD ENERGY COMPANY
By:/S/ FRANK A. LODZINSKI
Name: Frank A. Lodzinski
Title: President
CLIFFWOOD PRODUCTION COMPANY
By:/S/ FRANK A. LODZINSKI
Name: Frank A. Lodzinski
Title: President
TEXOIL, INC.
By:/S/ RUBEN MEDRANO
Name: Ruben Medrano
Title: President
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EXHIBIT 4.22
AMENDMENT TO SUBORDINATION AGREEMENT
THIS FIRST AMENDMENT TO SUBORDINATION AGREEMENT (the "Amendment"), dated
as of October 30, 1998, is by and among Comerica Bank-Texas, as Agent for the
Senior Creditors ("AGENT"), RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO
Partners, L.P. III, and RIMCO Partners, L.P. IV (each a "SUBORDINATE LENDER" and
collectively, the "SUBORDINATED LENDERS"), Cliffwood Oil & Gas Corp.
("Cliffwood"), Cliffwood Energy Company ("CEC") and Cliffwood Production Company
("CPC") (Cliffwood, CEC and CPC, together with their successors and assigns, the
"Borrowers") and the other Loan Parties and is made for the express benefit of
the Senior Creditors.
RECITALS:
A. As of December 30, 1997, the Agent (on behalf of the Senior
Creditors), the Subordinate Creditors, and the Loan Parties entered into a
Subordination Agreement (the "Agreement").
B. The Borrowers have requested an increase in the Senior Debt
and the Agent and the Senior Creditors are willing to extend additional Senior
Debt to the Borrowers, subject to, among other things, this Amendment.
C. The Subordinate Creditors are willing to enter into this
Amendment as part of the inducement for the Senior Creditors increasing the
amount of Senior Debt available to the Borrowers.
D. The Agent, the Senior Creditors, the Subordinate Creditors
and the Loan parties now desire to amend the Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows, intending to be
legally bound:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Amendment, to the extent
not otherwise defined herein, shall have the same meanings as in the Agreement,
as amended hereby.
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<PAGE>
ARTICLE II
AMENDMENTS
2.1 AMENDMENT TO DEFINITION OF SENIOR DEBT. The definition of "Senior
Debt" found in Section 1 is amended by deleting the reference to "$35,000,000"
and inserting in lieu thereof a reference to "$60,000,000."
ARTICLE III
CONDITIONS PRECEDENT
3.1 CONDITIONS. The effectiveness of this Amendment is subject to the
satisfaction of the following conditions precedent:
(a) Agent shall have received all of the following, each dated
(unless otherwise indicated) the date of this Amendment, in form and
substance satisfactory to it:
(1) AMENDMENT. This Amendment signed by all parties; and
(2) AMENDMENT TO SUBORDINATE LOAN DOCUMENTS. An amendment,
signed by all parties thereto, amending Section 10.03 of the
December 31, 1997 Note Purchase Agreement between Subordinate
Creditors and Texoil, Inc. to make it clear that the Senior Debt is
subtracted from Current Liabilities in determining compliance with
Section 10.03(a) thereof.
ARTICLE IV
MISCELLANEOUS
4.1 RATIFICATIONS. Except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement are ratified and confirmed
and shall continue in full force and effect. The parties hereto agree that the
Agreement as amended hereby shall continue to be legal, valid, binding and
enforceable in accordance with its terms.
4.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Amendment or the Agreement shall survive the execution
and delivery of this Amendment, and no investigation by any party or any closing
shall affect the representations and warranties or the right of such party to
rely upon them.
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<PAGE>
4.3 SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
4.4 APPLICABLE LAW. This Amendment shall be deemed to have been made and
to be performable in Houston, Harris County, Texas and shall be governed by and
construed in accordance with the laws of the State of Texas.
4.5 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of the parties and their respective successors and assigns.
4.6 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
4.7 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
4.8 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS
AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY
THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL
PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER
WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR
VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR
DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES HERETO.
Executed as of the date first written above.
[Balance of Page Left Blank Intentionally]
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<PAGE>
SUBORDINATE CREDITORS: SENIOR CREDITORS:
RIMCO PARTNERS, L.P., COMERICA BANK-TEXAS,
RIMCO PARTNERS, L.P. II, individually and as Agent
RIMCO PARTNERS, L.P. III, and
RIMCO PARTNERS, L.P. IV, By:/S/ JAMES KIMBLE
James W. Kimble
By: Resource Investors Management Vice President
Company Limited Partnership,
their general partner FIRST UNION NATIONAL BANK
By:RIMCO Associates, Inc.,
its general partner By:/S/ JAY M. CHERNOSKY
Jay M. Chernosky
Senior Vice President
By:/S/ GARY MILAVEC
Name: Gary Milavec CLIFFWOOD OIL & GAS CORP.
Title: Vice President CLIFFWOOD ENERGY COMPANY and
CLIFFWOOD PRODUCTION CO.
By:/S/ FRANK A. LODZINSKI
President of each
TEXOIL, INC. and
TEXOIL COMPANY
By:/S/ FRANK A. LODZINSKI
President of each
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EXHIBIT 4.23
FIFTH AMENDMENT TO CREDIT AGREEMENT
This Fifth Amendment to Amended and Restated Credit Agreement (this
"Amendment") is dated as of June 12, 1998 and is made by and among CLIFFWOOD OIL
& GAS CORP., CLIFFWOOD ENERGY COMPANY and CLIFFWOOD PRODUCTION CO. (the
"Borrowers"), COMERICA BANK-TEXAS, as Agent for itself and certain other lenders
(in such capacity, the "Agent") and as a Lender (as defined in the Agreement
described below) and FIRST UNION NATIONAL BANK, as a Lender.
R E C I T A L S:
WHEREAS, Borrowers, Agent and certain Lenders are party to the Amended and
Restated Credit Agreement dated as of August 1, 1997 (as amended through the
date hereof and as may be further amended, extended, renewed or restated from
time to time, the "Agreement") pursuant to which Lenders made a revolving line
of credit available to Borrowers under the terms and provisions stated therein;
and
WHEREAS, Borrowers, Agent and Lenders desire to amend the Agreement to
provide for, among other things, alternative pricing options for Borrowers and
modifications to certain payment provisions in connection therewith.
NOW, THEREFORE, in consideration of the premises herein contained, the
covenants and agreements set forth below and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS AND TERMS. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have the same
meaning as in the Agreement, as amended hereby, and all references to
"Sections," "clauses," "Articles" and "Exhibits" are references to the
Agreement's sections, clauses, articles and exhibits.
ARTICLE II
AMENDMENTS
Section 2.1 AMENDMENTS TO SECTION 1.2.
(a) Section 1.2 is amended by adding, in alphabetical order, the following
new definitions:
"CONVERSION NOTICE" means a request, subject to Section 2.27,
substantially in the form of Exhibit VII.
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 1
<PAGE>
"EURODOLLAR RATE" means, for the relevant Interest Period, the
annual interest rate (rounded upward, if necessary, to the nearest 0.01%)
equal to the quotient obtained by dividing (a) the rate that deposits in
United States dollars are offered to Agent in the London interbank market
at approximately 11:00 a.m. London time two Business Days before the first
day of that Interest Period in an amount comparable to the applicable Loan
and having a maturity approximately equal to that Interest Period, by (b)
one minus the Reserve Requirement (expressed as a decimal) applicable to
the relevant Interest Period.
"INTEREST PERIOD" is determined under Section 2.26 .
"RESERVE REQUIREMENT" means, for any Loan bearing interest based on
the Eurodollar Rate and for the relevant Interest Period, the total
reserve amount prescribed by the Board of Governors of the Federal Reserve
System (or any successor) for "Eurocurrency Liabilities" (as defined in
Regulation D of the Federal Reserve Board, as amended), adjusted by Agent
for expected changes in such reserve amount during the applicable Interest
Period.
(b) Section 1.2 is further amended by amending the following definitions
entirely so that they read as follows:
"BUSINESS DAY" shall mean (a) for purposes of any Loan bearing
interest based on the Eurodollar Rate, a day when commercial banks are
open for international business in London, England, and (b) for all
purposes, a day other than a Saturday, Sunday, legal holiday for
commercial banks under the laws of the State of Texas, or any other day
when banking is suspended in the State of Texas.
"FLOATING RATE" shall mean an interest rate per annum equal to the
lesser of either (a)(i) the Base Rate from time to time in effect plus
one-half of one percent or (ii) the Eurodollar Rate plus two and
one-quarter of one percent (in each case as designated or deemed
designated by Borrowers), as the case may be, or (b) the Highest Lawful
Rate; PROVIDED, HOWEVER, that the Eurodollar Rate may not be selected when
a Default or an Event of Default exists.
Section 2.2 AMENDMENTS TO SECTION 2.1.
(a) Section 2.1(a) is entirely amended so that it reads as follows:
(a) Upon the terms and conditions (including, without
limitation, the right of the Lenders to decline to make any Loan so
long as any Default or Event of Default exists) and relying on the
representations and warranties contained in this Agreement, each
Lender severally agrees, during the Commitment Period, to make Loans
not to exceed such Lender's Commitment Amount, in immediately
available funds at the Principal Office, to or for the benefit of
the Borrowers, from time to time on any Business Day designated by
the Borrowers following receipt by the Agent of a written request
(each, a "Borrowing Request") for such Loan; provided, however,
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 2
<PAGE>
(i) each Borrowing Request must be received by Lender no later than
(A) 11:00 a.m. on the third Business Day before the date on which
funds are requested (the "Borrowing Date") for any Loan bearing
interest based on the Eurodollar Rate, or (B) 11:00 a.m. on the
Borrowing Date for any Loan bearing interest based on the Base Rate,
and (ii) no Loan shall exceed the aggregate amount of the then
existing Available Commitment for such Lender as then in effect and
the Borrowers agree to immediately repay any Loan Balance
outstanding in excess of the aggregate amount of the Available
Commitment (including those necessary to meet the Commitment
Reduction Schedule). The Borrowers jointly and severally agree to
repay to the Lenders the Obligations pursuant to the terms hereof.
(b) Section 2.1(b) is entirely amended so that it reads as follows:
(b) Subject to the terms of this Agreement, during the
Commitment Period, the Borrowers may borrow, repay, and reborrow.
Except for prepayments made pursuant to Section 2.9, each borrowing
and prepayment of principal of Loans shall be in an amount at least
equal to (i) for any Loan bearing interest based on the Eurodollar
Rate, $1,000,000 or a greater integral multiple thereof, and (ii)
for any Loan bearing interest based on the Base Rate, $50,000 or a
greater integral multiple thereof.
Section 2.3 AMENDMENTS TO SECTION 2.3. The second sentence of Section 2.3
of the Agreement is amended by adding the following immediately after the word
"Loans":
"bearing interest based on the Base Rate."
Section 2.3 is further amended by adding thereto (inserted immediately after the
second sentence thereof) the following:
Interest on Loans bearing interest based on the Eurodollar Rate
shall be computed on the basis of a year of 360 days, and actual days
elapsed during the relevant Interest Period.
Section 2.4 AMENDMENT TO SECTION 2.5. Section 2.5 is amended by deleting
the first sentence thereof and substituting the following in lieu thereof:
Accrued and unpaid interest on each Loan bearing interest based on
the Eurodollar Rate shall be due and payable on the last day of its
respective Interest Period; PROVIDED, HOWEVER, if any Interest Period is a
period greater than one month, then accrued and unpaid interest shall also
be due and payable on the first day of each calendar month during such
Interest Period. Accrued and unpaid interest on each Loan bearing interest
based on the Base Rate shall be due and payable monthly on the first day
of each calendar month.
Section 2.5 ADDITIONS TO ARTICLE II. The following new sections are added
to Article II:
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 3
<PAGE>
2.26 INTEREST PERIODS. When Borrowers request any Loan bearing
interest based on the Eurodollar Rate, Borrowers may elect the applicable
interest period (each an "Interest Period"), which may be, at Borrowers'
option, one, two or three months, subject to the following conditions: (a)
the initial Interest Period for a Loan bearing interest based on the
Eurodollar Rate commences on the applicable Borrowing Date or conversion
date, and each subsequent Interest Period applicable to such Loan
commences on the day when the next preceding applicable Interest Period
expires; (b) if any Interest Period for a Loan bearing interest based on
the Eurodollar Rate begins on a day for which no numerically corresponding
Business Day in the calendar month at the end of the Interest Period
exists, then the Interest Period ends on the last Business Day of that
calendar month; (c) if Borrowers are required to pay any portion of a Loan
bearing interest based on the Eurodollar Rate before the end of its
Interest Period in order to comply with the payment provisions of the Loan
Documents, Borrowers shall also pay any related loss, expense, or
reduction in yield that any Lender incurs because of such payment; (d) no
Interest Period may end on a day after the Commitment Termination Date;
and (e) no more than three Interest Periods may be in effect at one time.
2.27 CONVERSIONS. Subject to the limitations of Section 2.1 and
provided that Borrowers may not convert to or select a new Interest Period
for a Loan bearing interest based on the Eurodollar Rate at any time when
a Default or Event of Default exists, Borrowers may (a) convert a Loan
bearing interest based on the Eurodollar Rate on the last day of the
applicable Interest Period to a Loan bearing interest based on the Base
Rate, (b) convert a Loan bearing interest based on the Base Rate at any
time to a Loan bearing interest based on the Eurodollar Rate, and (c)
elect a new Interest Period for a Loan bearing interest based on the
Eurodollar Rate. Such election may be made by telephonic request to Agent
no later than 11:00 a.m. on the third Business Day before the conversion
date or the last day of the Interest Period, as the case may be, for
conversion to a Loan bearing interest based on the Eurodollar Rate or
election of a new Interest Period, and no later than 11:00 a.m. on the
last day of the Interest Period for conversion to a Loan bearing interest
based on the Base Rate. Borrowers shall provide a Conversion Notice to
Agent no later than two days after the date of the telephonic request for
conversion or election. Absent Borrowers' telephonic request for
conversion or election of a new Interest Period or if a Default or Event
of Default exists, then, a Loan bearing interest based on the Eurodollar
Rate shall be deemed converted to a Loan bearing interest based on the
Base Rate effective when the applicable Interest Period expires.
2.28 BASIS UNAVAILABLE OR INADEQUATE FOR EURODOLLAR RATE. If, on or
before any date when a Eurodollar Rate is to be determined for a Loan,
Agent reasonably determines that the basis for determining the applicable
rate is not available or any Lender reasonably determines that the
resulting rate does not accurately reflect the cost to such Lender of
making or converting Loans at that rate for the applicable Interest
Period, then Agent shall promptly notify Borrowers of that determination
(which is conclusive and binding on Borrowers absent manifest error) and
the
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 4
<PAGE>
applicable Loan shall bear interest at the sum of the Base Rate plus
one-half of one percent. Until Agent notifies Borrowers that those
circumstances no longer exist, Lenders' commitments under this Agreement
to make, or to convert to, Loans bearing interest based on the Eurodollar
Rate, as the case may be, is suspended.
2.29 RESERVES. With respect to any Loan bearing interest based on
the Eurodollar Rate (a) if any change in any present Requirement of Law,
any change in the interpretation or application of any present Requirement
of Law, or any future Requirement of Law imposes, modifies, or deems
applicable (or if compliance by any Lender with any requirement of any
Governmental Authority results in) any requirement that any reserves
(including, without limitation, any marginal, emergency, supplemental, or
special reserves) be maintained (other than any reserve included in the
Reserve Requirement), and if (b) those reserves reduce any sums receivable
by such Lender under this Agreement or increase the costs incurred by such
Lender in advancing or maintaining any portion of any Loan bearing
interest based on the Eurodollar Rate, then (c) such Lender (through
Agent) shall deliver to Borrowers a certificate setting forth in
reasonable detail the calculation of the amount necessary to compensate it
for its reduction or increase (which certificate is conclusive and binding
absent manifest error), and (d) Borrower shall pay that amount to such
Lender within 10 Business Days after demand. The provisions of and
undertakings and indemnification in this Section 2.29 survive the
satisfaction and payment of the Obligations and termination of this
Agreement.
2.30 CHANGE IN REQUIREMENTS OF LAW. If any Requirement of Law makes
it unlawful for any Lender to make or maintain Loans bearing interest
based on the Eurodollar Rate, then such Lender shall promptly notify
Borrowers and Agent, and (a) as to undisbursed funds, such requested Loan
shall be made as a Loan bearing interest based on the Base Rate, and (b)
as to any outstanding Loan (i) if maintaining the Loan until the last day
of the applicable Interest Period is unlawful, the Loan shall be converted
to a Loan bearing interest based on the Base Rate as of the date of
notice, in which event Borrowers will not be required to pay any related
loss, expense, or reduction in yield that Lenders incur because of such
conversion, or (ii) if not prohibited by Requirements of Law, the Loan
shall be converted to a Loan bearing interest based on the Base Rate as of
the last day of the applicable Interest Period, or (iii) if any conversion
will not resolve the unlawfulness, Borrowers shall promptly prepay the
Loan, without penalty but with related loss, expense, or reduction in
yield that Lenders incur because of such conversion.
Section 2.6 AMENDMENT TO SECTION 5.20. Section 5.20 is amended by deleting
the word "May" and inserting in lieu thereof the word "July."
Section 2.7 AMENDMENTS TO SECTION 7.1.
(a) Section 7.1(c) is amended by adding after the word "Borrower"
found therein, the words ", Texoil or Texoil Company."
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 5
<PAGE>
(b) Section 7.1 is further amended by deleting the word "or" from
the end of clause (n), deleting the period (".") from the end of clause
(o) and replacing it with a semicolon (";") and the word "or," and adding
the following clause thereto:
(p) Texoil or Texoil Company shall fail or refuse to perform
or observe all terms, covenants, and agreements contained in
Paragraph 9 of its certain Guaranty dated as of June 12, 1998,
executed for the benefit of Lenders.
Section 2.8 ADDITIONAL EXHIBIT. A new Exhibit VII is added in the form of,
and all references in the Agreement to Exhibit VII shall be deemed to be
references to, the attached Exhibit VII.
ARTICLE III
MISCELLANEOUS
Section 3.1 RATIFICATIONS, REPRESENTATIONS AND WARRANTIES. Except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. The representations and warranties contained
herein and in all other Loan Documents, as amended hereby, shall be true and
correct as of, and as if made on, the date hereof. Borrowers, Agent and Lenders
agree that the Agreement as amended hereby shall continue to be legal, valid,
binding and enforceable in accordance with its terms.
Section 3.2 REFERENCE TO THE AGREEMENT. Each of the Loan Documents,
including the Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement as amended hereby.
Section 3.3 EXPENSES OF AGENT. As provided for in the Agreement, each
Borrower agrees, jointly and severally, to pay on demand all reasonable cost and
expenses incurred by Agent in connection with the preparation, negotiation,
execution of this Amendment, and the other Loan Documents executed pursuant
hereto and any and all amendments, modifications and supplements thereto
including, without limitation, the reasonable cost of Agent's legal counsel, and
all reasonable costs and expenses incurred by Agent in connection with the
enforcement or preservation of any rights under the Agreement, as amended
hereby, or any other Loan Documents.
Section 3.4 SEVERABILITY. Any provisions of this Amendment held by court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provisions so held to be invalid or unenforceable.
Section 3.5 APPLICABLE LAW. This Amendment and all other Loan Documents
executed pursuant hereto shall be governed by and construed in accordance with
the laws of the State of Texas.
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 6
<PAGE>
Section 3.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and
shall enure to the benefit of Agent, Lenders and Borrowers and their respective
successors and assigns.
Section 3.7 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original
but all of which when taken together shall constitute one and the same
instrument.
Section 3.8 HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 3.9 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS,
DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND
SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND
UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT
BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.
FIFTH AMENDMENT TO CREDIT AGREEMENT - PAGE 7
<PAGE>
EXECUTED as of the day and year first above written.
CLIFFWOOD OIL & GAS CORP.,
as a BORROWER
By: /S/ FRANK A. LODZINSKI
Frank A. Lodzinski
President
CLIFFWOOD ENERGY COMPANY, COMERICA BANK-TEXAS,
as a BORROWER as AGENT and a LENDER
By: /S/ FRANK A. LODZINSKI By: /S/ JAMES KIMBLE
Frank A. Lodzinski James Kimble
President Vice President
CLIFFWOOD PRODUCTION CO., FIRST UNION NATIONAL BANK,
as a BORROWER as a LENDER
By: /S/ FRANK A. LODZINSKI By: /S/
Frank A. Lodzinski Name:
President Title:
FIFTH AMENDMENT TO CREDIT AGREEMENT - SIGNATURE PAGE
EXHIBIT 4.24
SIXTH AMENDMENT TO CREDIT AGREEMENT
This Sixth Amendment to Amended and Restated Credit Agreement (this
"Amendment") is dated as of October 29, 1998 and is made by and among CLIFFWOOD
OIL & GAS CORP., CLIFFWOOD ENERGY COMPANY and CLIFFWOOD PRODUCTION CO. (the
"Borrowers"), COMERICA BANK-TEXAS, as Agent for itself and certain other lenders
(in such capacity, the "Agent") and as a Lender (as defined in the Agreement
described below) and FIRST UNION NATIONAL BANK, as a Lender.
R E C I T A L S:
WHEREAS, Borrowers, Agent and certain Lenders are party to the Amended and
Restated Credit Agreement dated as of August 1, 1997 (as amended through the
date hereof and as it may be further amended, extended, renewed or restated from
time to time, the "Agreement") pursuant to which Lenders made a revolving line
of credit available to Borrowers under the terms and provisions stated therein;
and
WHEREAS, Borrowers, Agent and Lenders desire to amend the Agreement to
provide for, among other things, an increase in the Commitment Amounts and the
Borrowing Base;
NOW, THEREFORE, in consideration of the premises herein contained, the
covenants and agreements set forth below and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows, intending to be legally bound:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS AND TERMS. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have the same
meaning as in the Agreement, as amended hereby, and all references to
"Sections," "clauses," "Articles" and "Exhibits" are references to the
Agreement's sections, clauses, articles and exhibits.
ARTICLE II
AMENDMENTS
Section 2.1 AMENDMENTS TO SECTION 1.2.
(a) Section 1.2 is amended by adding, in alphabetical order, the following
new definitions:
"APPLICABLE MARGIN" means, for any day, (a) with respect to Loans
bearing interest based on the Eurodollar Rate, the margin of interest over
the Eurodollar Rate that is applicable when any Floating Rate based on the
Eurodollar Rate is determined under this
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 1
<PAGE>
Agreement and (b) with respect to Loans bearing interest based on the
Prime Rate, the margin of interest over the Prime Rate that is applicable
when any Floating Rate based on the Prime Rate is determined under this
Agreement. The Applicable Margin is the percentages per annum set forth as
follows:
APPLICABLE MARGIN FOR LOAN APPLICABLE MARGIN FOR LOANS
BEARING INTEREST ON THE BEARING INTEREST ON THE
BORROWING BASE PERCENTAGE EURODOLLAR RATE PRIME RATE
- --------------------------------------------------------------------------------
Less than 33% 1.75% 0%
33% through 66% 2.00% .25%
Greater than 66% 2.25% .50%
"BORROWING BASE PERCENTAGE" means, at any date, the aggregate of the
Loan Balance PLUS all accrued interest that is overdue and unpaid in
respect of the Loan Balance as a percentage of the Borrowing Base then in
effect.
"CASH FLOW COVERAGE" means, for each period, the ratio of EBITDA of
the Borrowers and the Guarantors to gross interest expense (including
capitalized interest).
"EBITDA" means, for each Person and for each period, the sum of the
following, without duplication:
(a) the amount of net income for such period (whether positive
or negative) before interest expense, income taxes and extraordinary
items, NET OF
(b) depreciation, amortization of goodwill and all other
non-cash charges accrued but not actually paid that, in determining
net income for such period, were deducted from (or included in)
gross income for such period.
"GUARANTORS" means Texoil, Texoil Company and Cliffwood Exploration
Company.
"GUARANTIES" means the June 12, 1998 Guaranties of Texoil and Texoil
Company and the October 29, 1998 Guaranty of Cliffwood Operating Company.
"LOMA NOVIA FIELD" is described on Exhibit VIII.
"SONAT ACQUISITION" means the acquisition of Hydrocarbons and other
Property described on Exhibit IX by COGC, which acquisition may include
the Loma Novia Field.
(b) Section 1.2 is further amended by amending the following definition
entirely so that it reads as follows:
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 2
<PAGE>
"FLOATING RATE" shall mean an interest rate per annum equal to the
lesser of either (a)(i) the Base Rate from time to time in effect plus the
Applicable Margin or (ii) the Eurodollar Rate plus the Applicable Margin
(in each case as designated or deemed designated by Borrowers), as the
case may be, or (b) the Highest Lawful Rate; PROVIDED, HOWEVER, that the
Eurodollar Rate may not be selected when a Default or an Event of Default
exists.
(c) Section 1.2 is further amended as follows:
(1) the definition of "COMMITMENT AMOUNT" is amended by deleting the
reference in clause (a)(i) thereto to "$10,000,000" and inserting in lieu
thereof a reference to "$30,000,000 if the Loma Novia Field is included in
the Sonat Acquisition and $28,000,000 if the Loma Novia Field is not
included in the Sonat Acquisition";
(2) the definition of "Notes" is amended by deleting the references
to "$15,000,000" and "$10,000,000" and inserting in lieu thereof
references to "$30,000,000" and "$20,000,000" respectively; and
(3) the definition of "Obligations" is amended by adding in clause
(a) after the word "Notes" the words "and the Guaranties."
Section 2.2 AMENDMENTS TO SECTION 2.8. Section 2.8(a) is amended as
follows:
(a) by deleting the first sentence thereof and inserting the
following in lieu thereof:
"The Borrowing Base is acknowledged by the Borrowers, the Agent and
the Lenders to be $28,000,000 (after giving effect to the Sonat
Acquisition, but excluding the Loma Novia Field), which Borrowing
Base shall be increased to $30,000,000 if the Loma Novia Field is
purchased promptly at the end of the period when a preferential
right of first refusal in respect thereof expires, but in any event
no later than January 31, 1999"; and
(b) by deleting the date and dollar amount found in the second
sentence thereof and inserting the following in lieu thereof:
"February 1, 1999" and "$466,666, increasing to $500,000 if the
Borrowing Base is increased to $30,000,000 because of the inclusion
of the Loma Novia Field in the Borrowing Base."
Section 2.3 AMENDMENT TO ARTICLE V. Article V is amended by adding a new
section, numbered 5.21, reading as follows:
"Section 5.21 YEAR 2000. (a) Perform all acts reasonably necessary to
ensure that (i) it and any business in which it holds a substantial
interest and (ii) all customers, suppliers and vendors that are material
to its business become Year 2000 Compliant in a timely manner (such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of each Borrower's and each Guarantor's systems and
adopting a detailed
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 3
<PAGE>
plan, with itemized budget, for the remediation, monitoring and testing of
such systems); and (b) immediately upon request, provide to the Agent such
certifications or other evidence of its compliance with the terms of this
Section as the Agent may from time to time require. (As used in this
Section "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, fixtures, goods or systems
utilized by or material to the business operations or financial condition
of such entity, will properly perform date sensitive functions before,
during and after the year 2000)."
Section 2.4 AMENDMENT TO ARTICLE VI. Article VI is amended by adding
thereto a new section, numbered 6.16, reading as follows:
"6.16 CASH FLOW COVERAGE. Permit, calculated as of the end of each
calendar quarter during the term hereof, its Cash Flow Coverage to be less
than 3.0 to 1.0 on a consolidated basis."
Section 2.5 AMENDMENTS TO SECTION 7.1.
(a) Section 7.1(c) is amended by deleting ", Texoil or Texoil
Company" and inserting in lieu thereof "or Guarantor."
(b) Section 7.1 is further amended by deleting clause (p) in its
entirety and substituting the following clause in lieu thereof:
"(p) Guarantors, or any or some of them, shall fail or refuse
to perform or observe all terms, covenants, and agreements contained
in Paragraph 9 of Guaranties."
Section 2.6 ADDITIONAL EXHIBITS. New Exhibits VIII and IX are added in the
form of, and all references in the Agreement to Exhibits VIII and IX shall be
deemed to be references to, the attached Exhibits VIII and IX.
Section 2.7 REPLACEMENT OF EXHIBITS. Exhibit I and II are amended in their
entirety to read as set forth in Exhibits I and II to this Amendment.
Section 2.8 COMMITMENT AMOUNTS. The Commitment Amounts for each Lender are
as set forth beside their signatures on this Amendment, which amounts replace
those referred to in clause (ii)(a) of the definition of "COMMITMENT AMOUNT"
found in Section 1.2 of the Agreement.
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 4
<PAGE>
ARTICLE III
CONDITIONS PRECEDENT AND EFFECTIVENESS OF INCREASES
Section 3.1 CONDITIONS PRECEDENT. This Amendment shall be effective upon
satisfaction of the following conditions precedent:
(a) The Agent shall have received, reviewed, and approved the
following documents and other items, appropriately executed and
acknowledged when necessary, all in form and substance satisfactory to the
Agent:
(i) multiple counterparts of this Amendment, as requested by
the Agent;
(ii) the Notes (with aggregate face amounts of $50,000,000);
(iii) items (c) [to the extent different from those delivered
at the closing of the Agreement], (d) and (g) of Section 3.1 of the
Agreement;
(iv) items (c), (d) and (g) of Section 3.1 of the Agreement in
respect of each Guarantor (substituting Guarantor references for
Borrower);
(v) confirmation, acceptable to the Agent and the Lenders, of
title to the Property being purchased in the Sonat Acquisition, free
and clear of all Liens except Permitted Liens;
(vi) all Guaranties not previously delivered;
(vii) First Amendment to Subordination Agreement increasing
Senior Debt (as defined therein) to $60,000,000;
(viii)First Amendment to Note Purchase Agreement (one of the
Subordinate Loan Documents) to make it clear that the Loan Balance
is never characterized as Current Liabilities for purposes of
Section 10.3(a) thereof;
(ix) undated letters of the type specified in Section
3.1(f)(iv) of the Agreement;
(x) Security Instruments covering the Hydrocarbons and other
Property being purchased in the Sonat Acquisition; and
(xi) such other agreements, documents, instruments, opinions,
certificates, waivers, consents and evidence as the Agent and the
Lenders may require.
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 5
<PAGE>
(b) The Agent shall have received $147,499 which is the fee required
by Section 2.13 of the Agreement without giving effect to inclusion of the
Loma Novia Field in the Borrowing Base.
Section 3.2 EFFECTIVENESS OF INCREASES. The increases in the Borrowing
Base and Commitment Amounts are effective when all of the conditions precedent
in Section 3.1 of the Agreement are met and the Sonat Acquisition is
consummated.
ARTICLE IV
MISCELLANEOUS
Section 4.1 RATIFICATIONS, REPRESENTATIONS AND WARRANTIES. Except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. The representations and warranties contained
herein and in all other Loan Documents, as amended hereby, shall be true and
correct as of, and as if made on, the date hereof. Borrowers, Agent and Lenders
agree that the Agreement as amended hereby shall continue to be legal, valid,
binding and enforceable in accordance with its terms.
Section 4.2 REFERENCE TO THE AGREEMENT. Each of the Loan Documents,
including the Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement as amended hereby.
Section 4.3 EXPENSES OF AGENT, ETC. As provided for in the Agreement, each
Borrower agrees, jointly and severally, to pay on demand all reasonable cost and
expenses incurred by Agent in connection with the preparation, negotiation,
execution of this Amendment, and the other Loan Documents executed pursuant
hereto and any and all amendments, modifications and supplements thereto
including, without limitation, the reasonable cost of Agent's legal counsel, and
all reasonable costs and expenses incurred by Agent in connection with the
enforcement or preservation of any rights under the Agreement, as amended
hereby, or any other Loan Documents. In addition, the Borrowers agree to pay an
additional fee of $15,000 if the Loma Novia Field is included in the Borrowing
Base.
Section 4.4 SEVERABILITY. Any provisions of this Amendment held by court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provisions so held to be invalid or unenforceable.
Section 4.5 APPLICABLE LAW. This Amendment and all other Loan Documents
executed pursuant hereto shall be governed by and construed in accordance with
the laws of the State of Texas.
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 6
<PAGE>
Section 4.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and
shall enure to the benefit of Agent, Lenders and Borrowers and their respective
successors and assigns.
Section 4.7 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original
but all of which when taken together shall constitute one and the same
instrument.
Section 4.8 HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 4.9 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS,
DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS
AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND
SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND
UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT
BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.
SIXTH AMENDMENT TO CREDIT AGREEMENT - PAGE 7
<PAGE>
EXECUTED as of the day and year first above written.
CLIFFWOOD OIL & GAS CORP.,
as a BORROWER
By: /S/ FRANK A. LODZINSKI
Frank A. Lodzinski
President
CLIFFWOOD ENERGY COMPANY,
as a BORROWER
By: /S/ FRANK A. LODZINSKI
Frank A. Lodzinski
President
CLIFFWOOD PRODUCTION CO.,
as a BORROWER
By: /S/ FRANK A. LODZINSKI
Frank A. Lodzinski
President
SIXTH AMENDMENT TO CREDIT AGREEMENT - SIGNATURE PAGE 1 OF 2
<PAGE>
COMERICA BANK-TEXAS,
as AGENT and a LENDER
Commitment Amount: By:/S/ JAMES KIMBLE
$16,800,000 James W. Kimble
($18,000,000 if the Vice President
Loma Novia Field is
included in the
Borrowing Base)
FIRST UNION NATIONAL BANK,
Commitment Amount: as a LENDER
$11,200,000
($12,000,000 if the
Loma Novia Field is By:/S/ JAY M. CHERNOSKY
included in the Jay M. Chernosky
Borrowing Base) Senior Vice President
SIXTH AMENDMENT TO CREDIT AGREEMENT - SIGNATURE PAGE 2 OF 2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM TEXOIL, INC. 12/31/98 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 423
<SECURITIES> 0
<RECEIVABLES> 4,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,910
<PP&E> 50,049
<DEPRECIATION> 5,330
<TOTAL-ASSETS> 51,090
<CURRENT-LIABILITIES> 4,288
<BONDS> 0
0
0
<COMMON> 393
<OTHER-SE> 10,909
<TOTAL-LIABILITY-AND-EQUITY> 51,090
<SALES> 9,190
<TOTAL-REVENUES> 10,356
<CGS> 5,246
<TOTAL-COSTS> 5,782
<OTHER-EXPENSES> 4,273
<LOSS-PROVISION> 1,208
<INTEREST-EXPENSE> 982
<INCOME-PRETAX> (1,889)
<INCOME-TAX> 1,003
<INCOME-CONTINUING> (886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (886)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
