UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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 0-14096
Foreland Corporation
(Exact name of registrant as specified in its charter)
Nevada 87-0422812
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
143 Union Boulevard, Suite 210
Lakewood, Colorado 80228-2019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 988-3122
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $0.001
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
nonaffiliates computed at the average closing bid and asked prices in the over-
the-counter market as quoted on the National Association of Securities Dealers
National Quotation system ("NASDAQ") on April 13, 1999, was approximately $
7,441,748.
As of April 13, 1999, Foreland had outstanding 9,696,240 shares of its
common stock, par value $0.001.
Foreland's definitive proxy statement related to the 1999 annual meeting
of stockholders is incorporated herein by reference in response to Part III of
this annual report.
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PREFACE
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. When
used in this report, the words "believe," "may," "will," "should," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar words and
expressions are generally intended to identify forward-looking statements.
Statements that describe Foreland's future strategic plans, goals or objectives
are also forward-looking statements.
Readers of this report are cautioned that:
. any forward-looking statements, including those regarding Foreland or its
management's intent, belief or current expectations, are not guarantees of
future performance or results or events and involve risks and
uncertainties, such as:
* the prices of oil and the sales prices of finished goods;
* the successful integration of the refining, transportation, and
marketing operations with the exploration and production operations of
Foreland;
* the construction and operation of the asphalt processing facility;
* the availability of feedstock for refining;
* achievement of operating goals;
* quarterly fluctuations in operating results;and
* unanticipated changes in expenses or capital expenditures; and
. actual results and events may differ materially from those in the forward-
looking statements as a result of various factors, including:
* general economic conditions in the markets in which Foreland operates;
* competitive pressures within the industry and/or the markets in which
Foreland operates;
* the effect of future legislation or regulatory changes on Foreland's
operations; and
* other factors described in risk factors contained in this report.
The forward-looking information is based on present circumstances and on
Foreland's predictions respecting events that have not occurred, which may not
occur or which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including the risk factors detailed in this report. The forward-looking
statements included in this report are made only as of the date of this report.
The cautionary statements made in this report are intended to be applicable to
all related forward-looking statements wherever they appear in this report.
Foreland assumes no obligation to update such forward-looking statements or to
update reasons that actual results could differ materially from those
anticipated in such forward-looking statements.
OIL AND GAS TERMS
All defined terms under Rule 4-10(a) of Regulation S-X shall have their
statutorily prescribed meanings when used in this report.
<PAGE>
PART I.
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES
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Company Overview
Foreland's refinery and transportation segment refines crude oil in Nevada
and distributes and markets petroleum products throughout the western U.S. Its
oil and gas production segment explores for and produces crude oil in the
central Nevada region.
Refining and Marketing
Foreland owns and operates a refinery at Eagle Springs, Nevada, which has
the daily capacity to refine 4,500 to 6,000 barrels of crude oil produced in
Nevada by Foreland and other operators and by other operators in nearby states.
Refined products produced at Eagle Springs include asphalts, solvents, fuels,
and other specialty products. Foreland also owns a refinery at Tonopah, Nevada,
which is currently used as a storage terminal for products produced at Eagle
Springs, as well as for processing pipeline transmix (the blend of products
resulting when a pipeline changes from transporting one product to another).
The transmix processed at Foreland's Tonopah refinery yields gasoline, diesel,
and other specialty products that are marketed by Foreland.
Foreland owns an equity interest in the Cowboy Asphalt Terminal in Salt
Lake City, Utah. Cowboy Asphalt Terminal is a 180,000 barrel terminal used for
the storage and marketing of refined products. Foreland is nearing completion
of a manufacturing facility at Cowboy Asphalt Terminal for converting asphalt
flux into premium roofing asphalt. Foreland's Eagle Springs Refinery produces
high-quality asphalt flux from crude oil produced from one of Foreland's Nevada
oilfields.
Foreland owns a trucking fleet consisting of 24 truck tractors and 75 oil
gathering and finished goods delivery tank trailers. Foreland's trucks are used
for transportation of asphalt flux from the Eagle Springs Refinery to the Cowboy
Asphalt Terminal; distribution of other refined products through the western
U.S.; backhaul of crude oil and other products to Foreland's refineries;
gathering crude oil from Nevada oilfields; and transportation of refined
products for third parties as a common carrier.
Foreland purchased the refining and marketing assets from an unrelated firm
on August 12, 1998.
Exploration and Production
Foreland is engaged in the exploration for, and production of, crude oil in
the central Nevada region. Foreland owns an interest in four producing
oilfields in Nevada. All of the crude oil produced from these fields is
gathered by Foreland's trucks and refined at its Eagle Springs Refinery.
Foreland pioneered the use of 3D seismic in Nevada and has assembled a
proprietary technical database which is used in its exploration efforts.
Foreland has established a substantial inventory of exploration leads in Nevada
for possible exploration.
Certain Risks
Foreland's activities are subject to significant risks. See "Risk Factors"
below.
Foreland's Current Precarious Financial Condition
Foreland is suffering from extreme shortages of working capital, defaults
on major indebtedness and due or past due current liabilities and the need for
substantial amounts of additional investment, strategic alliances, or a sale,
merger, or reorganization involving all or portions of its business and
operations.
Foreland Had a Working Capital Deficit of $9.8 Million (disregarding $1.2
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million non-cash accrued discount for debt issuance) as of December 31,
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1998, and Faces Extreme Working Capital Requirements. Based on current
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oil production and prices, refinery throughput, and finished goods sales and
margins, Foreland does not generate sufficient revenues to satisfy its cash
requirements for general and administrative expenses, dividends on preferred
stock, principal payments on debt, and other payments to trade creditors and
others respecting approximately $15.2 million in short-term liabilities as of
December 31, 1998, including $12.4 million resulting from reclassification of
Foreland's long-term debt. Similarly, Foreland has insufficient cash to
undertake material oil and gas exploration.
Foreland Has Insufficient Cash to Pay $12.6 Million in Secured Indebtedness.
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Foreland was not able to pay the principal payment of $338,096 due April 1,
1999, on $12.6 million indebtedness due Energy Income Fund ("EIF"), did not
make earlier payments that were subsequently deferred and has not been in
compliance with certain financial covenants relating to minimum collateral to
indebtedness ratio, cash flow, equity requirements, current ratio, debt
service ratio, and general and administrative expense percentages. All of
Foreland's assets and operations used in its refinery, transportation and
marketing activities and its producing properties are encumbered as security
for this obligation. On April 15, 1999, EIF agreed to defer the first
principal payment (now $347,437) until May 1, 1999, and waive compliance with
the financial covenants until May 15, 1999. Foreland is implementing cost
cutting measures and restructuring its resources in order to be able to make
the required payments and comply with the financial covenants, but there is
no assurance it will be able to do so. If Foreland fails to make a required
payment or comply with the financial covenants, EIF will have the legal right
to implement its remedies on default, initiate foreclosure and seek to take
possession of substantially all of Foreland's assets. There can be no
assurance that EIF will agree to any further extensions or modifications or
continue to forbear from exercising its remedies in the event of a default.
Foreland's Audit Report for the Year Ended December 31, 1998, Contains a
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Going Concern Explanatory Paragraph. Foreland's independent auditor's
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report on the December 31, 1998, financial statements, as for preceding
fiscal years, contains an explanatory paragraph which indicates there is
substantial doubt as to Foreland's ability to continue as a going concern. As
of December 31, 1998, Foreland had a working capital deficit of $9.8 million
(disregarding the $1.2 million non-cash accrued discount for debt issuance)
and an accumulated deficit of $39.6 million since its inception in 1985.
Foreland had losses of $13.9 million for the year ended December 31, 1998,
and expects its losses to continue. Foreland is delinquent in payments to
trade creditors and others. There can be no assurance that Foreland's
efforts to obtain forbearance from EIF, trade creditors, or others; implement
adequate cost cutting measures; severely restrict activities; or implement
other measures that will enable Foreland to continue.
Foreland Will Need Additional Investment, Strategic Alliance or Sale/Merger.
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In order for Foreland to continue, it will need to capitalize on its market
position, technical capabilities, management, assets and identified business
opportunities by either raising additional capital, creating a strategic
alliance with another company, or selling or merging some or all of its lines
of business. Foreland has engaged an investment banker to assist in these
efforts.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Foreland's consolidated financial statements.
<PAGE>
Corporate Goals
Foreland's goal is to realize high margins on the sale of refined products
by:
. owning fully-integrated exploration and production as well as refining
and marketing assets;
. focusing on niche product markets where Foreland is not in competition
with larger, integrated oil companies;
. developing new markets for its products throughout the western U.S.; and
. owning its own crude oil supply for a substantial portion of its
refinery feedstock, supplemented by an aggressive exploration program in
central Nevada.
Corporate Strategy
Foreland seeks to attain its goal of becoming an integrated regional
exploration, production, refining, and marketing company that competes in niche
markets by implementing a strategy with the following principal components:
. Develop and significantly expand refined product marketing throughout
the western U.S.
. Manufacture and market roofing asphalt from its terminal in Salt Lake
City.
. Increase refinery feedstock throughput to achieve economics of scale by
(a) acquisition of producing properties; (b) refinery feedstock purchase
contracts; and (c) identification of backhaul opportunities (hauling
product using otherwise empty trucks) using Foreland's transportation
fleet.
. Increase the effective value of existing and future crude oil production
by owning fully-integrated refining and marketing assets.
. Explore and develop the central Nevada region to generate additional
crude oil feedstock for its oil refinery and marketing segments.
Refining and Transportation
In August 1998, Foreland completed the purchase of certain Nevada refining
and transportation assets from Petro Source Corporation. These assets include
the Eagle Springs and Tonopah, Nevada, Refineries, and a fleet of trucks to
gather crude oil and distribute products. Foreland is now integrating the
refining and transportation assets with its Nevada oil production and markets a
range of refined products. Foreland employs about 60 people formerly employed
in Petro Source's refining and marketing operations.
Eagle Springs Refinery
The Eagle Springs Refinery is located on U.S. Highway 6, about ten miles
southwest of Currant, Nevada, and immediately adjacent to the Eagle Springs
field. Eagle Springs Refinery is approximately 200 miles from Las Vegas, 310
miles from Salt Lake City, and 550 miles from Los Angeles. Eagle Springs
Refinery was built in 1984 on open land leased from the Bureau of Land
Management. The 30-year lease for the land expires in 2014. The refinery
produces several grades of asphalts, solvents, fuels, and specialty products.
Eagle Springs Refinery has the capacity to process between 4,500 and 6,500
barrels per day of crude oil, depending on its specifications. Eagle Springs
Refinery's current throughput is approximately 2,025 barrels of feedstock per
day. Eagle Springs Refinery is a self-contained facility with steam generation
equipment, a control room, maintenance shop, laboratories, and related
facilities. Eagle Springs Refinery also has a fully equipped truck maintenance
facility that can perform major tractor/trailer overhauls for Foreland's
trucking fleet. All of the crude oil processed at Eagle Springs Refinery is
obtained from Nye County, Nevada, and is delivered by Foreland's trucks into
approximately 20,000 barrels of crude oil storage capacity.
Three main types of crude oil are refined at Eagle Springs Refinery: light
crude, sour crude, and heavy crude. The asphalts produced from Foreland's sour
crude make excellent roofing asphalt. All of the projected future production of
roofing asphalt flux from Eagle Springs Refinery will feed the Cowboy Asphalt
Terminal in Salt Lake City (discussed in a later section of this report). The
three different types of crude are kept in separate tanks and run in batches so
that only one type of crude oil is processed at any given time. Eagle Springs
Refinery is operated this way because each type of crude produces asphalt and
other products with distinct properties and qualities. Eagle Springs Refinery
currently refines just over 2,025 barrels per day of crude in total, consisting
of 900 barrels of Nevada light crude, 700 barrels of sour crude (predominantly
Foreland's crude from the Eagle Springs and Ghost Ranch fields), 220 barrels of
Nevada heavy crude (including crude from its Kate Spring field), plus 210
barrels of other backhauls. Eagle Springs Refinery has approximately 65,000
barrels of storage capacity for refined products.
Foreland's main consideration in acquiring the Eagle Springs Refinery and
related assets was to capture the refinery's historical gross operating margins.
By capturing those margins, Foreland may justify expenditures for oilfield
workovers and maintenance as well as exploration during the current low oil
price environment. Foreland believes that the refinery's isolated location for
captive crude supplies and products markets is the reason for its consistently
high margins.
Tonopah, Nevada, Refinery
The Tonopah Refinery is located five miles east of Tonopah, Nevada, in Nye
County, approximately 100 miles from the Eagle Springs Refinery. Tonopah
Refinery commenced operations in 1978. The refinery site is located on
property now owned by the state of Nevada and leased by Foreland under a lease
expiring June 2004, with an option to extend the lease for an additional 25
years. As with Eagle Springs Refinery, Tonopah Refinery is completely self-
contained with steam generation equipment, mechanical shops, a control room,
office, laboratory, and related facilities.
Refined crude oil products produced at Tonopah Refinery include naphtha,
kerosene, several grades of diesel, atmospheric gas oil, and residual fuel. Due
to the decline in Nevada crude oil production over the last few years, Tonopah
Refinery is currently used as a storage terminal for Eagle Springs Refinery's
products and as a facility for processing transmix.
Millions of barrels per day of gasoline, diesel, and jet fuel are moved in
batches through pipelines connecting refineries to terminals and distribution
centers across the country. Each refiner and marketer is responsible for
disposing of the interface, or blend, of products between batches of individual
products. The mixture found where the two individual products are blended is
called "transmix" (or, more formally, transmission mixture). Transmix supply
for the Tonopah Refinery comes from pipeline terminals in northern and central
California as well as Sparks and Las Vegas, Nevada. The total volume of
transmix from these sources is estimated to be approximately 3,800 barrels per
day. The Tonopah Refinery currently receives about 700 barrels per day of
transmix that is trucked to the refinery. Processing equipment at Tonopah
Refinery consists of two conventional atmospheric distillation towers. Tonopah
Refinery has 63,000 barrels of storage capacity.
Transmix is processed at Tonopah Refinery into gasoline, diesel, and other
specialty products. These products are mostly marketed locally, although its
truck fleet enables Foreland to backhaul finished gasoline and diesel into the
Las Vegas and Sparks/Reno markets when prices are favorable. Foreland
consistently evaluates new markets for specialty products that can be produced
at Tonopah Refinery. For example, Foreland is currently studying the economics
of producing specialty waxes that could be sold to manufacturers of wax firelogs
in California. The wax sold to the manufacturers would be a blend of wax bought
in Utah and backhauled to the Tonopah Refinery, plus wax produced from Foreland
crude refined at Eagle Springs Refinery. Management believes that it can supply
a quality wax product into the California market at a lower price than that
offered by the manufacturers' existing suppliers in Salt Lake City. Two firelog
manufacturers have indicated an interest in purchasing Foreland's estimated wax
production from Tonopah Refinery.
Asphalt Marketing
Foreland owns a 33% interest in Cowboy Asphalt Terminal, LLC ("Cowboy"), an
entity that owns the Cowboy Asphalt Terminal in Salt Lake City. The terminal is
a 180,000 barrel storage facility with several key strategic benefits for
Foreland:
. Heated asphalt storage capacity for roofing asphalt flux produced at
Eagle Springs Refinery;
. A variety of other product storage tanks;
. Strategic location for distribution of roofing flux to potential
purchasers; and
. Land for future expansion.
By virtue of its ownership of the Eagle Springs field, Foreland has a
dedicated supply of crude oil that makes excellent asphalt flux. Foreland is
nearing completion of construction of an asphalt flux blowing facility at
Cowboy. This facility will convert the high quality asphalt flux produced at
Eagle Springs Refinery into roofing asphalt. Foreland previously sold its
asphalt flux to a refinery in Salt Lake City owned by a third party. Foreland
believes that it can gain market share in the asphalt roofing market and
increase gross margin per ton by selling asphalt as high quality roofing
asphalt. This is expected to enhance the value to Foreland of its Nevada crude
used to produce flux at Eagle Springs Refinery. Foreland estimates that
approximately 25% of the roofing asphalt produced at Cowboy will be sold in the
Salt Lake City area, with the remaining 75% sold throughout ten western states,
predominantly California and Nevada.
Transportation
As part of its acquisition of assets from Petro Source, Foreland acquired
the stock of Petrosource Transportation (now renamed Foreland Transportation)
("Transportation"), an entity that owns and operates a tanker transportation
fleet. Transportation was originally formed to haul crude oil from producing
fields in Nevada to the Eagle Springs and Tonopah Refineries. Later, Petro
Source began using its trucks to distribute finished products. Rather than
having the trucks return empty, Transportation began backhauling (using
otherwise empty trucks) products into Nevada.
Foreland's transportation fleet consists of approximately 24 truck tractors
(18 leased, six owned) and 75 oil gathering and finished goods delivery tank
trailers (six leased, 69 owned). Foreland believes that it is able to control
its transportation costs by operating its own trucking fleet. Transportation
holds contract carrier authority from the Interstate Commerce Commission.
Contract carrier authority allows the trucks to haul products for third parties,
thereby generating revenue and acting as a profit center for Foreland. Foreland
employs a number of former key Petro Source personnel who were responsible for
running Transportation, including the fleet manager.
As discussed previously, the Eagle Springs and Tonopah Refineries have
well-equipped truck maintenance facilities. Transportation access to the Eagle
Springs and Tonopah Refineries is provided by U.S. Highway 6 and other state
highways that provide a link to the population areas of Salt Lake City, Las
Vegas, Bakersfield, Reno, and Los Angeles.
Marketing
General
During 1997, Foreland initiated a program to become an integrated
exploration, production, refining and marketing company competing in niche
markets to enable Foreland to market finished products for a higher return than
it could obtain through the sale of its crude oil. This program ultimately
resulted in acquisition of the Eagle Springs and Tonopah Refineries, as well as
the related transportation assets. Additionally, in 1998, Foreland acquired a
33% interest in Cowboy Asphalt Terminal, LLC, and is nearing completion of the
manufacturing facility at the Cowboy Asphalt Terminal for converting the high
quality asphalt flux produced at the Eagle Springs Refinery into premium roofing
asphalt.
Product Markets
Foreland's refined products are sold to a variety of customers, including
mines, military users, utilities, other refineries, railroads, product brokers,
paving contractors and construction companies. Markets for specific products
are discussed below:
. Naphtha. Naphtha is marketed to other refineries as a gasoline blendstock if
it cannot be sold locally as mineral spirits. The closest refineries are in
Salt Lake City, with alternative markets in Los Angeles and Bakersfield.
. No. 1 Diesel. No.1 diesel is currently sold to a military base near Las
Vegas under a new three-year contract. An alternative market for No. 1
diesel is as a highway diesel fuel in Nevada.
. No. 2 Diesel. There are approximately 60 mines operating in Nevada which
purchase diesel for fuel. Many of these are strip-mining operations that
consume significant quantities of off-road diesel. Foreland currently sells
most of its No. 2 diesel to one mine in Nevada.
. Fuel Oils. Fuel oils from the Eagle Springs Refinery go to one of two
markets, depending on whether the fuel oil is blended to achieve a low sulfur
content (less than 1 percent). Low sulfur fuel oil is currently sold to
three customers in Nevada. Surplus low sulfur fuel oil, and high sulfur fuel
oil that cannot be blended to have less than 1 percent sulfur, are sold as
feedstock to refineries in Salt Lake City, Los Angeles or Bakersfield.
. Paving Asphalt. The paving asphalt market in Nevada is growing, and the
Eagle Springs Refinery is able to supply product with a transportation cost
advantage. Foreland is able to market all of its current production of
paving asphalt to private contractors and the State of Nevada.
. Roofing Asphalt Flux. Historically, roofing asphalt flux produced at the
Eagle Springs Refinery was sold to one asphalt marketer in Salt Lake City.
After acquiring the refinery, Foreland continued to sell its flux to this
manufacturer for several months, pending construction of Foreland's own flux
blowing facility at Cowboy Asphalt Terminal. Flux from the Eagle Springs
Refinery is now being stored at Cowboy Asphalt Terminal. All of the
projected future production of roofing asphalt flux from the Eagle Springs
Refinery will be trucked to Cowboy Asphalt Terminal, blown to produce roofing
asphalt and marketed by Foreland. If the production of flux from the Eagle
Springs Refinery exceeds the capacity of Cowboy Asphalt Terminal, potential
markets exist with manufacturers in Denver, Los Angeles and Portland.
Since acquisition of the Eagle Springs and Tonopah Refineries, Foreland
does not sell any crude oil to external purchasers.
Sales to Round Mountain Gold Corporation account for 20% of the refining
and transportation operations revenues
Exploration and Production
Producing Oilfields
Foreland owns working interests in four oil fields in Nevada. They are the
Eagle Springs, Ghost Ranch, Kate Spring, and Sand Dune fields. The Eagle
Springs field, Nevada's first oilfield, was discovered by Shell Oil Company in
1954 with the drilling of the No. 1 Eagle Springs Unit, which initially produced
343 barrels per day. By 1967, 14 wells had been completed in the field. This
early phase of the field's development saw a peak daily production rate in 1966
of 850 barrels of oil. Shell sold the field to other owner-operators, and
Foreland acquired the field in 1993 after it had been shut in for much of the
year due to low production. The previous operator had left the field with some
required environmental remediation which Foreland undertook to clean up in
conjunction with the Bureau of Land Management. Foreland's successful
environmental clean up efforts resulted in the Bureau of Land Management
awarding Foreland its first "Health of the Land" award in June 1996.
Foreland performed a 7.5 square mile 3D seismic shoot in March 1994 to
identify additional drilling locations at Eagle Springs. This data allowed
Foreland to commence a drilling program in the field, raising the peak
production rate to about 560 barrels per day. Eight of Foreland's nine new
wells were completed successfully. Cumulative production from the field is now
approximately 4.7 million barrels of oil.
In September 1997, Foreland initiated an enhanced oil recovery program in
Eagle Springs using high pressure air injection. The pilot program was
completed in early 1998. Although Foreland reported favorable results
initially, the project has now been terminated because the fractured nature of
the reservoirs led to minimal increased production and rapid breakthrough of
injected air. Foreland intends to return a former air injector into production.
The 3D data from the Eagle Springs field also indicated some structural
anomalies that Foreland considered exploratory prospects within the shoot area.
Based on these structural anomalies, Foreland began drilling about one-half mile
south of the Eagle Springs field. This well was spudded in July 1996 and
discovered oil in Devonian dolomite at 4,370 feet. The Ghost Ranch 48-35 well
was the discovery well for a new field and was completed producing 393 barrels
per day. Foreland believes that the Ghost Ranch well was the first use of 3D
seismic to locate a discovery well in Nevada. Foreland completed two additional
wells in the field during 1997. The Ghost Ranch field has produced 170,000
barrels of oil since its discovery. The field currently produces about 160
barrels per day. Foreland believes that its successful development drilling
program at Eagle Springs and its subsequent discovery of the Ghost Ranch field
have validated its extensive use of 3D seismic in Nevada.
Foreland owns a 21.8% working interest in one well (Kate Spring 12-2) in
the Kate Spring field, located approximately one mile south of Eagle Springs.
The field was discovered in 1986. The well is operated by Makoil, Inc., and
currently produces 50 barrels per day.
In July 1998, Foreland completed for production the Sand Dune no. 88-35
well on the Sand Dune field. The Sand Dune field is located approximately one-
half mile south of the Eagle Springs field and was identified by Foreland
through the use of 3D seismic. The well currently produces approximately 35
barrels per day.
All of the oil produced by Foreland is trucked to the Eagle Springs
Refinery for processing.
Nevada Exploration
Since its formation, Foreland has developed a comprehensive database of
geological and geophysical data pertaining to Nevada. The database was
assembled under the guidance of Dr. Grant Steele and consists of 50,000 square
miles of geologic mapping; 6,000 square miles of detailed gravity data; 15,000
square miles of air photo and satellite data; 1,400 line miles of 2D seismic
data; and 46 square miles of 3D seismic data. Foreland believes that Nevada is
well suited to the application of 3D data, due to the complexity of geological
structures. Conventional 2D seismic data had proven to be inadequate to
properly image most subsurface structures in the region. These structures can
be extremely large vertically, with up to 3,000 feet differences in the
subsurface depth, but very small in aerial extent. Foreland's strategy of
developing a comprehensive database and applying 3D technology was confirmed
with Foreland's discovery of the Ghost Ranch field in July 1996.
Foreland currently leases approximtely 166,600 gross (136,700 net) acres in
Nevada, and has developed a five-year, 3D-defined exploration and exploitation
program. The program consists of a balance of lower-risk opportunities to
exploit areas with large estimated amounts of oil in place, along with
exploration prospects with higher reserve and deliverability potential. A
summary of three of Foreland's large-target exploration prospects follows:
Hay Ranch Exploitation Area, Pine Valley, Nevada Foreland has identified
six leads in the Northern Pine Valley area using 2D seismic. . Foreland has
begun to process a 24.5 square mile 3D seismic shoot to properly image the
structural blocks, and to define locations for vertical wells or high angle
lateral wells.
Toano Draw, Northeastern Nevada An 800 foot column has produced oil
without water from a well reentered by Foreland in Toano Draw. This well
demonstrated that producible oil is present in the area but due to economic
consideration, producing equipment has not been installed. Foreland projects
that the thickness of the source rock averages approximately 700 feet. Foreland
has proposed a 30 square mile 3D seismic shoot to delineate the structural
blocks updip, and pinpoint drilling locations.
North Humboldt Prospect, Nevada The North Humboldt prospect is a large
structure covering approximately 5,000 acres on the flank of a deep Tertiary
basin. The structure has been delineated by detailed gravity and 2D seismic.
Oil has been tested from oil shale outcrops located to the north of the
prospect. Foreland controls a contiguous block of approximately 20,000 acres
over the prospect.
During 1998, Foreland conducted the following activities:
. drilled and placed into production one well in the Sand Dune prospect;
. entered into a joint venture with Conley P. Smith Operating Company for
exploration in Cave Valley, Nevada, for a 33% interest, and under such
joint venture drilled one exploration test, the Flat Top 27-15, which
was plugged and abandoned;
. entered into an agreement with McMurry Oil Company to participate in
Foreland's Dixie Flats prospect for a 50% interest, and under such
agreement drilled the initial test well, which was plugged and
abandoned; and
. drilled and tested North Pine Creek 1-6 exploratory well, subsequently
plugged and abandoned; and
. drilled and tested the Eagle Springs no. 14-35 development well and
Ghost Ranch no. 58-35 development well, both of which were plugged and
abandoned.
Management expects that it will take several years to fully explore the
Nevada target areas that have been identified by Foreland. In the meantime,
Foreland continues to increase and improve its geological and geophysical
expertise in central Nevada through its own drilling and field exploration
efforts, and by obtaining data from third parties as part of joint exploration,
property acquisition and data sharing arrangements. Foreland also reanalyzes
existing information as additional drilling data is gathered, and as new
computer techniques become available to the industry.
Proved Reserves
Foreland is engaged in the exploration for, and production of, crude oil in
the central Nevada region. Foreland owns an interest in four producing
oilfields in Nevada. All of the crude oil produced from these fields is
gathered by Foreland's trucks and refined at its Eagle Springs Refinery.
The following table sets forth the estimated oil reserves, net to
Foreland's interest, of oil and gas properties as of December 31, 1998. The
reserve information is based on the independent appraisal prepared by Malkewicz
Hueni Associates, Inc., Golden, Colorado, and was calculated in accordance with
the rules and regulations of the Securities and Exchange Commission. In
accordance with such rules and regulations, the estimates of future net revenues
from Foreland's proved reserves are made using a sales price of $5.80 per
barrel, held constant throughout the life of the properties, and do not consider
the price that Foreland may receive after refining the crude oil into finished
products. Due to the low oil price of $5.80 at December 31, 1998, as compared
to the oil prices of $12.55 and $18.05 per barrel used in the previous two year-
end reserve studies, Foreland recognized substantial downward revisions in its
oil reserve quantities, the standardized measure and net capitalized costs due
to impairment.
Present Value of
Estimated Future
Net
Estimated Revenues,
Estimated Proved Reserves Oil Discounted at 10% (1)
- ---------------------------- ---------- ---------------------
(MBbl) (In thousands)
Proved Developed Producing
Eagle Springs field..... 348.9 $362.3
Ghost Ranch field....... 159.5 129.2
Kate Springs field...... -- --
Sand Dune field -- --
---------- ---------------------
Total............... 508.5 $491.5
========== =====================
- --------
(1) The price used in the evaluation was the year-end values at the wellhead of
$5.80 per barrel. Operating costs have not been escalated. The operating
costs, based on information provided by Foreland, are computed by
estimating expenditures to be incurred in developing and producing the
proved oil reserves, based on year-end costs and assuming the continuation
of existing economic conditions. See "Item 8. Financial Statements and
Supplementary Data."
The oil reserves assigned to the properties in the evaluation were
determined by analyzing current test data, extrapolating historical production
data, and comparing field data with the production history of similar wells in
the area. The current volatility of oil prices provides an element of
uncertainty to any estimates. If prices should vary significantly from those
projected in the appraisal, the resulting values would change substantially.
The reserve estimates contained in the engineering report are based on accepted
engineering and evaluation principles. The present value of estimated future
net revenues, discounted at 10%, does not necessarily represent an estimate of a
fair market value for the evaluated properties.
In 1997 and 1998, Foreland implemented a high pressure air injection
project that was expected to increase production in portions of the Eagle
Springs field. The fractured nature of the reservoirs did not result in
increased oil production and the program was discontinued. The 1998 reserve
report gives effect to future oil recovery that may be realized from returning a
former air injection well to production.
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates in the appraisal are based on various
assumptions relating to rates of future production, timing and amount of
development expenditures, oil prices, and the results of planned development
work. Actual future production rates and volumes, revenues, taxes, operating
expenses, development expenditures, and quantities of recoverable oil reserves
may vary substantially from those assumed in the estimates. Any significant
change in these assumptions, including changes that result from variances
between projected and actual results, could materially and adversely affect
future reserve estimates. In addition, such reserves may be subject to downward
or upward revision based upon production history, results of future development,
prevailing oil prices, and other factors.
The actual amount of Foreland's proved reserves are dependent on the
prevailing price for oil, which is beyond Foreland's control or influence.
World oil prices declined significantly during 1997 and 1998 from previous
years. There can be no assurance that oil prices will not continue to decline
in the future. Oil and gas prices have been and are likely to continue to be
volatile and subject to wide fluctuations in response to any of the following
factors: relatively minor changes in the supply of and demand for oil and gas;
market uncertainty; political conditions in international oil producing regions;
the extent of domestic production and importation of oil; the level of consumer
demand; weather conditions; the competitive position of oil as a source of
energy as compared with natural gas, coal, nuclear energy, hydroelectric power,
and other energy sources; the refining capacity of prospective oil purchasers;
the effect of federal and state regulation on the production, transportation and
sale of oil; and other factors, all of which are beyond the control or influence
of Foreland.
In an effort to limit the adverse effects of extreme declines in oil
prices, Foreland has acquired and is operating the Eagle Springs and Tonopah
refineries. Additionally, Foreland is constructing a roofing asphalt
manufacturing facility in an effort to integrate production, processing, and
marketing to obtain price protection, establish a new profit center, and
increase revenues.
Wells and Acreage
In the oil and gas industry and as used herein, the word "gross" well or
acre is a well or acre in which a working interest is owned; the number of gross
wells is the total number of wells in which a working interest is owned. A
"net" well or acre is deemed to exist when the sum of fractional ownership
working interests in gross wells or acres equals one. The number of net wells
or acres is the sum of the fractional working interests owned in gross wells or
acres.
Shown below is a tabulation of the productive wells owned by Foreland in
Nevada as of December 31, 1998.
Productive Oil Wells
--------------------
Gross Net
-------- --------
23.0 17.79
Set forth below is information respecting the developed and undeveloped
acreage owned by Foreland in Nevada as of December 31, 1998.
Developed Acreage Undeveloped Acreage
----------------- ----------------------
Gross Net Gross Net
------ ------- -------- --------
4,280 4,184 166,600 136,700
Foreland's leases in Eagle Springs (2,960 gross and net acres), Ghost
Ranch (80 gross and net acres), Tomera Ranch (680 gross and net acres), North
Willow Creek (400 gross and net acres), Sand Dune (80 gross and net acres) and
Kate Springs (80 gross and 16 net acres) are held by production. Foreland's
undeveloped leases have various primary terms ranging from one to ten years.
Management believes that the expiration of any individual or group of related
undeveloped leasehold interests would not have a material adverse effect on
Foreland. Annual rentals on all undeveloped leases for 1999 are expected to be
approximately $168,400.
Drilling Activities
Set forth below is a tabulation of wells drilled and completed in which
Foreland has participated and the results thereof for each of the periods
indicated.
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
Gross Net Gross Net Gross Net
----- ---- ----- ----- ----- -----
Exploratory:
Dry.................... 2.0 1.16 -- -- 3.0 1.36
Oil.................... 2.0 1.60 -- -- -- --
Gas.................... -- -- -- -- -- --
----- ---- ----- ----- ----- -----
Totals............. 4.0 2.76 -- -- 3.0 1.36
===== ==== ===== ===== ===== =====
Development:
Dry.................... -- -- -- -- 2.0 2.0
Oil.................... -- -- 2.0 1.2 1.0 1.0
Gas.................... -- -- -- -- -- --
----- ---- ----- ----- ----- -----
Totals............. -- -- 2.0 1.2 3.0 3.0
===== ==== ===== ===== ===== =====
Production and Sale of Oil
The following table summarizes certain information relating to Foreland's
net oil produced and sold from Foreland's Nevada properties, after royalties,
during the periods indicated.
Year Ended December 31,
------------------------
1996 1997 1998
------- ------ --------
Average net daily production of oil (Bbl) 325 492 436
Average sales price of oil ($ per Bbl) $15.87 $12.46 $8.37
Average production cost ($ per Bbl)(1) $4.01 $5.03 $5.83
- ----------
(1)Includes lifting costs (electricity, fuel, water disposal, repairs,
maintenance, pumper, and similar items), and production taxes. Excludes
costs related to Eagle Springs air injection enhanced oil recovery project,
which has now been terminated.
Production from Eagle Springs started in January 1994, and currently
accounts for about 70% of Foreland's oil production. As part of routine field
maintenance wells are shut-in from time to time, subject to the availability of
appropriate rigs and equipment in the area and the availability of funds.
In December 1997, Foreland entered into an agreement, effective March 1,
1998, for the sale of all of its Nevada crude oil to Petro Source at the Eagle
Springs Refinery, which was subsequently acquired by Foreland in August 1998.
Foreland's activities are generally dependent on the prevailing price for
oil and finished goods sales, which are beyond Foreland's control or influence.
Management believes that refinery margins are less volatile than oil prices.
However, oil prices will continue to have an effect on the supply of crude oil
available to Foreland for processing, the level of exploration and development
activities generally in Nevada and surrounding areas, and the prices and margins
of finished goods.
World oil and gas prices and the prices and margins of finished goods have
been and are likely to continue to be volatile and subject to wide fluctuations
in response to:
. the supply and demand for refined products;
. market uncertainty;
. political conditions in international oil producing regions;
. the extent of domestic production and importation of oil;
. the level of consumer demand;
. weather conditions;
. the competitive position of oil as a source of energy as compared with
natural gas, coal, nuclear energy, hydroelectric power, and other energy
sources;
. the effect of federal and state regulation on the production,
transportation and sale of oil;
. and other factors, all of which are beyond the control or influence of
Foreland.
In addition to its direct impact on the prices at which oil or gas may be sold,
adverse changes in the market or regulatory environment would likely have an
adverse effect on Foreland's ability to obtain funding from lending
institutions, industry participants, the sale of additional securities, and
other sources.
Overall operating costs are a combination of costs associated with each
well and costs associated with operation of the entire field. In addition,
operating costs may continue to vary materially due to the costs of ongoing
treatment or reworking of existing wells and the impact of the other factors
discussed above. Foreland has only minor gas production which is used in
operations to reduce lifting costs.
Title to Properties
Substantially all of Foreland's working interests are held pursuant to
leases from third parties. Foreland performs only a minimal title investigation
before acquiring undeveloped properties, and a title opinion is typically
obtained shortly before the commencement of drilling operations. Foreland has
obtained other documentary confirmation of title on its principal producing
properties and believes that it has satisfactory title to such properties.
Foreland's properties are subject to customary royalty interests, liens for
current taxes, and other common burdens which Foreland believes do not
materially interfere with the use of such properties and whose economic effect
has been appropriately reflected in Foreland's acquisition costs of such
properties.
Government Regulation
The exploration for and production of oil in the United States are subject
to extensive regulation by both federal and state authorities. The following
discussion concerning regulation of the oil and gas industry is necessarily
brief and is not intended to constitute a complete discussion of the various
statutes, rules, regulations, and governmental orders to which operations of
Foreland may be subject.
Environmental Regulations
Operations of Foreland are subject to comprehensive federal, state, and
local laws and regulations governing the storage, use, and discharge of
materials into the environment, the remediation of environmental impacts, and
other matters relating to environmental protection, all of which may adversely
affect Foreland's operations and costs of doing business. It is probable that
state and federal environmental laws and regulations or their interpretations
will become more stringent in the future. There can be no assurance that
measures to further regulate the disposal of oil waste may not be adopted.
Environmental laws and regulations are frequently changed so Foreland is unable
to predict the ultimate cost of compliance. Foreland does not believe that it
will be required in the near future to expend material amounts due to current
environmental laws and regulations.
Present, as well as future, legislation and regulations could cause
additional expenditures, restrictions, and delays in Foreland's business, the
extent of which cannot be predicted and which may require Foreland to limit
substantially, delay or cease operations in some circumstances or subject
Foreland to various governmental controls. From time to time, regulatory
agencies have proposed or imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. Because federal energy
and taxation policies are subject to constant revisions, no prediction can be
made as to the ultimate effect of such governmental policies and controls on
Foreland.
In connection with the acquisition of the Eagle Springs property, Foreland
performed limited environmental inquiries and agreed to undertake certain work
to remediate a contaminated drilling pit at a former water injection well site.
That work was completed at a cost of $111,000 in coordination with federal and
state supervising agencies in early 1994, for which Foreland received the Bureau
of Land Management's "Health of the Land" award. Foreland does not believe that
it has any material continuing financial obligation respecting remediation of
environmental matters involving the Eagle Springs field. However, there can be
no assurance that new remediation issues will not arise in the future due to
existing undiscovered conditions or future legislation.
As a negotiated term of the acquisition of the Eagle Springs lease,
Foreland agreed to indemnify the secured creditor from which Foreland acquired a
portion of its property interests against claims for environmental liability.
Foreland does not believe that it has any material financial obligation under
such agreement.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds, and reports concerning drilling
and producing activities. Such regulations also cover the location of wells,
the method of drilling and casing wells, the surface use and restoration of well
locations, and the plugging and abandoning of wells, the density of well spacing
within a given area, and other matters. Nevada also has statutes and
regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil properties and establishment of
maximum rates of production from oil wells. Foreland believes it is currently
in full compliance with all material provisions of such regulations.
Federal Leases
Foreland conducts significant portions of its activities under federal oil
and gas leases. These operations must be conducted in accordance with detailed
federal regulations and orders which regulate, among other matters, drilling and
operations on these leases and calculation and disbursement of delay rentals and
royalty payments to the federal government.
Safety and Health Regulations
Foreland must also conduct its operations in accordance with various laws
and regulations concerning occupational safety and health. Currently, Foreland
does not foresee expending additional material amounts to comply with these
occupational safety and health laws and regulations. However, since such laws
and regulations are frequently changed, Foreland is unable to predict the future
effect of these laws and regulations.
Operational Hazards and Insurance
Foreland's operations are subject to the usual hazards incident to the
drilling, production, refining and transportation of oil. These hazards
include, but are not limited to, pipe failure, blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas, or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
operations and could result in Foreland incurring substantial losses and
liabilities to third parties.
In order to lessen the effects of these hazards, Foreland maintains
insurance of various types to cover its operations. As is customary in
exploration arrangements with other energy companies under which specified
drilling is to be conducted, the operator is required to purchase and pay for
insurance against risks customarily insured against in the oil and gas industry
by others conducting similar activities. Foreland has general liability
insurance of $1 million per occurrence, with a $2 million aggregate limitation,
including coverage for certain oil industry activities. Management believes
that Foreland's current insurance coverage is adequate; however, Foreland may
not be insured against all losses or liabilities which may arise from all
hazards because such insurance is unavailable at economic rates, because of
limitations on the insurance policy, or other factors. Foreland's insurance
does not cover every potential risk associated with the exploration, drilling,
and production of oil. In particular, coverage is not available for certain
types of environmental hazards. The occurrence of a significant adverse event,
the risks of which are not fully covered by insurance, could have a materially
adverse effect on Foreland. Moreover, no assurance can be given that adequate
insurance will be available at reasonable rates or that Foreland or the
operators of wells in which Foreland owns an interest will elect to maintain
certain types or amounts of insurance.
Foreland's activities are subject to periodic interruptions due to weather
conditions, which may be quite severe at various times of the year. Periods of
heavy precipitation make travel to exploration or drilling locations difficult
and/or impossible, while extremely cold temperatures limit or interrupt
drilling, pumping, and/or production activities or increase operating costs.
Employees
Foreland currently has 93 full-time employees, distributed between the
following locations:
. Executive and exploration offices, Lakewood, Colorado: 16 employees
. Foreland Refining Corporation, Woods Cross, Utah: 16 employees
. Eagle Springs Refinery, Nevada: 19 employees;
. Tonopah Refinery, Nevada: 11 employees
. Foreland Transportation, Nevada: 31 employees.
None of Foreland's employees is represented by a collective bargaining
organization, and Foreland considers its relationship with its employees to be
satisfactory.
Facilities
Foreland's principal executive offices located 143 Union Boulevard, Suite
210, Lakewood, Colorado 80228, are rented from an unrelated party under a lease
expiring January 2004, and requiring monthly payments of $9,766, including
certain common area charges. Foreland's refining and transportation segments
executive offices are located at 2561 South 560 West, Suite 200, Woods Cross,
Utah 84087, are rented from an unrelated party under a lease expiring January
2003 requiring monthly payment of $4,185.
Risk Factors
The business of Foreland is subject to a number of material risks,
including, but not limited to, the factors set forth below.
Foreland May Incur Costs and Experience Delays in its Refining,
Transportation, and Marketing Operations
In order for Foreland to operate successfully its refining, transportation,
and marketing segment acquired in August 1998, Foreland may incur substantial
costs or experience significant delays as it assumes management, implements
various operating changes, constructs modifications or improvements, implements
new marketing strategies, or makes other changes. These operations will be
under the supervision of Foreland's executive officers and directors, who have
no substantial experience or expertise in refining, transportation, and
marketing operations. Foreland is significantly dependent on the management
employees who previously worked for Petro Source in refinery and transportation
management and operations and on Foreland's ability to integrate skills and
activities with those of Foreland's management and personnel.
Foreland's Refining and Marketing Strategy is Substantially Dependent on
Successful Roofing Asphalt Manufacturing and Marketing.
Foreland's strategy to increase the revenues and margins received from the
crude oil it produces is substantially dependent on Foreland's ability to
manufacture and market roofing asphalt. Foreland's success in entering the
roofing asphalt market is dependent on successfully:
. completing construction, now underway, at the Cowboy terminal of a
manufacturing facility to produce roofing asphalt from asphalt flux
produced at Eagle Springs; and
. marketing roofing asphalt to be produced, notwithstanding competition
from established manufacturers with established sales forces and
customer relations and greater financial and technical resources than
Foreland.
Foreland Must Acquire More Refinery Feedstock to Achieve Economies of Scale
At current levels of Eagle Springs Refinery throughput of approximately
2,025 barrels per day, Foreland's revenues from refining, transportation, and
marketing operations are meeting related costs but do not provide sufficient
funds for exploration, development, and production operations, for general and
administrative expenses or to make interest and principal payments due on the
EIF secured indebtedness. In order to increase cash flows substantially,
Foreland must achieve economies of scale by significantly increasing refinery
throughput. Eagle Springs Refinery is currently processing all oil being
produced in Nevada. Therefore, Foreland will have to increase refinery
feedstock to achieve economies of scale by:
. establishing increased oil production through development and
exploration drilling;
. increasing oil production from existing producing properties;
. entering into additional refinery feedstock purchase contracts with non-
Nevada producers; or
. identifying backhaul opportunities using Foreland's transportation
fleet.
Other than the exploration activities of Foreland, there is presently little
exploration currently in Nevada, and given the current depressed prices of oil,
there is little incentive for exploration firms to incur substantial exploration
and development drilling costs. In the event Foreland's activities do not yield
additional oil production in Nevada, Foreland would be required to purchase
feedstock from outside the area, which would cause Foreland to incur
transportation costs. Such transportation costs would ultimately reduce the
margins at which Foreland's refined products are sold. Foreland cannot assure
that it can increase or acquire additional feedstock and maintain reasonable
profit margins.
Foreland Must Compete for Transmix Feedstock for the Tonopah Refinery.
In order to purchase from pipeline operators and others transmix feedstock
for processing at Tonopah Refinery, Foreland must compete with other processing
facilities, including transmix processors in other states.
Foreland is Dependent on Refinery Feedstock Purchase Contract for its
Feedstock Supply
Foreland has entered into agreements to purchase approximately 1,700
barrels per day of crude oil from other producers in Nevada, or about 82% of the
crude oil it refines. The terms of such contracts range from one-year contracts
(about 45% of amount purchased) to contracts terminable on 30 days' written
notice (about 17% of amount purchased). Foreland's operations would be
adversely affected if it were unable to purchase crude oil from these producers.
Foreland is aware of only two other refineries, which are located in Salt Lake
City, Utah, where Nevada crude could be processed. Foreland believes their
location in Salt Lake City and the need to run small quantities of Nevada crude
oil in small blocks rather than continuously, make this unlikely. Foreland is
unaware of any other refinery near Nevada at which Nevada crude oil could be
readily processed, but there is no assurance any such refineries could not be
modified or constructed. Foreland continues to identify other sources of
feedstock, including oil produced in Utah, Wyoming, and California. Obtaining
feedstock from such sources would result in increased transportation costs to
Foreland and impact the margins received from selling finished goods.
Foreland May be Subject to Contingent Environmental Liabilities Related to
the Acquired Refinery Assets
Foreland may be financially responsible for clean-up or other remediation
costs resulting from environmental contamination that existed as of the date of
acquisition, or subsequently, by Foreland at Eagle Springs Refinery, Tonopah
Refinery, or Cowboy Terminal. There can be no assurance that Foreland's pre-
acquisition inspection, investigation and agreements with the prior owners of
the purchased properties will protect Foreland from such contingencies.
Foreland's Refining, Transportation, and Marketing Operations are Subject
to Volatility of Gross Refining Margins and Current Market Conditions
Foreland's earnings and cash flows from operations will be primarily
dependent upon processing crude oil and selling quantities of refined products
at refining and marketing margins sufficient to cover fixed and variable
expenses and to fund its other operations. Crude oil costs and refined product
prices typically experience periods of extreme price volatility and may vary
based on numerous factors beyond Foreland's control, including:
. the supply of, and demand for, crude oil, gasoline and other refined
products;
. changes in national and regional economies;
. production levels;
. the competitive position of oil as a source of energy as compared with
natural gas, coal, nuclear energy, hydroelectric power, and other energy
sources;
. the extent of domestic production and importation of oil;
. the marketing of competitive fuels;
. market demand;
. the extent of government regulation;
. seasonal fluctuations;
. product pipeline capacity;
. local market conditions;
. the level of operations of competing refineries.
. political conditions in international oil producing regions; and
. the effect of federal and state regulation on the production,
transportation and sale of oil.
A substantial amount of Foreland's refined products are sold on the spot market
or under short-term contracts at market prices. Spot market prices for
feedstock and finished products are subject to volatile trading patterns in the
commodity futures markets. Foreland has entered into agreements to buy all of
the crude oil currently being produced in Nevada and is seeking to increase its
supply of feedstock. Foreland may maintain inventories of crude oil, other
feedstock, intermediate products and refined products, the values of which are
subject to fluctuations in market prices. Factors that are beyond the control of
Foreland may cause the cost of crude oil and other feedstock purchased by
Foreland and the price of refined products sold by Foreland to fluctuate widely.
Although prices of crude oil and refined petroleum products generally move in
the same direction, prices of refined products often do not respond immediately
to changes in crude oil costs. An increase in market prices for crude oil and
other feedstock obtained from others, or a decrease in market prices for refined
products, could have an adverse impact on Foreland's income and cash flow.
Foreland's Different Products have Widely Varying Margins, which may be
Further Affected by Government Regulations
The finished products sold by Foreland have widely varying margins. The
refining operations are subject to regulatory requirements of certain agencies.
In the event of changes by such regulatory agencies affecting the product
specifications of Foreland's specific products, these margins could be adversely
affected. For example, should regulations impose a decrease on the amount of
sulfur allowable in diesel fuel, Foreland's operations would be adversely
impacted as it modifies its refining process to decrease such sulfur content.
Foreland's Finished Products are Subject to Seasonal Volume and Price
Fluctuations
Foreland's principal customers are in the mining, construction and
agricultural industries, which are subject to seasonal fluctuations. During
years of severe winter or substantial precipitation, these industries scale back
in operations and require less finished goods produced by Foreland. These
fluctuations have the effect of reducing both sales volumes and prices.
Therefore, the sale of finished products by the Foreland refineries will be
subject to substantial fluctuations in results as a consequence of weather and
other seasonal fluctuations. Foreland also makes sales to the federal
government during winter months which partially mitigates the seasonal
fluctuations. There can be no assurance that this will continue
A Significant Amount of Foreland's Revenues Comes From a Few Customers
Foreland sells a substantial portion of its finished products to a key
group of customers, including Round Mountain Gold Corporation that results in
20% of the refining and transportation operations revenues. The contract with
that customer is for one year. In most instances, there are limited contractual
obligations of such customers to continue to purchase Foreland's finished
products. Although Foreland generally believes, based on historical business,
such customers will continue to purchase finished products from the Foreland
refineries, there can be no assurance that this will actually be the case.
Uncertainty of Reserve Estimates and Future Net Revenues
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates of reserves are based on various assumptions
relating to:
. rates of future production;
. timing and amount of development expenditures;
. oil prices;
. the results of planned development work;
. actual future production rates and volumes;
. revenues;
. taxes;
. operating expenses;
. development expenditures; and
. quantities of recoverable oil reserves.
The estimates of quantities and future net cash flows may vary substantially
from those assumed in the estimates. Any significant change in these
assumptions, including changes that result from variances between projected and
actual results, could materially and adversely affect future reserve estimates.
In addition, such reserves may be subject to downward or upward revision based
upon production history, results of future development, prevailing oil prices
and other factors.
Foreland May Not be Able to Discover Additional Oil Reserves
Foreland's ability to economically locate additional oil and gas reserves
in commercial quantities is dependent upon a number of factors, including its
participation in multiple exploration projects, its technological capabilities,
and funding availability. Foreland has had limited success in discovering oil
reserves in Nevada. Additionally, there are a limited number of firms actively
exploring and developing for oil in Nevada, which decreases the number of
potential industry partners available to Foreland. Given current oil prices, it
is unlikely that this will change in the near future. Except to the extent
Foreland successfully locates commercial quantities of economically recoverable
oil and gas, Foreland's reserves will decline as reserves are produced. There
can be no assurance that Foreland will be able to discover additional commercial
quantities of oil and gas.
Foreland Will Require Substantial Amounts of Capital in Order to Accomplish
its Exploration Goals in Nevada.
The total cost required to explore Foreland's exploration properties in
Nevada cannot be predicted precisely but could amount to tens of millions of
dollars. Because of the size of the total exploration possibilities and
Foreland's limited resources, Foreland expects it will have to seek funding
through borrowings, the sale of equity securities, or through sharing
arrangements with industry participants, which could substantially dilute the
interest of Foreland's shareholders. Foreland cannot assure that it can obtain
required funds on acceptable or favorable terms to continue exploration.
Foreland is Dependent on Entering into Joint Exploration Agreements with
Others
Foreland is dependent on entering into joint exploration agreements with
industry participants to obtain funds for drilling and other exploration. Even
if such arrangements are reached, typically the other participants may terminate
their participation at specified points during the exploration program, which
would likely result in additional costs and delays to Foreland.
Foreland has had Limited Commercial Drilling Success to Date
Foreland has established only limited reserves and developed limited
ongoing production as a result of its own drilling program. The Ghost Ranch
field, which was placed into production in 1996, is the first exploration by
Foreland that has resulted in significant ongoing production. The oil
production from the Eagle Springs field was acquired by Foreland in 1993 and
thereafter and did not result from Foreland's exploration activities.
Foreland's Activities are Concentrated in Higher Risk Frontier Areas
Foreland focuses its exploration and development activities in the Great
Basin area of Nevada, a largely unproved and unexplored geological province.
Foreland's exploration holdings are insignificant when compared to the size of
the potential geological area. Other than in the Eagle Springs and Ghost Ranch
fields, Foreland has not established material ongoing commercial oil production.
In addition, the areas targeted by Foreland, other than the Eagle Springs and
Ghost Ranch fields and the Pine Valley area, have geological, geophysical,
drilling, completion, and production problems which to date have prevented
Foreland and others with larger exploration budgets from developing or
establishing significant production or reserves. Foreland cannot assure that it
can overcome these problems or that its drilling program will be commercially
successful.
Foreland's Costs are Higher in Nevada than in More Developed Areas
Foreland's costs of exploration, drilling, production, and transportation
are higher in Nevada than they would be in a more fully developed oil producing
area. Access roads to drilling targets over relatively long distances
frequently have to be completed. Drilling equipment and services typically must
be brought in from considerable distances. Further, there is no collection
pipeline so that any oil that is produced must be trucked to a refinery.
Foreland's Activities are Subject to Operating Risks and Uninsured Hazards
Foreland is subject to the inherent risks involved in oil and gas
exploration, production, refining, and transportation and the risks of incurring
substantial losses and liabilities to third parties from hazards such as:
. fire;
. explosion;
. flood;
. pipe failure;
. cave in and collapse;
. unusual or unexpected formations, pressures, and other conditions;
. environmental damage;
. personal injury;
. uncontrollable flows of oil and gas; and
. other occurrences.
Foreland could be subject to significant interruption if the refineries that it
operates were to experience a fire, flood, major accident, shutdown or equipment
failure, or damage due to severe weather or other natural disaster. Foreland
typically purchases and pays for insurance against risks customarily insured
against in the oil and gas industry by others conducting similar activities.
Nevertheless, Foreland may not be insured against all losses or liabilities that
may arise from all hazards because such insurance is unavailable at economic
rates, because the operator has not fulfilled its obligation to purchase such
insurance, or because of other factors. Any uninsured loss could have a
material adverse effect on Foreland. The occurrence of significant events
against which Foreland is not fully insured or of a number of lesser events
against which Foreland is fully insured but subject to substantial deductibles
could materially and adversely affect Foreland's operations and financial
condition.
Foreland's Operations can be Adversely Affected by Adverse Weather
Foreland's exploration activities are subject to periodic interruptions due
to weather conditions, which may be quite severe in Nevada at various times of
the year. Periods of heavy precipitation make travel to exploration or drilling
locations difficult and/or impossible, while extremely cold temperatures limit
or interrupt drilling, pumping, and/or production activities or increase
operating costs.
- ------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- ------------------------------------------------------------------------------
Foreland is not a party to any material legal proceeding, and none has been
threatened by or, to the best of Foreland's knowledge, against Foreland.
- ------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------------------------
No matters were submitted to a vote of the shareholders during the fourth
quarter of 1998.
PART II.
- ------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Price Range of Common Stock
Foreland's common stock is traded in the over-the-counter market and is
quoted on Nasdaq under the symbol "FORL." The following table sets forth the
high and low closing bid quotations for Foreland's common stock as quoted by
Nasdaq for the periods indicated, based on interdealer bid quotations, without
markup, markdown, commissions, or adjustments (which may not reflect actual
transactions).
Common Stock
-------------------
High Low
------- --------
1997
First Quarter............ 5.6875 4.3125
Second Quarter........... 4.375 2.6875
Third Quarter ........... 3.50 2.0625
Fourth Quarter........... 5.00 3.375
1998
First Quarter............ 6.0625 4.00
Second Quarter........... 7.0625 4.50
Third Quarter ........... 5.125 2.00
Fourth Quarter........... 2.75 0.6563
On April 13, 1999, the closing bid price of Foreland's common stock on
Nasdaq was approximately $0.75. Foreland has approximately 1,727 common stock
shareholders of record.
The common stock price has been volatile in the past and could fluctuate
significantly in response to the results of specific exploration drilling tests,
variations in quarterly operating results, and changes in recommendations by
securities analysts. Further, the common stock's trading volume is relatively
small, so the market may not be able to efficiently accommodate significant
trades on any given day. Consequently, sizable sales or purchases of the common
stock have in the past, and may in the future, cause greater price volatility
for its common stock than in other more actively traded securities. With
trading volume, persons may not be able to effect larger transactions at the
then current market price. In addition, Foreland may experience significant
price and volume fluctuations that are unrelated or disproportionate to the
results of its operations. These broad fluctuations may adversely affect the
market price of the common stock.
Foreland has granted to employees, officers, and directors vested options
to purchase up to approximately 1.1 million shares of Common Stock with exercise
prices ranging from $2.50 to $9.00 per share. Options to purchase a total of
94,000 shares contain a provision that, on exercise, the holder is granted a new
option covering the number of shares for which the prior option was exercised,
with the exercise price of the new option fixed at the then fair market value of
the common stock. Foreland also has outstanding options and warrants held by
unrelated third parties to purchase over approximately 1,650,000 shares of
common stock at prices ranging from $3.75 per share to $7.50 per share. In
addition, Foreland has shares of outstanding preferred stock that are
convertible into common stock and has agreed to grant warrants to purchase
common stock on conversion of certain of such preferred stock. The existence of
such options, warrants, and preferred stock may prove to be a hindrance to
future financing by Foreland, and the exercise of options and warrants and
conversion of preferred stock may further dilute the interests of the
stockholders. The possible future issuances of common stock on the exercise of
options and warrants or the conversion of preferred stock could adversely affect
the prevailing market price of Foreland's common stock. Further, the holders of
options and warrants may exercise them at a time when Foreland would otherwise
be able to obtain additional equity capital on terms more favorable to Foreland.
Dividend Policy
Foreland has never paid cash dividends on its common stock and does not
anticipate that it will pay dividends in the foreseeable future. Foreland
intends to continue using any cash from operations to expand its business
operations. Foreland's debt financing with Energy Income Fund, established in
1998, prohibits the payment of dividends on common stock.
Unregistered Sales of Securities
During 1998, the year covered by this report, Foreland sold securities
without registration under the Securities Act of 1933 (the "Securities Act") in
the following transactions:
1. Persons converted 20,000 shares of 1991 Preferred Stock into 6,667 shares of
Common Stock; 12,000 shares of 1994 Preferred Stock into 4,000 shares of
common stock and 72,000 shares of 1995 Preferred Stock into 24,000 shares of
common stock. The shares of common stock issued in such conversions were
issued without registration in reliance on the exemption from registration
requirements of the Securities Act provided in Section 3(a)(9) thereof.
2. Foreland granted options to purchase 8,000 shares of common stock to an
employee. Two employees exercised options to purchase an aggregate of 8,000
shares of common stock.
3. Foreland issued 863,602 shares of common stock to Petro Source Corporation in
partial consideration of the purchase of the Eagle Springs and Tonopah
refineries and crude oil transportation corporation assets.
4. In connection with the debt financing arrangement, Foreland granted to EIF
warrants to purchase an aggregate of 1,500,000 shares of common stock at an
exercise price of $6.00 per share, sold 2,000 shares of 1998 Series
Preferred Stock, convertible into an aggregate of 333,333 shares of common
stock, for $2,000,000, and issued 250,0000 shares of common stock .
Except as otherwise noted, the securities issued in the transactions
described above were issued in reliance on the exemption from the registration
and prospectus delivery requirements of the Securities Act provided in Section
4(2) thereof.
Each purchaser was provided with business and financial information
respecting Foreland and was provided with the opportunity to obtain additional
information in order to verify the information provided or to further inform
themselves respecting Foreland.
Each of the persons acquiring such securities acknowledged in writing that
such person was obtaining "restricted securities" as defined in rule 144 under
the Securities Act; that such shares could not be transferred without
registration or an available exemption therefrom; that such person must bear the
economic risk of the investment for an indefinite period; and that Foreland
would restrict the transfer of the securities in accordance with such
representations. Such persons also agreed that any certificates representing
such shares would be stamped with a restrictive legend covering the transfer of
such shares. The certificates representing the foregoing shares bear an
appropriate restrictive legend conspicuously on their face, and stop transfer
instructions are noted on Foreland's stock transfer records.
- ------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------
The following selected financial data of Foreland for each of the past five
years, including the period ended December 31, 1998, are derived from the
audited financial statements and notes thereto of Foreland. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of Foreland and related notes thereto included with this
report. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
Foreland effected a three-to-one reverse stock split on June 15, 1996. All
share and per share amounts herein have been retroactively adjusted to give
effect to such reverse split.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $ 542,991 $ 1,115,876 $ 2,018,816 $2,300,744 $10,542,237
Net Loss.................. (4,453,718) (2,275,565) (3,385,287) (3,129,900) (13,872,311)
Net Loss Applicable to
Common Stockholders...... (4,453,718) (2,275,565) (5,715,489) (3,509,929) (13, 909,133)
Net Loss Per Share........ (1.03) (0.48) (0.99) (0.46) (1.57)
Weighted Average Number of
Common Shares
Outstanding.............. 4,330,000 4,757,000 5,752,000 7,656,000 8,870,000
December 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
Balance Sheet Data:
Working Capital (Deficit). $ 47,629 $(2,005,407) $ 2,340,858 $(495,155) $(8,552,265)
Total Assets.............. 5,197,414 5,601,098 10,760,457 7,953,172 14,642,687
Long-Term Debt............ 400,000 23,091 1,018,247 642,951 --
Current Portion of Long-
Term Debt ............... -- 404,237 4,844 25,301 12,375,279
Discount on Long-Term Debt -- -- -- -- (1,219,796)
Stockholders' Equity
(Deficit)................. 3,708,472 3,012,872 8,884,365 6,456,288 (562,087)
</TABLE>
- ------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
- ------------------------------------------------------------------------------
Overview
Since its organization in June 1985, Foreland has been engaged principally
in oil exploration in the Great Basin and Range of Nevada, an area that
management believes has potential for the discovery of major oil reserves. In
continuing to advance this exploration, Foreland's strategy is to generate
exploration prospects with the most recent generally available scientific
techniques, expand and improve Foreland's strategic land position, and establish
arrangements with other oil exploration firms active in Nevada to obtain
additional scientific data, leases, and funding. In an effort to increase the
financial return to Foreland from its crude oil productions and expand its
operations, in August 1998 Foreland began crude oil refining and marketing of
petroleum products. These operations employ the Eagle Spring Refinery and
Tonopah Refinery assets and trucking fleet purchased from Petro Source in August
1998.
Foreland produces oil in Nevada from the Eagle Springs, Ghost Ranch, Kate
Springs and Sand Dune fields. Foreland purchased a 60% working interest in the
Eagle Springs field in 1993 and the remaining 40% working interest in November
1996. Foreland discovered the Ghost Ranch field in 1996 and purchased the 40%
working interests in the field held by another firm in 1997. Foreland also owns
a 21.8% working interest in a well in Kate Springs.
Through 1996, Foreland funded its exploration program principally from the
sale of common and preferred stock. In November 1996, Foreland established a
bank credit facility, now repaid. In early 1998, Foreland arranged to borrow up
to $16.9 million from EIF to fund certain activities. Through December 31,
1998, Foreland had borrowed $12.4 million from EIF. During 1999, the credit
facility was amended, with a net additional draw of $200,000, and further loan
commitments have now been terminated. In connection with the EIF financing,
Foreland granted EIF warrants to purchase an aggregate of 1,500,000 shares of
common stock at $6.00 per share, issued 250,000 shares of common stock to EIF,
and sold to EIF for $2,000,000 in cash 2,000 shares of 1998 Series Preferred
Stock, convertible into an aggregate of 333,333 shares of common stock. As
discussed below, Foreland is now in default on the EIF loan, which was
classified as a short-term liability as of December 31, 1998. In 1999, Foreland
Refining Corporation, a subsidiary of Foreland, established a line of credit
with First Security Bank for $2,000,000 at 8.75% which is collateralized by
accounts receivable and inventory.
On December 31, 1997, Foreland obtained an option to purchase certain oil
refining and transportation assets and operations from Petro Source. Foreland
paid $520,000 for the option by issuing 130,000 shares of common stock. Foreland
subsequently exercised the option and, on August 12, 1998, completed the
purchase of the refining and transportation assets by paying $5,000,000 in cash
(utilizing funds from the EIF loan), with the remaining $2,676,322 purchase
price paid by the issuance of 763,602 shares of common stock, subject to
adjustment in the number of shares and potential issuances of additional shares
so that the resale of such shares by Petro Source yields net proceeds equal to
$2,676,332 plus interest at 10% per annum. In addition, Foreland issued 100,000
shares of common stock to Petro Source at the closing of the purchase.
Beginning in 1999, Foreland is required to make monthly cash payments equal to
5% per annum of the amount by which $2,676,333 exceeds net proceeds received by
Petro Source from the sale of the shares of common stock (not including the
130,000 shares to receive the option or 100,000 of the shares issued at
closing). Petro Source has not sold any of the 863,602 shares issued at
closing.
The auditor's report on the financial statements of Foreland as of
December 31, 1998, contains an explanatory paragraph as to the ability of
Foreland to continue as a going concern because of its continuing losses from
operations. Foreland had a working capital deficit as of December 31, 1998, of
$9.8 million (not including $1.2 million of debt that is reflected on the
financial statements as an unamortized discount for the debt).
Results of Operations (Reported by Segments, see Financial Statements Note 11)
1998 and 1997
Oil sales decreased $898,600, or 40.6%, to $1,324,700 in 1998 as compared
to 1997, consisting principally of a decrease of $275,000 in Ghost Ranch field
revenue, a $573,800 decrease in Eagle Springs field revenue and a $47,800
decrease in the revenue from Foreland's other producing properties. The
decrease in total oil revenue was the result of a decrease of 11.4% in barrels
of oil sold and a decrease of 32.4% in the average price per barrel of oil sold.
Other revenue decreased $77,400, or 88.7%, to $9,900 in 1998 as compared to
1997, due to a reduction of $58,800 in water disposal income, a reduction of
$10,200 in overhead income and a decrease of $7,100 in miscellaneous and rental
equipment income.
The refining and transportation revenues for August through December 1998
were $9,704,000 on sales of 460,200 barrels of refined products. Foreland
purchased the refining and transportation assets effective as of May 31, 1998,
with a closing date of August 12, 1998. The revenues for the period from June
1, 1998, through the closing date were approximately $4.6 million. The sales
during such period were accounted for as adjustments to the purchase price of
the assets.
Oil and gas production costs for 1998 increased $66,700, or 7.3%, to
$974,000. Per barrel production expense increased $0.80 per barrel, or 15.9%,
to $5.83 in 1998, as compared to $5.03 per barrel in 1997. The Eagle Springs
field decreased $22,100, while the Ghost Ranch field contributed a $61,000
increase and Foreland's remaining wells contributed a $27,800 increase to oil
and gas production costs. Additionally, Foreland's enhanced oil recovery (EOR)
pilot program that was instituted on the Eagle Springs field contributed
$585,100 of cost during 1998. This EOR pilot program did not produce the
desired results and was terminated in November 1998.
Refinery and transportation operations cost of goods sold for August
through December 1998 (before inter-company consolidation entries) was
$8,751,200. Crude oil purchases were $7,350,700 for the purchase of
approximately 451,400 barrels of crude oil, repairs and maintenance costs were
$266,500 and other costs (primarily transportation costs) were $1,134,000. The
refinery and transportation operations cost of goods sold for the period June 1
through the closing date were approximately $4.2 million. The sales during such
period were accounted for as adjustments to the purchase price of the assets.
Oil and gas exploration costs increased $675,900, or 54.0%, to $1,928,800
in 1998 as compared to a year earlier as a result of Foreland's increased
exploration and development activity. Primary contributors were 3-D seismic
cost increases of $774,200 to $1,006,000, for costs primarily associated with
the Hay Ranch 3-D seismic, exploration personnel cost decreases of $70,800, and
costs associated with lease rentals in 1998 that decreased $39,000 when compared
to 1997. During 1998, oil exploration dry hole costs increased $1,692,800 to
$1,705,900, as compared to 1997. Foreland drilled five dry holes (the Flat Top
Federal no. 27-15, North Pine Creek no. 1-6, Dixie Flats no. 1-4, Eagle Springs
no. 14-35, and Ghost Ranch no. 58-35 wells).
The 1998 abandonment and impairment expenses increased $3,085,100 to
$3,650,500. The primary contributor is impairment of the producing wells of
$3,617,900. This was required by assessment of the carrying cost of long-lived
assets whenever events or circumstances (i.e., reduced oil and gas prices)
indicate that the carrying value of the long-lived assets may not be
recoverable. Additionally, Foreland also impaired $32,600 of capitalized non-
producing leasehold cost associated with leases that will expire at the end of
their primary term in 1999.
Depreciation, depletion and amortization increased $2,974,900, or 330.8%,
to $4,263,700, as compared to the previous year. The 1998 increase was due
principally to a significant decrease in reserves. The December 31, 1998, oil
prices adversely affected the estimated quantity of Foreland's reserves
contributing to such increased depreciation and depletion. Additionally,
refining and transportation depreciation, depletion and amortization related to
refining and transportation operations contributed $264,000 to this increase.
General and administrative expenses increased $246,400, or 25.6%, to
$1,207,900 for 1998, as compared to 1997. Refining and transportation general
and administrative costs were $382,900 while exploration and production general
and administrative expenses decreased $136,500, when compared to 1997. Primary
changes in the exploration and production general and administrative expenses
were professional fee cost increases of $49,200, bad debt expense decreases of
$35,500, contract services decreases of $6,500, and non-cash compensation
decreases of $147,000. The refinery and transportation general and
administrative costs for the time period from June 1 through the closing date
were approximately $109,000. The expenses from June 1 through the effective date
were accounted for as adjustments to the purchase price of the assets.
Shareholder/investor services decreased $85,800 during 1998 to $106,900 as
compared to 1997. This decrease relates to a reduction in the number of
investor relations advisors, and a reduction of cost of printed material mailed
to shareholders and investors. During 1998 compensation costs for below market
options decreased $176,700 to $8,700 for 1998. These costs incurred in 1997
were primarily for options associated with debt retirement for three officers
and directors.
Interest income increased $21,400, or 18.9%, to $134,800, primarily on the
monies invested in short term certificates of deposit which were used as
collateral for letters of credit issued to the sellers of crude oil to the
refineries. Interest expense increased $1,696,700 to $1,865,900 primarily
because of the interest payments associated with the $12,375,279 of debt payable
to EIF. Interest accrued or paid in cash was $1,081,900 and amortization of
debt issuance cost was $947,600.
During 1998, net loss applicable to common stockholders was increased by
dividends of $36,800 incurred on preferred. This amount is for earnings per
share calculations only and is not recorded in Foreland's financial statements,
until such stock dividends are declared by Foreland.
1997 and 1996
Oil sales increased $255,000, or 13.0%, to $2,213,300 in 1997 as compared
to 1996, consisting principally of an increase of $449,700 in Ghost Ranch field
revenue offset by a $169,200 decrease in Eagle Springs field revenue and a
$25,500 decrease in the revenue from Foreland's other properties. The increase
in total oil revenue was the result of an increase of 51.6% in barrels of oil
sold and a decrease of 21.5% in the average price per barrel of oil sold. Other
revenue increased $26,900, or 44.6%, to $87,400 in 1997 as compared to 1996, due
to the drilling of two additional Ghost Ranch wells and production overhead
charges on the three Ghost Ranch wells during 1997
Oil and gas production costs for 1997 increased $374,000, or 70.1%,
reflecting the general increase in production during 1997. Per barrel
production expense increased $1.02 per barrel, or 25.4%, to $5.03 in 1997, as
compared to $4.01 per barrel in 1996. The Eagle Springs field contributed
$173,100 of the increase, partially due to workover cost on the water injection
well. Additionally the Ghost Ranch field contributed $142,600 of the increase
due to two additional wells beginning operations in 1997, and Foreland's
remaining wells contributed $58,300 to the increased oil and gas production
costs.
Oil and gas exploration cost increased $418,400, or 50.2%, to $1,252,800
in 1997 as compared to a year earlier as a result of Foreland's increased
exploration activity. Primary contributors were exploration personnel cost
increases of $208,600, while 3-D seismic cost increased $129,500 when compared
to the prior year's activity, and costs associated with lease rentals in 1997
increased $30,600 when compared to 1996.
During 1997, dry hole, abandonment and impairment costs decreased
$906,900, or 61.0 %, to $578,900 as compared to 1996. The 1997 expenses include
$411,000 in impairment expense related to a well in progress at the end of 1996
that was determined to be uneconomic. Foreland also expensed $154,400 in
capitalized leasehold cost associated with leases that expired at the end of
their primary term.
Depreciation, depletion and amortization increased $577,200, or 81.1%, in
1997 to $1,288,800 as compared to the previous year. The 1997 increase was due
principally to a significant increase in production combined with a decrease in
reserves. The December 31, 1997, oil prices adversely affect the reserve
quantity of Foreland's reserves. Lower reserves and increased oil sales for
1997 increased the percentage used to calculate the depletion for 1997.
General and administrative expenses increased $393,200, or 69.2% to
$961,500 for 1997 as compared to 1996. Administrative personnel cost increased
$175,400 and a non-cash compensation charge of $147,000 associated with the
overriding royalty interest conveyed as part of an employee termination
agreement was recognized in 1997.
Shareholder/investor services decreased $865,500 during 1997 to $192,700
as compared to 1996. This decrease relates to a reduction in the number of
investor relations advisors. During 1996 the company incurred a non-cash
expense of $418,000 resulting from the application of SFAS 123, Accounting for
Stock Based Compensation. (See Note 8 to Notes to Consolidated Financial
Statements.) Foreland did not have any such investor related expenses in 1997.
During 1997 compensation for below market options increased $25,800, or
16.2% when compared to 1996. These were primarily for options associated with
debt retirement for four officers and directors.
During 1997, net loss applicable to common stockholders was increased by
dividends of $164,000 incurred on preferred stock converted during the year and
imputed dividends of $216,000, as a result of convertibility of its outstanding
preferred stock into common stock at below-market prices. These amounts are for
earnings per share calculations only and are not recorded in Foreland's
financial statements.
Accounting Treatment of Certain Capitalized Costs
Foreland follows the "successful efforts" method of accounting for oil and
gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory and development wells that find
proved reserves, are capitalized. Costs to drill exploratory wells that do not
find proved reserves, geological and geophysical costs, and costs of carrying
and retaining unproved properties are expensed.
Foreland's accounting policy requires it to assess the carrying cost of
long-lived assets whenever events or changes of circumstances indicate that the
carrying value of long lived assets may not be recoverable. When an assessment
for impairment of oil and gas properties is performed, Foreland is required to
compare the net carrying value of proved oil and gas properties on a lease by
lease basis (the lowest level at which cash flows can be determined on a
consistent basis) to the related estimates of undiscounted future net cash flows
for such properties. If the carrying value exceeds the net cash flows, then
impairment is recognized to reduce the carrying value to the estimated fair
value. The result of this accounting policy caused Foreland to recognize an
impairment charge of $411,000 in the fourth quarter of 1997 and an impairment
charge of $3,650,500 in the fourth quarter of 1998. Foreland expects that from
time to time capitalized costs will be charged to expense based on management's
evaluation of specific wells or properties or the disposition, through sales or
conveyances of fractional interests in connection with industry sharing
arrangements, of property interests.
As part of Foreland's evaluation of its oil and gas reserves in connection
with the preparation of Foreland's annual financial statements, Foreland
completes an engineering evaluation of its properties based on current
engineering information, oil and gas prices, and production costs, which may
result in material changes in the total undiscounted net present value of
Foreland's oil and gas reserves resulting in an impairment allowance as
discussed above. See "Items 1 and 2. Business and Properties."
Certain Costs
The costs of exploring, drilling, producing, and transporting are higher in
the geological province targeted by management than they would be in a more
fully developed oil producing area. Access roads to drilling targets over
relatively long distances frequently have to be completed and drilling equipment
and services typically must be brought in from considerable distances.
Liquidity and Capital Resources
Current Period/Future Requirements
Foreland's operations used net cash of $1,458,500 in 1998 when Foreland
reported a net loss of $13,872,300. The 1998 loss included expenses which
generally did not require cash for the current period of $5,356,400 for dry
holes, abandonments and impairment, $4,263,700 for depreciation, depletion and
amortization, and $784,000 for amortization of debt issuance and debt discount
costs associated with the $12,375,279 debt financing with Energy Income Fund.
Components of working capital requiring cash expenditures included $19,300 used
to increase inventories, and $71,900 used for prepaid expenses and other
miscellaneous assets. Components of working capital providing cash are a
reduction of accounts receivable of $1,811,600, and increased accounts payable
of $231,100. This is compared to Foreland's operations that used net cash of
$453,900 in 1997 when Foreland reported a net loss of $3,129,900. The 1997 loss
included non-cash expenses of $579,000 for abandonments and impairments,
$1,288,800 for depreciation, depletion and amortization, and $185,400 for below
market options. Components of working capital requiring cash expenditures
included $102,200 used to reduce accounts payable and accrued expenses, and
$30,600 for prepaid expenses and other miscellaneous assets. Components of
working capital providing cash are a reduction of accounts receivable of
$522,700, use of existing inventory of $19,500 and an increase of officers and
other salaries payable of $78,600.
Investing activities required cash of $5,058,800 in 1998, including
approximately $4.4 million for additions to property and equipment. Additionally
Foreland used $700,000 to purchase other certificates of deposit that were
pledged as security on letters of credit. The letters of credit are used as
security against the oil purchased from unaffiliated companies for processing in
the refineries. Investing activities in 1997 required cash of $1,477,300
including approximately $1.4 million for additions to oil and gas properties,
conversion cost for an air injection well for the pilot EOR program in the Eagle
Spring field and the completion of two Ghost Ranch wells. Additionally Foreland
used $71,900 to purchase other property and equipment.
As noted above, cash required for both operating and investing activities
was provided from financing activities during the fiscal year ending December
31, 1998. Financing activities for 1998 provided $8,326,500, primarily from the
proceeds from debt of $6,401,000 and the sale of $2,000,000 in stock. Financing
activities for 1997 used $353,200, primarily for the payment of debt associated
with the credit facility with Colorado National Bank.
The nature, extent, and cost of exploring prospects in the Great Basin
province over several years cannot be predicted, but the total cost could amount
to tens of millions of dollars. Because of the size of the total exploration
possibilities and Foreland's limited resources, it is likely that the interest
of Foreland's shareholders in Foreland and the interest of Foreland in its
drilling prospects will continue to be diluted substantially as Foreland
continues to obtain funding through the sale of additional securities or through
sharing arrangements with industry participants. There can be no assurance that
exploration funds will be available to Foreland when required or, if available,
that such funds can be obtained on terms acceptable or favorable to Foreland.
In addition to the above, Foreland's oil and gas exploration and production
activities were also advanced by approximately $698,000, $868,000 and $478,000
provided during 1996, 1997, and 1998, respectively, by others under industry
sharing arrangements related to specific drilling or other exploration.
Debt Financing
In January 1998, Foreland completed the debt financing arrangement with
EIF. This arrangement was amended in August 1998. During the year, Foreland
drew an aggregate of $12,375,279 under this facility to fund most of its cash
requirements, including the purchase of the refinery and transportation assets
from Peto Source.
Pursuant to the terms of the financing arrangement, Foreland was required
to make payments of interest only through November 1998, after which payments of
principal and interest were required to amortize the indebtedness generally over
a 48-month period; provided, however, that the final payment of all accrued but
unpaid interest and the remaining principal balance is due on January 1, 2002.
Foreland also agreed to transfer to Energy Income Fund a 3% overriding royalty
interest in Foreland's interest in its proved oil and gas properties and a 1%
overriding royalty interest in certain unproved properties.
Amounts due under the financing arrangement are collateralized by oil and
gas properties and Foreland is required to maintain certain financial ratios and
comply with other terms and conditions while any balance of indebtedness remains
outstanding. Foreland initially issued to Energy Income Fund five-year warrants
to purchase 750,000 shares of common stock at $6.00 per share and 250,000 shares
at $10.00 per share. The warrants were subsequently amended to purchase an
aggregate of 1,500,000 shares at $6.00 per share. Foreland granted Energy
Income Fund the right to designate a representative for appointment to the board
of directors of Foreland. EIF designated Robert Gershen as its representative.
Prior to November 1, 1998, when principal payments were to commence,
Foreland recognized that it had insufficient cash to make these payments and
would be unable to meet certain financial ratios and covenants under the loan.
Therefore, Foreland began seeking to renegotiate the terms of the EIF loan. On
October 4, 1998, EIF agreed in principle, subject to negotiation and execution
of definitive agreements, to defer all payments under the financing arrangement,
other than monthly interest payments, until April 1999, extend certain financial
covenants of Foreland until such date, and waive its exercise of remedies upon
default until such date. Under this informal understanding, Foreland continued
to make interest payments on this loan but did not commence principal payments
on November 1, 1998, or pay $1,300,000 due November 10, 1998, respecting
certain inventory financing. Additionally, Foreland did not meet certain
financial ratios and covenants under the loan. Accordingly, the entire balance
of $12.4 million due EIF was included in current liabilities as of December 31,
1998.
In February 1999, EIF agreed to reschedule the principal amortization to
commence April 1999. In consideration of these loan modifications, Foreland
agreed that it would issue shares of restricted common stock to EIF and extend
the exercise period of and, in specified circumstances, adjust the exercise
price of the common stock purchase warrants held by EIF. Foreland drew an
additional net $200,000 under the loan arrangement and additional loan
commitments were canceled.
Foreland was unable to pay principal payments of $338,096 due April 1,
1999, on the $12.6 million in indebtedness due EIF and is not in compliance with
certain financial covenants relating to minimum cash flow, equity requirements,
current ratio, debt service ratio, and general administrative expense
percentages. On April 15, 1999, EIF agreed to defer the first principal payment
(now $347,437) until May 1, 1999, and waive compliance with the financial
covenants until May 15, 1999. Foreland is implementing cost cutting measures
and restructuring its resources in order to be able to make the required
payments and comply with the financial covenants, but there is no assurance it
will be able to do so. If Foreland fails to make a required payment or comply
with the financial covenants, EIF will have the legal right to implement its
remedies on default, initiate foreclosure and seek to take possession of
substantially all of Foreland's assets. There can be no assurance that EIF will
agree to any further extensions or modifications or continue to forbear from
exercising its remedies in the event of a default. It may be impossible for
Foreland to continue if EIF were to foreclose on essentially all of Foreland's
oil producing, refining, and transportation assets.
Inflation
Foreland's activities have not been, and in the near-term are not expected
to be, materially affected by inflation or changing prices in general.
Foreland's oil exploration and production activities are generally affected by
prevailing sales prices for oil and the recent significant decreases in oil
prices have caused some activities to be uneconomic.
Impact of the Year 2000 Issue
Many existing computer programs use only two digits, rather than four, to
define a year within the date field in order to conserve memory resources. Such
programs were designed and developed without considering the potential impact of
the upcoming change of the century. After December 31, 1999, any of the computer
programs used by Foreland that contain date-sensitive computer codes that are
not "year 2000 compliant," may recognize a date using "00" as the year 1900
rather than the year 2000. If not corrected, such computer applications could
fail or create erroneous results.
Foreland uses computers principally for processing and analyzing geological
and geophysical data, map-making, and administrative functions, including word-
processing, accounting, electronic mail and other applications. Its refining
operations principally do not use computer systems. Foreland has implemented an
ongoing program to ensure that its computer systems are year 2000 compliant.
Foreland has contacted its vendors who have represented that the systems and
software used by Foreland are year 2000 compliant. Foreland will require future
vendors to make such representation. There can be no assurance that such
programs are actually year 2000 compliant. Foreland also interacts with the
computer systems of others. There can be no assurance that such computer
systems are year 2000 compliant.
Foreland believes that it will not incur material expenditures in
connection with this issue, but there can be no assurance that Foreland has
anticipated every circumstance where Foreland's operations may be impacted.
Although Foreland believes its own internal systems will be year 2000 compliant,
no assurance can be given that the systems of vendors, telephone and utility
providers, customers, and other third parties with which Foreland has a material
relationship will be year 2000 compliant. Foreland does not believe it can
develop contingency plans to adequately deal with major external infrastructure
failures such as in communications, transportation or utilities. However, such
failures would likely not impact Foreland worse than they would any other
business.
Foreland has been notified by the vendor of its accounting software that
the software is not year 2000 compliant and that there exists a problem that
will generate errors in the general ledger if not corrected. Foreland has been
informed by the vendor that it expects to have this problem resolved by the end
of the second quarter of 1999.
- ------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------------------
Foreland's major market risk exposures will continue to be the prices it
pays for crude oil and other feedstock and the sales prices and margins it
receives from the sale of its refined products. These prices are volatile and
affected by various factors beyond Foreland's control, as described in this
report. Foreland does not engage in any hedging activities to protect itself
against the market risks associated with these fluctuations, although its
ultimate strategy in acquiring the refinery and transportation assets and
operations was to stabilize and increase the margins received from its
activities.
- ------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
The table of contents of the financial statements and supplementary data
included in this report is contained in "ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K."
- ------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------------
Foreland and its auditors have not disagreed on any items of accounting
treatment or financial disclosure.
PART III.
- ------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
- ------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1999 annual
meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Directors
and Executive Officers" is incorporated herein by reference.
- ------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- ------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1999 annual
meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Executive
Compensation" is incorporated herein by reference.
- ------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1999 annual
meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Certain
Beneficial Owners and Management" is incorporated herein by reference.
- ------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1999 annual
meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Certain
relationships and Related Transactions" is incorporated herein by reference.
PART IV
- ------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
(a)(1) Financial Statements. The following financial statements are
included in this report:
Title of Document Page
Table of Contents F-1
Report of Hein + Associates LLP, Certified Public Accountants F-2
Consolidated Balance Sheets - As of at December 31, 1997 and 1998 F-3
Consolidated Statements of Operations - For the Years Ended December
31, 1996, 1997, and 1998 F-5
Consolidated Statements of Stockholders' Equity (Deficit) - For the
Years Ended December 31, 1996, 1997, and 1998 F-6
Consolidated Statements of Cash Flows - For the Years Ended December F-8
31, 1996, 1997, and 1998
Notes to Consolidated Financial Statements F-10
(a)(2) Financial Statement Schedules. Schedules are omitted because of
the absence of conditions under which they are required or because the
information is shown in the financial statements.
(a)(3) Exhibits. The following exhibits are included as part of this
report:
SEC
Exhibit Reference
No. No. Title of Document Location
Item 2. Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession
2.01 2 Option and Purchase Agreement between Incorporated
Foreland, Petro Source Corporation, by
Petrosource Refining Corporation, and Reference(14)
Petrosource Transportation dated
December 31, 1997
2.02 2 Amendment to Option and Purchase Incorporated
Agreement between Foreland, Petro Source by
Corporation, Foreland Refining Reference(16)
Corporation, and Petrosource
Transportation dated August 11, 1998
Item 3. Articles of Incorporation and Bylaws
3.01 3 Articles of Incorporation Incorporated
by
Reference(13)
3.02 3 Bylaws Incorporated
by
Reference(2)
Instruments Defining the Rights of
Security Holders, Including Indentures
Item 4.
4.01 4 Specimen Common Stock Certificate Incorporated
by
Reference(1)
4.02 4 Designation of Rights, Privileges, and Incorporated
Preferences of 1991 Series Preferred by
Stock Reference(1)
4.03 4 Designation of Rights, Privileges and Incorporated
Preferences of 1994 Series Convertible by
Preferred Stock Reference(3)
4.04 4 Designation of Rights, Privileges and Incorporated
Preferences of 1995 Series Convertible by
Preferred Stock Reference(7)
4.05 4 Form of Warrants to Kevin L. Spencer and Incorporated
Jay W. Enyart by
Reference(8)
4.06 4 Form of Rights Agreement dated effective Incorporated
April 12, 1997, between Foreland and by
Atlas Stock Transfer Corporation Reference(12)
4.07 4 Warrant of Energy Income Fund, L.P., Incorporated
dated January 6, 1998, to purchase by
750,000 shares of common stock at $6.00 Reference(14)
per share
4.08 4 Warrant of Energy Income Fund, L.P., Incorporated
dated August 10, 1998, to purchase by
250,000 shares of common stock at $10.00 Reference(16
per share (replaces warrant dated
January 6, 1998 for 250,000 shares of
common stock at $10.00 per share)
4.09 4 Designation of Rights, Privileges and Incorporated
Preferences for 1998 Series Convertible by
Preferred Stock Reference(16)
4.10 4 Registration Rights Agreement between Incorporated
Energy Income Fund, L.P., and Foreland, by
dated as of August 10, 1998 Reference(16)
Item 10. Material Contracts
10.01 10 Option Agreement between N. Thomas Steele Incorporated
and Foreland, dated June 24, 1985** by
Reference(6)
10.02 10 Option Agreement between Grant Steele and Incorporated
Foreland, dated June 24, 1985** by
Reference(6)
10.03 10 Form of Options to directors dated April Incorporated
30, 1991 with respect to options by
previously granted 1986** Reference(1)
10.04 10 Form of Nonqualified Stock Option between Incorporated
Foreland and unrelated third parties, by
with related schedule Reference(4)
10.05 10 Form of Promissory Notes relating to Incorporated
certain options exercised by officers, by
with related schedule Reference(5)
10.06 10 Form of Option granted pursuant to reload Incorporated
provisions of previously granted options by
with related schedule Reference(5)
10.07 10 Form of Registration Agreement relating Incorporated
to Units consisting of 1995 Series by
Preferred Stock and M Warrants Reference(7)
10.08 10 Form of Revised Executive Employment Incorporated
Agreement between Foreland and executive by
officers, with related schedule** Reference(9)
10.09 10 Form of Nonqualified Stock Options Incorporated
granted to executive officers dated July by
18, 1996, with related schedule** Reference(9)
10.10 10 Form of Nonqualified Stock Options Incorporated
granted to executive officers in by
connection with employment agreements, Reference(9)
with related schedule**
10.11 10 Form of Nonqualified Stock Options Incorporated
granted to employees in connection with by
employment agreements, with related Reference(9)
schedule
10.12 10 Purchase and Sale Agreement dated Incorporated
November 14, 1996, between Plains by
Petroleum Operating Company and Eagle Reference(10)
Springs Production Limited Liability
Company, respecting the purchase of
Plains' interest in the Eagle Springs
field, with related Assignment,
Conveyance, and Bill of Sale
10.13 10 Financing Agreement dated as of January Incorporated
6, 1998, by and among Foreland, Eagle by
Springs Production Limited Liability Reference(14)
Company and Energy Income Fund, L.P.
10.14 10 Refinancing Note dated as of January 6, Incorporated
1998, by Foreland and Eagle Springs by
Production Limited Liability Company Reference(14)
10.15 10 Development Note dated as of January 6, Incorporated
1998, by Foreland and Eagle Springs by
Production Limited Liability Company Reference(14)
10.16 10 Acquisition Note dated as of January 6, Incorporated
1998, by Foreland and Eagle Springs by
Production Limited Liability Company Reference(14)
10.17 10 Deed of Trust, Security Agreement, Incorporated
Assignment of Production and Proceeds, by
Financing Statement and Fixture Filing Reference(14)
dated as of January 6, 1998, by and
among Foreland, Eagle Springs Production
Limited Liability Company, First
American Title Company of Nevada, and
Energy Income Fund, L.P.
10.18 10 Assignment of Overriding Royalty Interest Incorporated
dated effective as of January 1, 1998, by
of a 3% net revenue interest from Reference(14)
Foreland and Eagle Springs Production
Limited Liability Company to Energy
Income Fund, L.P.
10.19 10 Assignment of Overriding Royalty Interest Incorporated
dated effective as of January 1, 1998, by
of a 1% net revenue interest from Reference(14)
Foreland and Eagle Springs Production
Limited Liability Company to Energy
Income Fund, L.P.
10.20 10 Option and Purchase Agreement between Incorporated
Foreland Corporation and Petro Source by
Corporation respecting the purchase of Reference(15)
Petro Source Transportation dated
effective December 31, 1997
10.21 10 Purchase and Sale Agreement dated Incorporated
effective December 31, 1998, between by
Foreland and Plains Petroleum Operating Reference(15)
Company
10.22 10 Purchase Contract Confirmation dated Incorporated
effective December 15, 1997, between by
Foreland and Petro Source Refining Reference(15)
Partners
10.23 10 First Amendment to Financing Agreement Incorporated
between Foreland, Eagle Springs by
Production Limited Liability Company, Reference(16)
Foreland Refining Corporation, Foreland
Asset Corporation, Petrosource
Transportation, and Energy Income Fund,
L.P., dated August 10, 1998
10.24 10 Stock Purchase Agreement dated August 10, Incorporated
1998, between Energy Income Fund, L.P., by
and Foreland Reference(16)
10.25 10 First Allonge to Acquisition Note in the Incorporated
original principal amount of $2,327,000, by
dated as of August 10, 1998 Reference(16)
10.26 10 First Allonge to Development Note in the Incorporated
original principal amount of by
$13,893,000, dated as of August 10, 1998 Reference(16)
10.27 10 First Allonge to Refinancing Note in the Incorporated
original principal amount of $680,000, by
dated as of August 10, 1998 Reference(16)
10.28 10 Environmental Indemnity Agreement between Incorporated
Petro Source Corporation, Petrosource by
Investments, Inc., Foreland, Foreland Reference(16)
Refining Corporation, Foreland Asset
Corporation, and Petrosource
Transportation dated August 11, 1998
10.29 10 Second Amendment to Deed of Trust, Incorporated
Security Agreement, Assignment of by
Production and Proceeds, Financing Reference(16)
Statement and Fixture Filing dated as of
August 11, 1998, by and among Foreland,
Eagle Springs Production Limited
Liability Company, First American Title
Company of Nevada, and Energy Income
Fund, L.P.
10.30 10 Operating Agreement of Cowboy Asphalt This Filing*
Terminal, LLC, between Crown Asphalt
Company, and Foreland Asphalt
Corporation, dated as of January 12,
1999
10.31 10 Second Amendment to Financing Agreement This Filing*
between Foreland, Eagle Springs
Production Limited Liability Company,
Foreland Refining Corporation, Foreland
Asset Corporation, Petrosource
Transportation, and Energy Income Fund,
L.P., dated as of February 4, 1999
10.32 10 First Amendment to Registration Rights This Filing*
Agreement between Energy Income Fund,
L.P., and Foreland, dated as of February
4, 1999
10.33 10 First Amendment to Common Stock Purchase This Filing*
Warrant dated January 6, 1998 (Warrant
No. 1), dated as of February 4, 1999
10.34 10 First Amendment to Common Stock Purchase This Filing*
Warrant dated August 10, 1998 (Warrant
No. 2), dated as of February 4, 1999
10.35 10 Common Stock Issuance Agreement between This Filing*
Energy Income Fund, L.P., and Foreland,
dated as of February 4, 1999
10.36 10 Security Agreement (relating to fixtures) This Filing*
between Foreland Asphalt Corporation and
Energy Income Fund, L.P., dated as of
February 4, 1999
10.37 10 Pledge and Security Agreement (Cowboy This Filing*
Asphalt Terminal, L.LC. membership
interests) from Foreland Asphalt
Corporation to Energy Income Fund, L.P.,
dated as of February 4,1 999
10.38 10 Letter/deferral/waiver/release agreement This Filing*
dated April 14, 1999, between Energy
Income Fund, L.P. and Foreland
Corporation and subsidiaries.
Item 21. Subsidiaries
21.01 Subsidiaries of Foreland Corporation This Filing*
Item 23. Consents of Experts and Counsel
23.01 23 Consent of Hein + Associates LLP, This Filing*
certified public accountants
23.02 23 Consent of Malkewicz Hueni Associates, This Filing*
Inc.
Item 27. Financial Data Schedule
27.01 Financial Data Schedule This Filing*
- ------------
(1)Incorporated by reference from Foreland's registration statement on form S-
2, SEC file no. 33-42828.
(2)Incorporated by reference from Foreland's registration statement on form S-
1, SEC file no. 33-19014.
(3)Incorporated by reference from Foreland's registration statement on form S-
1, SEC file no. 33-81538.
(4)Incorporated by reference from Foreland's registration statement on form S-
2, SEC file no. 33-64756.
(5)Incorporated by reference from Foreland's registration statement on form S-
2, , SEC file no. 33-86076.
(6)Incorporated by reference from Foreland's annual report on form 10-K for the
fiscal year ended December 31, 1985.
(7)Incorporated by reference from Foreland's annual report on form 10-K for the
fiscal year ended December 31, 1994.
(8)Incorporated by reference from Foreland's registration statement on form S-
3, SEC file no. 333-3779.
(9)Incorporated by reference from Foreland's quarterly report on form 10-Q for
the period ending September 30, 1996.
(10) Incorporated by reference from Foreland's interim report on form 8-K dated
November 15, 1996.
(11) Incorporated by reference from Foreland's registration statement on form S-
3, SEC file no. 333-19063.
(12) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1996.
(13) Incorporated by reference from Foreland's registration statement on form S-
3, SEC file no. 333-37793.
(14) Incorporated by reference from Foreland's interim report on form 8-K dated
January 6, 1998.
(15) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1997.
(16) Incorporated by reference from Foreland's interim report on form 8-K dated
August 12, 1998, as amended on Form 8-K/A filed October 26, 1998.
(17) Incorporated by reference from Foreland's quarterly report on form 10-Q for
the period ending September 30, 1998.
* Filed as an exhibit to this annual report on Form 10-K.
** Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
(b) Reports on Form 8-K.
During the last quarter of the fiscal year ended December 31, 1998,
Foreland filed reports on form 8-K as follows:
Date of Event Reported Item Reported
October 14, 1998 Item 5. Other Events
October 28, 1998 Item 5. Other Events
November 18, 1998 Item 5. Other Events
December 8, 1998 Item 5. Other Events
- ------------------------------------------------------------------------------
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORELAND CORPORATION
Dated: April 15, 1999 By/s/
---------------------------------
N. Thomas Steele, President
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: April 15, 1999 /s/
N. Thomas Steele, President and Director
(Principal Executive and Financial Officer)
Dated: April 15, 1999 /s/
Grant Steele, Director
Dated: April 15, 1999 /s/
Bruce C. Decker, Director
Dated: April 15, 1999 /s/
Don W. Treece, Controller (Principal
Accounting Officer)
Dated: April 15,, 1999
Robert D. Gershen, Director
Dated: April 15, 1999 /s/
Lee Brian Van Ramshorst, Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report...............................................F-2
Consolidated Balance Sheets - As of December 31, 1997 and 1998.............F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1996,
1997, and 1998........................................................F-5
Consolidated Statements of Stockholders' Equity (Deficit) - For the Years Ended
December 31, 1996, 1997, and 1998..... ...............................F-6
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996,
1997, and 1998........................................................F-8
Notes to Consolidated Financial Statements................................F-10
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Foreland Corporation
Lakewood, Colorado
We have audited the accompanying consolidated balance sheets of Foreland
Corporation and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foreland Corporation
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the real-
ization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 2 to the financial statements, the Company has
suffered cumulative losses from inception of $39.6 million and, at December 31,
1998, the Company has a working capital deficit of $8.6 million. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 10, 1999, except for the last sentence of Note 5
as to which the date is April 1, 1999
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1997 1998
----- ----
ASSETS
CURRENT ASSETS:
Cash and equivalents $40,631 $1,849,782
Trade receivables 245,041 2,771,085
Inventories 61,108 1,166,361
Marketable securities - 700,000
Prepaid expenses and other 11,998 164,921
---------- ----------
Total current assets 358,778 6,652,149
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the successful
efforts method 11,878,336 13,566,505
Refineries and building - 4,845,472
Transportation and other equipment 146,745 1,007,571
Office furniture and equipment 215,426 419,317
Construction in progress - 367,509
---------- ----------
12,240,507 20,206,374
Less accumulated depreciation, depletion and
amortization (5,346,333) (13,115,997)
---------- ----------
6,894,174 7,090,377
OTHER ASSETS:
Debt issuance costs, net of accumulated
amortization of $368,190 in 1998 ($-0- in
1997) 49,390 576,190
Investment in Cowboy Asphalt Terminal - 172,177
---------- ----------
Deposits and other 650,830 151,794
---------- ----------
Total other assets 700,220 900,161
TOTAL ASSETS $7,953,172 $14,642,687
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt, net of
discount of $1,219,796 in 1998 ($-0- in
1997) $25,301 $11,168,213
Accounts payable 424,769 2,378,274
Officers' salaries payable 364,276 434,813
Accrued expenses and other 39,587 1,223,474
---------- ----------
Total current liabilities 853,933 15,204,774
LONG-TERM DEBT, less current maturities 642,951 -
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, and
9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 5,000,000
shares authorized; 761,807 shares issued
and outstanding in 1997 (liquidation
preference of $1,215,280), 524,243 shares
issued and outstanding in 1998
(liquidation preference of $2,891,757) 762 524
Common stock, $.001 par value, 50,000,000
shares authorized; 8,467,703 and 9,673,191
shares issued and outstanding,
respectively 8,468 9,673
Additional paid-in capital 32,486,345 39,366,477
Less stock subscriptions receivable (311,758) (338,921)
Accumulated deficit (25,727,529) (39,599,840)
---------- ----------
Total stockholders' equity (deficit) 6,456,288 (562,087)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,953,172 $14,642,687
(DEFICIT) ========== ===========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---------- --------- ----------
(Note 11)
REVENUE:
Refining and transportation $ - $ - $9,703,996
Oil sales 1,958,348 2,213,336 828,293
Other 60,468 87,408 9,948
---------- ---------- -----------
Total revenue 2,018,816 2,300,744 10,542,237
EXPENSES:
Refining and transportation:
Cost of goods sold - - 6,864,301
Repairs and maintenance - - 266,520
Other - - 1,720,217
Oil production costs:
Enhanced recovery project - - 585,117
Other 533,339 907,332 387,769
Oil exploration:
Dry hole costs 943,120 13,405 1,705,858
Other 834,407 1,252,838 1,928,765
General and administrative:
Shareholder and investor services 1,058,145 192,664 106,898
Stock-based compensation - 159,500 185,371 8,718
employees
Other 568,348 961,528 1,207,926
Abandonment and impairment costs 542,700 565,483 3,650,533
Depreciation, depletion, and
amortization 711,608 1,288,780 4,263,704
---------- ---------- -----------
Total expenses 5,351,167 5,367,401 22,696,326
---------- ---------- -----------
OPERATING LOSS (3,332,351) (3,066,657) (12,154,089)
OTHER INCOME (EXPENSE):
Interest income 107,234 113,407 134,845
Interest expense (160,170) (169,176) (1,865,920)
Gain (loss) on sale of property and
equipment - (7,474) 12,853
---------- ---------- -----------
NET LOSS (3,385,287) (3,129,900) (13,872,311)
PREFERRED STOCK DIVIDENDS:
Converted to common stock (61,138) (164,029) -
Accrued (24,064) - (36,822)
Imputed (2,245,000) (216,000) -
---------- ---------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $(5,715,489) $(3,509,929) $(13,909,133)
=========== =========== ===========
NET LOSS PER COMMON SHARE $(.99) $(.46) $(1.57)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,752,000 7,656,000 8,870,000
=========== =========== ===========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
NOTES FOR TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
------------------ -------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT)
--------- ------- --------- --------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 1,489,020 $ 1,489 4,829,800 $ 4,830 $ 23,311,517 $(19,212,342) $(1,092,622) $ 3,012,872
Preferred stock offerings 5,255 5 - - 7,549,995 - - 7,550,000
Offering costs - - - - (820,861) - - (820,861)
Preferred stock exchanged
for common (675,533) (676) 1,932,212 1,932 (1,256) - - -
Accrued preferred stock
dividends converted to
common stock - - 15,957 16 (16) - - -
Exercise of warrants for
common stock - - 455,050 455 1,937,822 - - 1,938,277
Fair value of options granted - - - - 418,000 - - 418,000
to consultants for services
Options granted to employees
at below market exercise
prices - - - - 159,500 - - 159,500
Acquisition of oil and gas
property for common stock - - 8,276 8 34,907 - - 34,915
Collection of principal on
notes - - - - - - 28,850 28,850
Accrued interest on notes - - - - - - (51,901) (51,901)
Common stock returned by
former officer in payment
of subscriptions receivable
and accrued interest - - (3,118) (3) (21,433) - 21,436 -
Net loss - - - - - (3,385,287) - (3,385,287)
--------- ------- --------- ------- ------------ ------------ ----------- -----------
BALANCES, December 31, 1996 818,742 818 7,238,177 7,238 32,568,175 (22,597,629) (1,094,237) 8,884,365
Preferred stock exchanged
for common (56,935) (56) 1,126,872 1,127 (1,071) - - -
Accrued preferred stock
dividends converted to
common stock - - 71,759 71 (71) - - -
Fair value of options
granted to consultants
for services - - 46,250 46 6,987 - - 7,033
Options granted to
employees at below market
exercise prices - - - - 67,488 - - 67,488
Acquisition of oil and gas
property for common stock - - 6,040 6 27,552 - - 27,558
Collection of principal on
notes - - - - - - 2,323 2,323
Accrued interest on notes - - - - - - (66,544) (66,544)
Stock options returned by
officers in payment of
subscriptions receivable
and accrued interest - - - - - - 117,883 117,883
Common stock returned in
payment of subscriptions
receivable and accrued
interest - - (151,395) (151) (702,584) - 728,817 26,082
Issuance of common stock
for option to acquire
Petro Source - - 130,000 131 519,869 - - 520,000
Net loss - - - - - (3,129,900) - (3,129,900)
--------- ------- --------- ------- ------------ ------------ ----------- -----------
BALANCES, December 31, 1997 761,807 762 8,467,703 8,468 32,486,345 (25,727,529) (311,758) 6,456,288
Exercise of options and
warrants for common stock - - 8,000 8 31,992 - - 32,000
Issuance of 1998 series
preferred stock 2,000 2 - - 1,999,998 - - 2,000,000
Preferred stock exchanged
for common (239,564) (240) 79,855 80 160 - - -
Issuance of common stock for:
Services - - 4,031 4 18,146 - - 18,150
Refinery assets - - 863,602 863 3,021,743 - - 3,022,606
Common stock issued for debt
issuance costs - - 250,000 250 179,375 - - 179,625
Accrued interest on notes - - - - - - (27,163) (27,163)
Options granted to employees - - - - 8,718 - - 8,718
Warrants granted for debt
discount - - - - 1,620,000 - - 1,620,000
Net loss - - - - - (13,872,311) - (13,872,311)
--------- ------- --------- ------- ------------ ------------ ----------- -----------
BALANCES, December 31, 1998 524,243 $ 524 9,673,191 $ 9,673 $ 39,366,477 $(39,599,840) $ (338,921) $ (562,087)
========= ======= ========= ======= ============ ============ =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,385,287) $(3,129,900) $(13,872,311)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization 711,608 1,288,780 4,263,704
Bad debt expense - 36,241 774
Dry holes, abandonments and impairments 1,485,820 578,888 5,356,391
Issuance of stock and options for services 418,000 7,033 18,150
Accrued note receivable interest (51,901) (66,544) (27,163)
Amortization of debt discount and issuance - 3,912 784,039
costs
Stock-based compensation - employees 159,500 67,488 8,718
Stock options surrendered for stock - 117,883 -
subscriptions receivable
Loss (gain) on sale of assets - 7,474 (12,853)
Oil and royalty interest conveyed under - 147,000 -
severance agreement
Other 33,362 -
Changes in operating assets and liabilities,
net of effects of acquisition:
(Increase) decrease in:
Accounts receivable (336,981) 522,698 1,811,616
Inventories 814 19,460 (19,289)
Prepaid expenses and other (8,219) (30,627) (71,914)
Increase (decrease) in:
Accounts payable and accrued expenses (568,345) (102,230) 231,065
Officers' salaries payable (106,741) 78,555 70,537
--------- --------- ---------
Net cash used in operating activities (1,648,370) (453,889) (1,458,536)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - 2,050 12,853
Net cash received in acquisition of refining and - - 162,718
transportation businesses
Investment in certificates of deposit - - (700,000)
Investment in Cowboy Asphalt Terminal, L.L.C. - - (172,177)
Capital expenditures for property and equipment (5,356,151) (1,479,398) (4,362,175)
----------- ------------ -----------
Net cash used in investing activities (5,356,151) (1,477,348) (5,058,781)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 7,550,000 - 2,000,000
Proceeds from exercise of warrants and options 1,938,277 - 32,000
Payment of offering and registration costs (813,780) - -
Payment of long-term debt and promissory notes (404,237) (355,533) (25,522)
Payment of debt issuance costs - - (81,010)
Collection of principal on notes 28,850 2,322 -
Proceeds from long-term debt 1,000,000 - 6,401,000
----------- ------------ ----------
Net cash provided by financing activities 9,299,110 (353,211) 8,326,468
----------- ------------ ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,294,589 (2,284,448) 1,809,151
CASH AND EQUIVALENTS, beginning of year 30,490 2,325,079 40,631
----------- ------------ -----------
CASH AND EQUIVALENTS, end of year $2,325,079 $ 40,631 $1,849,782
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid for interest $175,508 $169,175 $918,325
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of refining and transportation
businesses for:
Common stock $ - $520,000 $3,022,606
=========== ============ ===========
Debt $ - $ - $5,000,000
=========== ============ ===========
Debt issuance costs incurred for:
Common stock $ - $ - $ 179,625
=========== ============ ===========
Debt $ - $ - $ 300,000
=========== ============ ===========
Transfer of royalty interest $ - $ - $ 350,000
=========== ============ ==========
Issuance of warrants for debt discount $ - $ - $1,620,000
=========== ============ ==========
Issuance of common stock for acquisition
of oil and gas properties $34,915 $ 27,558 $ -
=========== ============ ==========
Return of common stock by officers for
subscription receivable $21,436 $ 728,817 $ -
=========== ============ ==========
Accrued preferred stock dividends converted to
common stock $61,138 $ 164,032 $ -
=========== ============ ==========
</TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - Foreland Corporation (Foreland) was incorporated in
Nevada in 1985 to engage in oil exploration, development, and production.
Activities to date have focused primarily in north-central Nevada. As
discussed in Note 3, the Company acquired certain refineries and
transportation equipment from Petro Source Corporation in August 1998. The
refineries produce diesel fuel, residual fuel oil, asphalts, and other
petroleum products.
Principles of Consolidation - The consolidated financial statements include
the accounts of Foreland and its wholly-owned subsidiaries, Foreland Refining
Corporation, Foreland Transportation Corporation, Foreland Asphalt
Corporation, Foreland Asset Corporation, Krutex Energy Corporation, and Eagle
Springs LLC, collectively referred to as the Company. Krutex has no assets
or operations. All significant intercompany transactions and balances have
been eliminated in consolidation.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Marketable Securities - Marketable securities consist of certificates of
deposit which are carried at fair value, with unrealized holding gains and
losses included in earnings.
Oil and Gas Properties - The Company follows the "successful efforts" method
of accounting for oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells
that find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed. Management estimates that the
salvage value of lease and well equipment will approximately offset the
future liability for plugging and abandonment of the related wells.
Capitalized costs of producing oil and gas properties are depreciated and
depleted by the unit-of-production method. Costs of exploratory wells in
progress are capitalized and excluded from depletion until such time as
proved reserves are established or impairment is determined, generally not
longer than one year from completion of drilling. Depreciation and depletion
expense related to oil and gas properties amounted to $663,160, $1,243,485,
and $3,929,360 for the years ended December 31, 1996, 1997, and 1998,
respectively.
Upon the sale of an entire interest in an unproved property for cash, gain or
loss on the sale is recognized, taking into consideration the amount of any
recorded impairment if the property had been assessed individually. If a
partial interest in an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest retained.
Other Property and Equipment - Depreciation is calculated using the straight-
line method over the following estimated useful lives:
Years
-------
Refineries and building 3-15
Transportation and other 3-7
equipment
Office furniture and equipment 3-10
The cost of normal maintenance and repairs is charged to operating expenses
as incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Depreciation expense related to other property and equipment amounted to
$48,448, $45,295, and $334,344 for the years ended December 31, 1996, 1997,
and 1998, respectively.
Deferred Turnaround Charges - Deferred turnaround charges consist of major
refurbishing and other upgrades which extend the life of the refineries.
These costs are included in property and equipment and are amortized over 3
years.
Impairment of Long-Lived Assets - The Company assesses impairment whenever
events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. When an assessment for impairment
of proved oil and gas properties is performed, the Company is required to
compare the net carrying value of proved oil and gas properties on a field-
by-field basis (the lowest level at which cash flows can be determined on a
consistent basis) to the related estimates of undiscounted future net cash
flows for such properties. If the net carrying value exceeds the net cash
flows, then impairment is recognized to reduce the carrying value to the
estimated fair value.
Unproved oil and gas properties are periodically assessed for impairment of
value, and a loss is recognized at the time of impairment by providing an
impairment allowance.
During the year ended December 31, 1998, the Company determined that certain
oil and gas properties were impaired and accordingly, a charge of $3,650,533
was recognized to reduce the properties to the estimated fair value. The
provision for impairment is included in accumulated depreciation, depletion,
and amortization in the accompanying balance sheets.
Inventories - Inventories are carried at the lower of cost or market. For
refined petroleum products, cost is generally determined using the first-in,
first-out method. For other inventories, cost is determined using the
average cost method or specific identification where possible.
Income Taxes - The Company accounts for income taxes using the liability
method, whereby deferred tax, assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Revenue Recognition - The Company recognizes sales of refined petroleum
products and crude oil upon delivery to the purchaser. Transportation
revenues are recognized as the services are performed.
Net Loss Per Common Share - Net loss per common share is presented in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share, which requires disclosure of basic
earnings per share (EPS) and diluted EPS. Basic EPS is computed by dividing
income or loss applicable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in
the issuance of common stock. Basic and diluted EPS are the same for all
periods presented since all potential common shares were antidilutive.
For the years ended December 31, 1996 and 1997, the Company recognized
imputed preferred dividends of $2,245,000 and $216,000, respectively, in
arriving at the net loss applicable to common stockholders. This charge
relates to preferred stock that was convertible to common stock at a
discount.
Stock-Based Compensation - The Company accounts for stock-based compensation
issued to employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Accordingly, compensation cost for stock
options granted to employees is measured as the excess, if any, of the quoted
market price of the Company's common stock at the measurement date
(generally, the date of grant) over the amount an employee must pay to
acquire the stock.
The Company accounts for options, warrants, and similar instruments which are
granted to non-employees for goods and services at fair value on the grant
date, as required by SFAS No. 123, Accounting for Stock-Based Compensation.
Fair value is generally determined under an option pricing model using the
criteria set forth in SFAS No. 123. The Company did not adopt SFAS No. 123
to account for stock-based compensation for employees but is subject to the
pro forma disclosure requirements.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The actual results could differ from
those estimates.
The Company's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, realizability of
notes for common stock subscriptions receivable, assumptions affecting the
fair value of options and warrants, impairment of long-lived assets, and oil
reserve quantities which are the basis for the calculation of depreciation,
depletion, and impairment of proved oil and gas properties. The Company's
reserve estimates were determined by an independent petroleum engineering
firm. However, management emphasizes that reserve estimates are inherently
imprecise and that estimates of more recent discoveries are more imprecise
than those for properties with long production histories. Accordingly, the
Company's estimates are expected to change as future information becomes
available.
As discussed above, the reserve estimates are also the basis for assessment
of impairment of proved oil and gas properties. In addition to the
uncertainties inherent in the reserve estimation process, this amount is
affected by historical prices for oil which have typically been volatile. It
is reasonably possible that the Company's oil reserve estimates will
materially change in the forthcoming year.
Reverse Stock Split - On June 15, 1996, the Company effected a three-for-one
reverse stock split. Accordingly, all share and per share amounts in the
accompanying financial statements have been retroactively restated to give
effect to the reverse stock split.
Financial Instruments - SFAS No. 107 requires all entities to disclose the
fair value of certain financial instruments in their financial statements.
Accordingly, at December 31, 1997 and 1998, management's best estimate is
that the carrying amount of all financial instruments approximates fair
value.
Reclassifications - Certain reclassifications have been made to the 1996 and
1997 financial statements to conform to the presentation in 1998. The
reclassifications had no effect on the 1996 or 1997 net loss.
2.BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared on the
going concern basis, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
incurred a net loss of $13.9 million in 1998 and has incurred cumulative
losses of approximately $39.6 million since inception. Additionally, the
Company is not in compliance with certain covenants of its loan agreements,
and has a working capital deficit of approximately $8.6 million and a
stockholders' deficit of $562,000 at December 31, 1998. As discussed in
Note 5, the Company failed to make the April 1, 1999 payment under the
revised debt financing arrangements. The ability of the Company to continue
as a going concern is dependent on its ability to repay or refinance its
debt, successfully develop its oil and gas properties, increase utilization
at its refineries, and ultimately achieve profitable operations.
3.PURCHASE OF REFINING AND TRANSPORTATION ASSETS:
On August 12, 1998, the Company completed the purchase from an unrelated firm
of a crude oil processing refinery in Eagle Springs, Nevada, a hydrocarbon
processing facility in Tonopah, Nevada, and trucks and related equipment used
to gather crude oil and distribute products. The purchase price was
$8,688,371, which consisted of $520,000 in common stock issued by the Company
in December 1997 to acquire the option, $5,000,000 in cash, the issuance of
863,602 shares of common stock with a fair value of approximately $3,023,000,
and other costs related to the acquisition of $145,371. The acquisition was
accounted for using the purchase method of accounting for business
combinations, and, accordingly, the accompanying consolidated financial
statements include the results of operations of the acquired business since
the date of acquisition. The purchase of the refinery and transportation
assets and related operations was effective as of June 1, 1998. For
financial reporting purposes, earnings between the effective date and the
closing date were accounted for as a reduction in the purchase price.
The purchase agreement requires the Company to register the shares issued for
the acquired assets. If the proceeds from liquidation of 763,602 shares is
less than $2,676,322 (plus interest at 10% per annum), the Company is
required to issue additional shares or pay cash for the deficiency. Based on
the current trading price of the Company's common stock, the Company could be
required to issue additional shares which may ultimately result in a change
of control.
The following unaudited pro forma information assumes that the acquisition
had occurred on January 1, 1997:
For the Years Ended
December 31,
----------------------------
1997 1998
Revenue $27,863,000 $13,798,000
=========== =============
Net loss applicable to common
stockholders $(3,467,000) $(14,590,000)
=========== =============
Net loss per share - basic and
diluted $(.41) $(1.55)
=========== =============
4.INVENTORIES:
Inventories consist of the following at December 31, 1997 and 1998:
1997 1998
-------- ---------
Crude oil and other raw materials $ 5,090 $227,000
Refined oil products - 785,000
Oil field equipment and other 56,018 154,361
-------- ---------
Total $61,108 $1,166,361
======== ===========
5.LONG-TERM DEBT:
Long-term debt at December 31, 1997 and 1998, consists of the following:
1997 1998
----------- ----------
Note payable to Energy Income Fund (EIF),
interest at 12% $ - $12,375,279
Less unamortized discount - (1,219,796)
-------- ---------
Net - 11,155,483
Note payable to bank pursuant to revolving
credit agreement. Interest at variable rate
(11% at December 31, 1997), collateralized by
oil and gas properties. 650,000 -
Other installment notes. Interest at 13.4%,
monthly principal and interest payments of
approximately $639 through October 1999 when
the remaining balance is due. The notes are
collateralized by vehicles. 18,252 12,730
Total long-term debt 668,252 11,168,213
Less current maturities (25,301) (11,168,213)
-------- ---------
Total Long-term debt, less current
maturities $642,951 $ -
======== ==========
The financing arrangement with EIF was entered into in January 1998 and was
amended in August 1998 and February 1999. Amounts due under the financing
arrangement are collateralized by substantially all property and equipment,
and the Company is required to maintain certain financial ratios and comply
with other terms and conditions while any balance of indebtedness remains
outstanding.
During 1998, the Company violated certain covenants and was not in compliance
with certain financial ratios and other terms and conditions of the loan. In
February 1999, EIF agreed to reschedule the principal amortization to
commence April 1999 (previously scheduled to commence in November 1998),
extend certain financial covenants of the Company, and waive EIF's exercise
of remedies upon default until April 1999. As amended, the Company is
required to make 34 monthly payments of $338,096 plus accrued interest
commencing April 1, 1999. However, the Company does not have the ability to
comply with the amended covenants during 1999 and, accordingly, the entire
balance is included in current liabilities in the accompanying financial
statements. Despite this presentation, management continues to negotiate a
payment plan with EIF and is hopeful that EIF will continue to make
concessions to prevent acceleration of the entire principal balance.
In connection with the establishment of the financing arrangement, the
Company issued to EIF five-year warrants to purchase 750,000 shares of common
stock at $6.00 per share and 250,000 shares at $10.00 per share and granted
EIF the right to designate a representative for appointment to the Board of
Directors of the Company. In connection with the modification of the
financing arrangement in August, the Company increased the outstanding
warrant to purchase 250,000 shares at $10.00 per share to 750,000 shares and
reduced the exercise price to $6.00 per share. The estimated fair value of
these warrants and the subsequent modification amounted to $1,620,000. This
amount is accounted for as a discount which is amortized using the interest
method, resulting in a balance of $1,219,796 at December 31, 1998.
In addition to the warrants, the Company also agreed to transfer to EIF a 3%
overriding royalty interest in the Company's proved oil and gas properties
and a 1% overriding royalty interest in certain unproved properties. The
estimated fair value of these royalty interests of $350,000 was accounted for
as a debt issuance cost which is being amortized using the interest method.
In December 1998, the Company issued 250,000 shares of common stock to EIF as
an inducement to enter into negotiations to restructure the financing
agreement. The fair value of this stock of $179,625 was accounted for as a
debt issuance cost and was charged to operations in the fourth quarter of
1998.
During 1999, the Company entered into a line-of-credit agreement with a bank.
The line provides for borrowings up to $2,000,000 and has an interest rate of
8.75%, and has a maturity date of February 15, 2000. Borrowings under the
line-of-credit are collateralized by accounts receivable and inventories.
The Company failed to make the April 1, 1999 payment under the revised debt
agreement with EIF.
6.INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997 and 1998:
1997 1998
----------- ------------
Long-term deferred tax assets
(liabilities):
Net operating loss carryforward $11,645,000 $14,000,000
Property and equipment basis
differences (430,000) (120,000)
Below-market stock options 200,000 200,000
----------- ------------
Net deferred tax assets 11,415,000 14,080,000
Less valuation allowance (11,415,000) (14,080,000)
----------- ------------
Net deferred tax assets $ - $ -
=========== ============
The Company has a net operating loss carryforward of approximately
$38 million for income tax purposes. This carryforward expires in varying
amounts from 1999 through 2018. A portion of this net operating loss
carryforward may be subject to reduction or limitation of use as a result of
changes in ownership or certain consolidated return filing regulations.
7.PREFERRED STOCK:
The Company's Board of Directors has authorized the issuance of several
series of convertible preferred stock. The following is a summary of shares
issued and outstanding under each series at December 31, 1998:
Convertible
to
Preferred Common Stock Liquidation
Series Shares Shares Preference
- -------------------------- ----------- ------------ -----------
1991 Convertible Preferred
Stock 20,000 6,667 $25,000
1994 Convertible Preferred
Stock 153,140 51,047 306,280
1995 Convertible Preferred
Stock 349,103 116,368 523,655
1998 Convertible Preferred
Stock 2,000 333,333 2,036,822
--------- -------- ---------
Total 524,243 507,415 $2,891,757
========= ======== ==========
None of the series of preferred stock outstanding at December 31, 1998
provides for dividends to the holders.
The 1994 convertible preferred stock is redeemable at $4.00 per share at the
Company's option. EIF is the sole holder of the 1998 convertible preferred
stock.
As of December 31, 1998, the Company has authority to issue approximately
348,000 shares of preferred stock. Such shares may be issued in the future
in such series and preferences as determined by the Company's Board of
Directors.
Imputed Dividends - During 1996, the Company issued four series of
convertible preferred stock whereby the holders were provided the opportunity
to convert shares of preferred stock to common stock pursuant to a formula
that provided for a discount of 10% to 35% of the market price of the
Company's common stock. The amount of this discount has been accounted for
as an imputed dividend to the holders of the preferred stock, and was
recognized over the period from the issuance date to the earliest date when
each series of preferred stock was convertible. For the years ended
December 31, 1996 and 1997, imputed dividends amounted to $2,245,000 and
$216,000, respectively.
Preferred Stock Warrants - The Company has outstanding warrants exercisable
at $6.60 per share to purchase preferred stock convertible into 43,874 shares
of common stock. These warrants expire in July 1999.
Shareholder Rights Plan - During 1997, the Company's Board of Directors
adopted a rights agreement under which preferred stock purchase rights
(Rights) were distributed, as a dividend, at a rate of one Right for each
outstanding share of the Company's common stock on the record date. Each
Right entitles the holder to purchase 1/1000th of a share of Series A
preferred stock at an exercise price of $100. The Rights may be redeemed by
the Company at a redemption price of $.01 per Right in the event of a
takeover attempt. The Rights plan is not designed to prevent a takeover but
rather to encourage a potential acquiror to negotiate with Board of
Directors. The Rights are not currently exercisable and do not trade
separately from the Company's common stock.
8.STOCK-BASED COMPENSATION:
Employee Stock Options - The Company's Board of Directors has granted non-
qualified stock options to officers, directors, and employees of the Company.
The following is a summary of activity under these stock option plans for the
years ended December 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998
------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning
of year 434,000 $6.01 1,098,667 $5.25 1,653,000 $3.89
Granted 804,667 4.80 1,119,667 3.45 20,000 3.50
Surrendered for notes - - (408,334) 5.70 - -
receivable
Expired (23,333) 8.13 (16,333) 6.13 (16,667) 5.70
Canceled - - - - (8,000) 4.00
Exercised - - - - (8,000) 4.00
Repriced (116,667) 4.39 (140,667) 4.41 - -
---------- ---------- -------- --------
Outstanding, end of 3.87
year 1,098,667 5.25 1,653,000 3.89 1,640,333
========== ========== ==========
</TABLE>
At December 31, 1998, outstanding options vest as follows:
Range of Weighted
Exercise Prices Number Average
---------------
Vested at Low High of Shares Exercise Price
December 31,
1998 $ 2.50 $ 9.00 825,333 $4.31
1999 2.50 5.00 293,000 3.52
2000 2.50 5.00 293,000 3.52
2001 2.50 4.00 229,000 3.16
---------
1,640,333 3.87
=========
If not previously exercised, options outstanding at December 31, 1998, will
expire as follows:
Range of
Exercise Prices Weighted
---------------- Average
Year Ending Exercise Number
December 31, Low High Price of Shares
- ----------------- ------- ------ -------- ---------
1999 $ 6.38 $ 9.00 $8.40 36,666
2002 3.93 4.50 4.40 126,667
2003 - 2006 4.00 5.00 4.73 567,000
2007 2.50 4.00 3.58 487,500
2008 - 2010 2.50 2.50 2.50 422,500
---------
3.87 1,640,333
=========
Modification of Option Terms - During 1996 and 1997, the Company extended
the exercise period for certain non-qualified common stock options which had
been granted to officers and directors. The following is a summary of these
activities:
Original Terms New Terms
---------------------------- ---------------------------
Grant Exercise Expiration Grant Exercise Expiration Number of
Date Price Date Date Price Date Shares
------ -------- ---------- ----- -------- ---------- ---------
1996 Modification
-----------------
1986 $ 4.50 1996 1996 $ 4.50 1997 94,000
1993 3.93 1996 1996 3.93 1997 11,111
1986 3.93 1996 1996 3.93 1997 11,556
-------
116,667
=======
1997 Modification
-----------------
1996 $ 4.50 1997 1997 $ 4.50 2002 94,000
1993 4.50 1998 1997 4.50 2002 24,000
1996 3.93 1997 1997 3.93 2002 22,667
-------
140,667
=======
The market price of the Company's common stock exceeded the exercise price
for 116,667 options whose term was extended in 1996 and, accordingly, the
Company recognized a stock-based compensation charge of $159,500 in 1996.
Based on vesting provisions for these repriced options, the Company
recognized additional compensation of $52,568 in 1997 and $8,718 in 1998.
Options for 33,334 shares were extended in 1997 and compensation of $14,921
was recognized. During 1997, the expiration dates of options for
107,333 shares were extended for five years and no compensation was
recognized since the market price of the Company's common stock was less
than the exercise price on the date the options were extended. Additional
stock-based compensation of $117,882 was recognized in 1997 related to the
value of options surrendered by officers and directors to settle notes
receivable.
Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified common stock purchase options to non-employees
which are summarized as follows for the years ended December 31, 1996, 1997,
and 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1997 1998
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- -------- ---------- ---------
Outstanding, beginning of year 1,006,224 $15.58 326,025 $ 9.38 740,025 $10.84
Granted for goods and services 433,333 5.20 - - - -
Granted in equity offerings 90,920 5.39 - - - -
Granted to previous holders of L warrants - - 414,000 12.00 - -
Reload grants 175,200 9.23 - - - -
Granted for debt discount and issuance costs
- - - - 1,750,000 6.57
Canceled - - - - (250,000) 10.00
Anti-dilution adjustments 41,600 2.52 - - - -
Expired (956,202) 15.74 - - (583,222) 12.00
Exercised (455,050) 4.26 - - - -
Repriced (10,000) 9.00 - - - -
-------- -------- --------- ------
Outstanding, end of year 326,025 9.38 740,025 $10.84 1,656,803 6.05
======== ======== =========
</TABLE>
All outstanding warrants and non-qualified options granted to non-employees
were exercisable at December 31, 1998. If not previously exercised, these
instruments will expire as follows:
Range of
Exercise Prices Weighted
---------------- Average
Year Ending Exercise Number
December 31, Low High Price of Shares
- ----------------- ------- ------ -------- ---------
1999 $ 3.75 $ 3.75 $3.75 10,000
2000 4.50 4.50 4.50 8,333
2001 4.50 7.50 6.87 138,470
2003 6.00 6.00 6.00 1,500,000
---------
6.05 1,656,803
=========
Reload Options - At December 31, 1998, options and warrants with a reload
feature are outstanding for a total of 94,000 shares of common stock. Upon
exercise of all or part of these options, additional options will be granted
with an exercise price equal to the market price of the Company's common
stock at the date of exercise and an exercise period of 5 years. If an
employee tenders mature shares (held in excess of six months) for the
exercise price, then no compensation charge will be recognized.
Stock Subscriptions Receivable - During 1994, officers and directors
exercised stock options to acquire an aggregate of 216,667 shares of common
stock at a weighted average exercise price of $4.67 per share. Pursuant to
the terms of the options exercised, each optionee paid the purchase price of
the options by the delivery of a promissory note payable in three equal,
consecutive installments of principal plus interest on the unpaid balance at
7% per annum, payable annually commencing on the first anniversary of the
exercise. The note installments are payable in cash or the delivery of
Common Stock or other options valued at the trading price at the time of
payment.
Also pursuant to the terms of the options exercised, the Company
automatically granted new five year options to purchase 216,667 shares of
Common Stock at $6.38 per share. In connection with the issuance of shares
on the exercise of such options, in 1994 the optionees returned an aggregate
of 24,118 shares of Common Stock to satisfy withholding obligations of the
Company, as provided for in the terms of the options exercised. The first
payment for the above referenced notes became due in September 1995, when
the officers returned an aggregate of 57,159 shares of Common Stock in
satisfaction of the first installment of principal and interest on their
notes. In connection with employment agreements executed in 1996, the due
dates for the September 1996 and 1997 installments were deferred for one
year.
The remaining balance due under these notes of $735,523 was satisfied in
1997 through the delivery of an aggregate of 151,395 shares of common stock
owned by the directors. The fair value of these shares amounted to $617,640
and the directors also agreed to surrender stock options for an aggregate of
208,334 shares of common stock with an exercise price of $6.38 per share as
additional consideration for the repayment of the notes receivable. The
Company recognized a charge of $117,883 related to the exchange of the stock
options for the remaining obligations under the notes receivable.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options and
warrants which are granted to employees. Accordingly, the Company
recognizes compensation cost for options granted to employees to the extent
that the market price of the Company's common stock exceeds the exercise
price on the date of grant. If compensation cost had been recognized using
the fair value method prescribed by FAS 123 rather than the intrinsic value
method under APB 25, the Company's net loss applicable to common
shareholders and loss per share would have been changed to the pro forma
amounts indicated below.
Year Ended December 31,
--------------------------------
1996 1997 1998
------- ------- ------
Net loss applicable to
common stockholders:
As reported $(5,715,489) $(3,509,929) $(13,909,133)
Pro forma (6,648,000) (5,068,313) (13,937,133)
Net loss per common
share:
As reported $(.99) $(.46) $(1.57)
Pro forma (1.19) (.66) (1.57)
The weighted average fair value of options granted to employees amounted to
$3.03, $1.54, and $1.40 for the years ended December 31, 1996, 1997, and
1998, respectively. The fair value of each employee option and warrant was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended December 31,
------------------------
1996 1997 1998
------ ------- -------
Expected volatility 70.0% 70.0% 70.0%
Risk-free interest rate 6.5% 6.4% 6.1%
Expected dividends - - -
Expected terms 4.7 6.7 3.5
(in years)
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases - The Company currently rents administrative office space
and equipment under noncancelable leases. Total rental expenses incurred
under operating leases amounted to $69,879, $60,125, and $88,922 for the
years ended December 31, 1996, 1997, and 1998, respectively. The total
minimum rental commitment under all operating leases is as follows:
Year Ending
December 31,
1999 $167,000
2000 171,000
2001 174,000
2002 178,000
2003 135,000
--------
$825,000
========
Delay Rentals - At December 31, 1998, the Company has an investment in
undeveloped oil and gas leases with a carrying value of $472,238. In order
to retain these leases, management estimates that delay rental payments of
approximately $168,000 will be required in 1999. Delay rental expense
amounted to $175,055 for the year ended December 31, 1998 and is included
in oil exploration expense in the accompanying statement of operations.
Employment Agreements - In September 1997, the Company entered into
employment agreements with four officers, directors, and employees of the
Company. The agreements automatically renew each month for a period of
3 years and provide for aggregate annual salaries of $388,000. The
agreements also provide for an increase in the aggregate annual salaries to
$484,000 when the Company sustains net oil production at an average of at
least 1,000 barrels of oil per day for any calendar month.
Employee Royalties - During 1996, the Company agreed to transfer a 1%
overriding royalty interest in substantially all of the Company's wells to
a limited liability company to be formed to hold this interest. The
proceeds from this royalty interest are required to be distributed to
employees as additional compensation. Through December 31, 1998, total
royalties related to this interest amounted to $64,500.
During October 1997, in connection with an officer's severance
arrangements, the Company agreed to transfer a 1% overriding royalty in
properties which comprise substantially all of the Company's proved
reserves. The estimated fair value of this royalty interest of
approximately $147,000 is included in general and administrative expenses
in the 1997 statement of operations.
Environmental - The Company is subject to extensive Federal, state, and
local environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed. Liabilities for expenditures of a non-capital nature are
recorded when environmental assessment and/or remediation is probable, and
the costs can be reasonably estimated. The seller of the refineries agreed
to indemnify the Company for certain environmental obligations.
Oil Purchase Commitment - During 1999, the Company entered into an
agreement to purchase all oil produced by a third party in the State of
Nevada, at a market responsive price, with a guaranteed floor of between
$7.50 and $12.00 per barrel. The Company does not anticipate the
quantities purchased will be in excess of its refining capacities.
Contingencies - The Company may from time to time be involved in various
claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operations of its business. The Company is not currently involved in any
such incidental litigation which it believes could have a materially
adverse effect on its financial conditions or results of operations.
10. SIGNIFICANT CONCENTRATIONS:
At December 31, 1998, the Company had cash on deposit with a single
financial institution for approximately $884,000, $472,000, and $368,000.
These amounts are Federally-insured to the extent of $100,000 for each
financial institution. The Company also had an investment in a certificate
of deposit for $550,000 which was not Federally-insured.
At December 31, 1998, the Company had trade receivables of $538,000 and
$516,000 from refining customers. The Company's refining customers include
other petroleum companies and entities that are primarily engaged in mining
and construction. Prior to shipment, the Company generally evaluates each
customer's financial condition and establishes the amount of credit which
may be extended. If a customer desires credit in excess of this amount,
the Company generally obtains a letter-of-credit or other collateral to
support the higher level of credit.
The Company's refineries and oil and gas properties are located in Nevada.
While there have been significant oil discoveries in this area, the remote
location may result in delays and/or shortages of labor and certain
services. The incremental cost of transporting goods and personnel may
result in higher costs than those incurred by companies doing business in
other areas of the United States. In addition to the crude oil production
from the Company's properties, the refining operations are dependent upon
other oil producers in this area to ensure an adequate supply of feedstock.
In the current low oil price environment, the Company could experience
shortages of feedstock if the producers of crude oil decide to suspend
operations until oil prices recover.
As discussed in Note 5, substantially all of the Company's debt financing
has been obtained from a single lender and the Company is not in compliance
with several covenants under this financing arrangement. In August 1998,
the lender also purchased 2,000 shares of convertible preferred stock with
a liquidation preference of $2,000,000. In connection with these financing
activities, the Company has granted warrants to this lender for the
purchase of an aggregate of 1,500,000 shares of common stock, exercisable
at $6.00 per share.
11. INDUSTRY SEGMENTS:
Through July 1998, the Company's operations were concentrated in oil and
gas producing activities. Beginning in August 1998, the Company is also
engaged in the refining and transportation segment.
The accounting policies of the segments are the same as those described in
Note 1. Sales from the oil and gas producing segment to refining are based
on prices paid to unrelated parties. The Company evaluates performance
based on net income or loss.
Presented below is a summary of results of operations for each segment for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Oil and Gas Refining Consolida-
and tion
Producing Transpor- Entries Consoli-
tation dated
--------------- ----------- ---------- ------------
Revenue:
External customers $ 838,241 $9,703,996 $ - $10,542,237
Inter-segment 486,421 - (486,421) -
--------------- ----------- ---------- ------------
Total revenue 1,324,662 9,703,996 (486,421) 10,542,237
Costs and expenses:
Refining and
transportation - 8,751,210 99,828 8,851,038
Oil production 974,018 - (586,249) 387,769
Enhanced recovery project 585,117 - - 585,117
Oil exploration 3,634,623 - - 3,634,623
General and
administrative 940,640 382,902 - 1,323,542
Abandonment and
impairment costs 3,650,533 - - 3,650,533
Depreciation,
depletion and
amortization 3,999,750 263,954 - 4,263,704
Interest and other,
net 1,572,279 145,943 - 1,718,222
--------------- ----------- ---------- ------------
Total cost and
expenses 15,356,960 9,544,009 (486,421) 24,414,548
Income (loss) before
income taxes (14,032,298) 159,987 - (13,872,311)
Income tax benefit 50,000 (50,000) - -
(expense)
--------------- ----------- ---------- ------------
Net income (loss) $(13,982,298) $109,987 $ - $(13,872,311)
=============== =========== ========== ============
</TABLE>
Total assets for each segment as of December 31, 1998 are as
follows:
Oil and Gas Refining Consolida-
and tion
Producing Transpor- Entries Consoli-
tation dated
--------------- ----------- ---------- ------------
$3,769,498 $11,132,330 $(259,141) $14,642,687
=============== =========== ========== ============
12. INVESTMENT IN COWBOY ASPHALT TERMINAL:
During 1998, the Company formed Cowboy Asphalt Terminal, L.L.C. (CAT). CAT
is a limited liability company that is owned 67% by an unrelated entity and
33% by the Company. CAT was formed to acquire and operate an asphalt
terminal located near Salt Lake City, Utah. Under CAT's operating
agreement, a portion of the asphalt terminal property has been designated
for joint activities of the owners, a portion has been set aside for the
other owner to conduct its paving asphalt business, and the remainder is
designated for the Company to conduct its roofing asphalt business.
During 1998, CAT made payments totaling $286,164 to obtain the right to
purchase the asphalt terminal. On January 7, 1999, the closing for the
acquisition of the asphalt terminal occurred whereby CAT made an additional
cash payment of $195,000 and executed a promissory note for $1,282,070.
The note is collateralized by the asphalt terminal property, provides for
interest at 9%, and monthly payments of $20,627 are due until January 2006.
In connection with the purchase agreement, the seller retained a residual
interest in the event the property is sold and the parties agreed to
provide a right of first refusal if a member of CAT desires to sell its
interest.
Through December 31, 1998, the Company incurred $172,177 for capital
contributions to CAT. The Company also incurred $367,509 for construction
in progress expenditures related to the 100% owned roofing asphalt
business. Management expects that the roofing asphalt business will be
operational during the second quarter of 1999.
13. FOURTH QUARTER ADJUSTMENTS AND TRANSACTIONS:
During the fourth quarter of 1998, the Company recognized charges totaling
approximately $7 million for depletion, depreciation and impairment related
to oil and gas properties that did not have economic reserves based on
prices in effect at December 31, 1998.
14. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
All oil and gas operations of the Company and its subsidiaries are
conducted in the United States. Capitalized costs relating to oil and gas
producing activities are as follows:
DECEMBER 31,
--------------------------
1997 1998
------------ -------------
Proved oil and gas producing properties $11,406,799 $13,094,267
Unproved properties, net of allowance
for impairment of $169,000 in 1997
and $67,000 in 1998 471,537 472,238
------------ -------------
11,878,336 13,566,505
Accumulated depreciation, depletion
and amortization (5,114,382) (12,556,271)
------------ -------------
$6,763,954 $1,010,234
============ =============
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, during the years ended December 31, 1996, 1997, and 1998 are as
follows:
1996 1997 1998
----------- ----------- ----------
Acquisition costs $2,908,254 $358,403 $602,292
=========== =========== ==========
Exploration costs $2,205,883 $1,252,838 $4,358,142
=========== =========== ==========
Development costs $477,210 $1,076,636 $849,438
=========== =========== ==========
Results of operations from oil and gas producing activities (excluding
refining and transportation activities, general and administrative expenses,
and interest expense) for the years ended December 31, 1996, 1997, and 1998
are presented below.
1996 1997 1998
----------- ------------ -----------
Oil sales $1,958,348 $2,213,336 $1,314,714
Gain (loss) on sale of oil
and gas properties - (7,474) 2,635
Production costs:
Enhanced recovery project - - (585,117)
Other (533,339) (907,332) (974,012)
Exploration costs:
Dry hole costs (943,120) (13,405) (1,705,858)
Delay rentals (184,421) (214,019) (175,055)
Geologic and geophysical (649,986) (1,038,819) (1,753,710)
Abandonment and impairment
costs (542,700) (565,483) (3,650,533)
Depreciation and depletion (663,160) (1,243,485) (3,929,360)
----------- ------------ -----------
Results of operations from
oil and gas producing
activities $(1,558,378) $ (1,776,681)$(11,456,296)
=========== ============ ===========
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - Proved oil
and gas reserves are the estimated quantities of crude oil, which geological
and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are those expected to be
recovered through existing wells with existing equipment and operating
methods. However, reserve information should not be construed as the current
market value of the Company's oil and gas reserves or the costs that would be
incurred to obtain equivalent reserves. Reserve calculations involve the
estimation of future net recoverable reserves of oil and gas and the timing
and amount of future net revenues to be received therefrom. These estimates
are based on numerous factors, many of which are variable and uncertain.
Accordingly, it is common for the actual production and revenues to vary from
earlier estimates.
Reserve estimates for recently drilled wells and undeveloped properties are
subject to substantial upward or downward revisions after drilling is
completed and a production history obtained. Therefore, reserve estimates
and estimates of future net revenues from production may be subject to
substantial revision from year to year. Reserve information presented herein
is based on reports prepared by independent petroleum engineers.
Set forth below is the unaudited summary of the changes in the net quantities
of the Company's proved oil reserves (in barrels) as of December 31, 1996,
1997, and 1998:
1996 1997 1998
---------- ------------ -----------
Proved reserves, beginning of
year 2,006,000 3,723,000 2,297,000
Production (118,000) (180,000) (159,000)
Purchase of reserves in
place 1,321,000 16,000 224,000
Transfer of royalty
interests to employees (50,000) (28,000) -
Discoveries, extensions and
other additions 646,000 - -
Revisions of previous
estimates (82,000) (1,234,000) (1,854,000)
---------- ------------ -----------
Proved reserves, end of year 3,723,000 2,297,000 508,000
========== ============ ===========
Proved developed reserves,
beginning of year 1,175,000 1,900,000 1,450,000
========== ============ ===========
Proved developed reserves, end
of year 1,900,000 1,450,000 508,000
========== ============ ===========
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes guidelines for
computing a standardized measure of future net cash flows and changes therein
relating to estimated proved reserves. The Company has followed these
guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities
of oil and gas to be produced. Estimated future income taxes are computed
using current statutory income tax rates including consideration for
estimated future statutory depletion and tax credits. The resulting future
net cash flows are reduced to present value amounts by applying a 10% annual
discount factor. The Company's year-end reserve reports were prepared based
upon average oil prices of approximately $18.05, $12.55, and $5.80 per barrel
as of December 31, 1996, 1997, and 1998, respectively.
The assumptions used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations for actual revenues to be derived from
those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
DECEMBER 31,
---------------------------------------
1996 1997 1998
------------ ------------ -----------
Future cash inflows $67,226,000 $28,838,000 $2,949,000
Future production costs (19,216,000) (14,502,000) (2,313,000)
Future development costs (5,182,000) (2,240,000) -
Future income tax expense (3,630,000) - -
------------ ------------ -----------
Future net cash flows 39,198,000 12,096,000 636,000
10% annual discount for estimated
timing of cash flows (18,218,000) (5,384,000) (145,000)
------------ ------------ -----------
Standardized measure of
discounted future net cash flow $20,980,000 $6,712,000 $ 491,000
============ ============ ===========
The following are the principal sources of change in the standardized measure
of discounted future net cash flows for the years ended December 31, 1996,
1997, and 1998:
1996 1997 1998
----------- ----------- -----------
Standardized measure, beginning of
year $6,200,000 $20,980,000 $6,712,000
Sales of oil and gas, net of
production costs (1,425,000) (1,306,000) (372,000)
Extensions, discoveries and other,
net 6,977,000 - -
Purchase of reserves in place 8,964,000 37,000 799,000
Transfer of royalty interests to
employees (290,000) (213,000) -
Net change due to revisions in
quantity estimates (1,913,000) (5,728,000) (2,565,000)
Net change due to changes in prices
and production costs 5,719,000 (13,530,000) (6,882,000)
Net change in future development
costs (1,930,000) 2,432,000 2,128,000
Net change in income taxes (1,942,000) 1,942,000 -
Accretion of discount 620,000 2,098,000 671,000
----------- ----------- -----------
Standardized measure, end of year $20,980,000 $6,712,000 $491,000
=========== =========== ===========
Due to the low oil prices at December 31, 1998 of approximately $5.80 per
barrel, the Company recognized substantial downward revisions in oil reserve
quantities, the standardized measure, and net capitalized costs due to
impairment. In addition to the adverse impact on current operating results,
low oil prices tend to dramatically reduce estimates of future oil reserve
quantities since the wells become uneconomic at an earlier date. The
following pro forma information illustrates the sensitivity of reserve
quantities and the standardized measure to changes in oil prices as prepared
for the Company's lender by an independent petroleum engineering firm:
Pro Forma
Quantity Standardized
Oil Price (bbls) Measure
$ 9.75 1,716,000 $2,198,000
$12.50 2,039,000 $4,126,000
In March 1999, oil prices related to the Company's properties had recovered
to approximately $10 per barrel.
OPERATING AGREEMENT
OF
COWBOY ASPHALT TERMINAL, L.L.C.
THIS OPERATING AGREEMENT of COWBOY ASPHALT TERMINAL, L.L.C. (this
"Agreement"), is made and entered into effective as of the 12th day of February
1999, by and among CROWN ASPHALT PRODUCTS COMPANY, a Utah corporation ("Capco"),
and FORELAND ASPHALT CORPORATION, a Utah corporation ("Foreco") (collectively
referred to herein as the "Members").
RECITALS
A. The parties desire to engage in the business of acquiring, holding,
managing, and operating an asphalt terminal.
B. On or about June 16, 1998, Articles of Organization were filed with
the Division of Corporations and Commercial Code of the Department of Commerce,
state of Utah, to form Cowboy Asphalt Terminal, L.L.C. (the "Company").
C. It is the intent of the parties that additional improvements for the
joint use of the parties will be made by the Company to that portion of the
Property (as defined below) that is designated for the joint use of the parties,
in which case the parties will share in the cost and expense of such
improvements in proportion with their Ownership Percentages (as defined below)
and will receive an increase in each such party's Capital Account in the amount
paid by such party. Further, upon the mutual agreement of the parties, each
party may erect and install equipment and other improvements, as such party's
sole and separate property and at its sole cost and expense, on that portion of
the Property that is designated for such Party's exclusive use, in which case
the cost and expense of such improvements shall not be treated as Capital
Contributions and such improvements will be owned by the party bearing the cost
thereof and not by the Company.
D. The parties hereto desire to provide for the regulation and management
of the affairs of the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
DEFINED TERMS
When used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Act" shall mean the Utah Limited Liability Company Act, as amended or
revised from time to time.
1.2 "Affiliate" of a Person shall mean a Person, directly or indirectly,
through one or more intermediaries, controlling, controlled by, or under common
control with the Person in question. The term "control," as used in the
immediately preceding sentence, means, respecting a Person that is a
corporation, the right to exercise, directly or indirectly, more than 50% of the
voting rights attributable to the shares of the controlled corporation, and,
respecting a Person that is not a corporation, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the controlled Person.
1.3 "Agreement" shall mean this Operating Agreement of Cowboy Asphalt
Terminal, L.L.C., as originally executed and as amended from time to time.
Words such as "herein," "hereinafter," "hereof," "hereto," "hereby," and
"hereunder," when used with reference to this Agreement, refer to this Agreement
as a whole, unless the context otherwise requires.
1.4 "Available Cash" of the Company shall mean all cash funds of the
Company on hand from time to time (including cash funds obtained as
contributions to the capital of the Company by the Members, loans to the
Company, and net proceeds from Capital Transactions, but excluding cash funds
obtained from Terminating Transactions) after (i) payment of all expenses of the
Company as of such time, including all costs, expenses, or charges respecting
the ownership, operation, development, maintenance, and upkeep of the Company
property, including ad valorem taxes, debt amortization (including interest
payments), advertising expenses, professional fees, wages, and utility costs,
(ii) provision for payment of all outstanding and unpaid current obligations of
the Company as of such time, and (iii) provision for an adequate working capital
reserve as determined by the Manager to be reasonably necessary for operations
of the business of the Company.
1.5 "Capital Account" shall have the meaning set forth in Section 3.3(a).
1.6 "Capital Transaction" shall mean a transaction (i) pursuant to which
the Company borrows funds, (ii) pursuant to which part of the assets of the
Company are sold, condemned, exchanged, abandoned or otherwise disposed of,
(iii) pursuant to which insurance proceeds or other damages are recovered by the
Company in respect of a capital asset of the Company (and, not for such items as
business interruption or similar items), or (iv) that, in accordance with
generally accepted accounting principles, is otherwise considered capital in
nature.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended (or
any corresponding provision or provisions of succeeding law).
1.8 "Company" shall mean the limited liability company operated pursuant
to the terms hereof for the limited purposes and scope set forth herein.
1.9 "Fiscal Year" of the Company shall mean the calendar year.
1.10 "Liquidation" of a Member's interest shall mean and shall be deemed to
occur upon the earlier of (i) the date upon which the Company is terminated
under section 708(b)(1) of the Code; (ii) the date upon which the Company ceases
to be a going concern (even though it may continue in existence for the limited
purpose of winding up its affairs, paying its debts, and distributing any
remaining Company assets to the Members); or (iii) the date upon which there is
a liquidation of the Member's interest (but the Company is not terminated) under
section 1.761-1(d) of the Regulations.
1.11 "Manager" shall mean the Person designated pursuant to Section 5.3 to
manage and operate the business of the Company.
1.12 "Members" shall mean the parties to this Agreement and such other
persons or entities that are admitted to the Company as additional or
substituted Members. Reference to a "Member" shall mean any one of the Members.
1.13 "Net Income or Loss" of the Company for any Fiscal Year (or portion
thereof) shall mean the excess or deficit, as the case may be, of (i) the gross
income of the Company derived from Operations as calculated under federal income
tax accounting principles for such Fiscal Year over (ii) all items of expense
[incurred, in case the Company selects the accrual method of accounting for tax
purposes, or paid, in the case the Company selects the cash method of accounting
for tax purposes,] by the Company respecting Operations during such Fiscal Year
which are allowable as deductions under federal income tax accounting principles
and depreciation, cost recovery or other amortization deduction allowable to the
Company for federal income tax purposes respecting any Company asset for such
Fiscal Year.
1.14 "Operations" shall mean revenue producing activities of the Company
other than (a) activities relating to Capital Transactions; or (b) activities
conducted separately by either Capco or Foreland. It is contemplated that
Operations shall be limited to ownership of the Property and the leasing of tank
capacity as the Members shall agree.
1.15 "Ownership Percentage" means, respecting each Member, the product of
(a) 100%, multiplied by (b) a fraction, the numerator of which shall be the
number of Units held by such Member and the denominator of which shall be the
total number of Units outstanding at that time.
1.16 "Person" shall mean any individual, partnership, corporation, trust or
other entity or association.
1.17 "Property" shall mean the Cowboy Asphalt Terminal comprising the real
property located in Davis County, Utah, as more particularly described in
Exhibit "A" attached hereto and incorporated herein by this reference, together
with the buildings, fixtures, and improvements and certain items of personal
property from time-to-time located thereon, excluding improvements to the
Property made pursuant to Section 3.2(d).
1.18 "Regulations" shall mean the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Regulations shall include
any corresponding provision or provisions of succeeding, similar, substitute
proposed or final Regulations.
1.19 "Terminating Transaction" shall mean a sale, condemnation, exchange or
other disposition, whether by foreclosure, abandonment, or otherwise, of all or
substantially all of the then remaining assets of the Company which is entered
into in connection with the dissolution, termination and winding up of the
Company or that will result in the dissolution of the Company.
1.20 "Unit" shall mean an interest in the Company consisting of the rights,
covenants, and responsibilities more particularly set forth herein.
ARTICLE II
GENERAL PROVISIONS
2.1 Formation of the Company. The Members previously formed the Company
as a limited liability company pursuant to the provisions of the Act, by filing
Articles of Organization with the Division of Corporations and Commercial Code
of the Department of Commerce, state of Utah, and hereby adopt this Agreement to
provide for the regulation and management of the affairs of the Company.
2.2 Name. The business of the Company shall be conducted under the name
"Cowboy Asphalt Terminal, L.L.C." or such other name that the Members may
select.
2.3 Purposes and Scope. Subject to the provisions of this Agreement, the
Company is formed to acquire, hold, manage, and operate an asphalt receiving,
processing, storage, and handling terminal, to engage in any activity necessary
or convenient to accomplish its purposes and operate its business as set forth
herein as the Members may from time-to-time determine; and to exercise all
powers permitted thereby. This Agreement does not and shall not be construed to
govern any business relationships between the parties other than those specified
in this Agreement.
2.4 Articles of Organization. The Members further agree and obligate
themselves to execute, acknowledge, file, record and/or publish, as necessary,
such amendments to the Articles of Organization as may be required by the terms
hereof or by law and such other certificates and documents as may be appropriate
to comply with the requirements of law for the continuation, preservation,
and/or operation of the Company as a limited liability company.
2.5 Fictitious Name. Concurrently with the execution of this Agreement,
the Company shall make any filings or disclosures required by the laws of the
state of Utah respecting its use of a fictitious name, if any.
2.6 Ownership. The interest of each Member in the Company shall be
personal property for all purposes. All property and interests in property, real
or personal, owned by the Company shall be deemed owned by the Company as an
entity, and no Member, individually, shall have any ownership in any property or
interest in property owned by the Company except as a Member in the Company.
Each of the Members irrevocably waives, during the term of the Company and
during any period of its liquidation following any dissolution, any right that
such Member may have to maintain any action for partition respecting any of the
assets of the Company.
2.7 Membership Certificates. Units of membership interest in the Company
shall be represented by certificates which shall state on their face the name of
the Company and that it is organized under the laws of the state of Utah, the
name of the Member to whom the certificate is issued, and the number and, if
applicable, the class or other designation of the series, if any, the
certificate represents. Each share certificate must be signed by the Manager
and may contain such other information as the Manager or the Members consider
necessary or appropriate. The Company shall maintain a membership ledger
indicating the name, address, certificate serial number, and number of units or
other interests held by each Member from time to time, showing the cancellation
of certificates, as appropriate.
2.8 No Individual Authority. Except as otherwise specifically provided in
this Agreement, no Member, acting alone, shall have any authority to act for, or
to undertake or assume any obligation, debt, duty or responsibility on behalf
of, any other Member or the Company.
2.9 Place of Business. The principal place of business of the Company
shall be at 215 South State Street, Suite 650, Salt Lake City, Utah 84111, or at
such other or additional place or places as the Members shall reasonably
determine.
2.10 Term of the Company. The term of the Company shall continue until
terminated pursuant to the provisions of this Agreement or such other date as
the Members shall select in accordance with the provisions of Section 8.1.
2.11 Registered Agent. The registered agent of the Company shall be Jay
Mealey, whose office address is 215 South State Street, Suite 650, Salt Lake
City, Utah 84111.
2.12 Registered Office. The registered office of the Company shall be 215
South State Street, Suite 650, Salt Lake City, Utah 84111.
ARTICLE III
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contributions; Units. In connection with the
formation of the Company, each Member shall be deemed to have contributed to the
capital (the "Capital Contributions") of the Company the approximate amount of
cash paid to Hancock-Geisler R.I.C. through November 30, 1998, respecting the
payments due under that certain amortization schedule regarding the purchase of
the Property, and has been credited with the number of Units, set forth opposite
such Member's name set forth below:
OWNERSHIP
NAME CONTRIBUTION UNITS HELD PERCENTAGES
- ------------------------------ ------------ ---------- -----------
Crown Asphalt Products Company $174,533 66.67 66.67%
Foreland Asphalt Corporation $87,267 33.33 33.33%
3.2 Additional Contributions.
(a) Each Member shall be obligated to contribute one-half of (i) such
additional amounts as may be required, not to exceed a total of $650,000,
for the Company to fulfill its obligations under such corrective action
plan that may be acceptable to the Company and the Utah Department of
Environmental Quality for environmental management, remediation, and
containment costs of bringing the Property into compliance with applicable
environmental laws respecting conditions existing as of the date of this
Agreement, which such additional contribution shall be paid within ten (10)
days after demand therefor by the Manager; and (ii) such additional amounts
required to cover legal costs incurred in obtaining title to the Property
from Hancock Geisler R.I.C., or relating to the environmental remediation
work referenced in clause (i).
(b) Each Member shall be obligated to contribute, pro rata in
proportion to its Ownership Percentage, such additional amounts as may be
required for the Company to fulfill its obligations under the following:
(i) the payment of the balance of the purchase price for the
Property as reflected under that certain Memorandum of Closing dated
January 7, 1999, attached hereto as Exhibit "B" for by and between
Hancock Geisler R.I.C., Inc., and the Company and the special warranty
deed, trust deed note, deed of trust, and other documents to be
executed and delivered in consummation of the transaction contemplated
thereby;
(ii) environmental management and containment costs other than
those described in subparagraph (a) of this Section 3.2, which such
additional contribution shall be paid within ten (10) days after
demand therefor by the Manager;
(iii) the Company's expenses for Operations, which such
additional contribution shall be paid within ten (10) days after
demand therefor by the Manager; and
(iv) the construction of capital improvements to the Property
that, in the judgment of the Manager and, if required in accordance
with the provisions of Section 5.7, the approval of the Members, will
be beneficial to the business interests and for the joint use of both
Members.
(c) Any additional Capital Contributions of a Member shall increase
the Member's Capital Account, but as long as such contributions are made in
proportion to their respective obligations as set forth in subparagraph (a)
and (b) above of this Section 3.2, shall not result in an increase in the
number of Units held by the Members. No Member shall be required to
purchase additional Units or make any additional Capital Contributions
beyond those set forth in Section 3.1 and this Section 3.2, respectively.
(d) In addition to the foregoing, the Members anticipate that each
Member may deem it necessary or desirable to make certain capital
improvements to the Property intended to benefit only such Member in all
material respects and not the other Member, all as more particularly
provided in this Section 3.2(d). To the extent that the improvement sought
to be made is located in the area set forth on Exhibit "C" as being devoted
to the exclusive use of the Member making such improvement, no approval
from any other Member shall be required. If, however, the subject
improvement is to be located on an area not designated on Exhibit "C" for
such Member's exclusive use, any such improvements shall be made only upon
the prior written consent of both Members, which such consent shall not be
unreasonably withheld if, in the exercise of the Members' reasonable
commercial judgment, it does not appear that it will be likely that the
proposed improvements will materially and interfere on a recurring basis
with the continued use of the remainder of the facility in accordance with
then contemporaneous practice. The Member receiving the principal benefits
of such capital improvements shall fund all related costs and expenses of
installation, construction, and operation of such improvements and shall be
entitled to all revenues and profits in connection therewith. The payment
of such costs and expenses of installation and construction shall in no
event be treated as additional Capital Contributions or loans to the
Company but shall be for the sole account of the Member bearing such
payments. All improvements to the Property made pursuant to this Section
3.2(d) shall be owned solely by the Member funding the installation,
construction and operation thereof, and shall not be considered Company
property..
3.3 Capital Accounts.
(a) A separate "Capital Account" (herein so called) shall be
maintained for each Member in accordance with the capital accounting rules
of section 1.704-1(b)(2)(iv) of the Regulations. Each Member shall have
only one Capital Account, regardless of the number or classes of Units in
the Company owned by such Member and regardless of the time or manner in
which such Units were acquired by such Member. Pursuant to the basic rules
of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each
Member's Capital Account shall be:
(i) credited with: (1) the amount of money contributed by such
Member to the Company and the fair market value of any property
contributed by such Member to the Company (net of liabilities secured
by such property that the Company assumes or takes subject to); (2)
except as provided below, the amount of taxable income or gain
allocated to such Member; and (3) such Member's pro rata share of any
tax exempt income or gain of the Company; and
(ii) debited with: (1) the amount of money (excluding guaranteed
payments) and the agreed fair market value of any property distributed
to such Member (net of liabilities secured by such property that the
Member assumes or takes subject to); (2) except as provided below, the
amount of taxable loss and deductions (or items thereof) allocated to
such Member; and (3) such Member's pro rata share of any expenditures
of the Company described in section 705(a)(2)(B) of the Code (or
expenditures which are so treated under section 1.704-(b) of the
Regulations); and
(iii) otherwise adjusted in accordance with the other capital
account maintenance rules of section 1.704-1(b)(2)(iv) of the
Regulations.
In addition, if property is distributed in kind by the Company, the Capital
Accounts of the Members shall be adjusted to reflect the manner in which
the unrealized income, gain, loss and deduction inherent in such property
(that has not already been reflected in the Members' Capital Accounts)
would be allocated to the Members if there were a taxable disposition of
such property for its agreed fair market value on the date of distribution.
(b) Notwithstanding the foregoing, if property is contributed to the
Company by a Member, the Company shall thereafter compute gain, loss and
depreciation in respect of the contributed property separately for book and
tax purposes as required by sections 1.704-1(b)(2)(iv), 1.704-1(b)(4)(i)
and 1.704-(b)(4)(iii) of the Regulations. Such items so computed for book
purposes shall be allocated among the Members in the manner provided in
Article IV below and shall be reflected in the Members' Capital Accounts by
appropriate increases or decreases thereto as required by section
1.704-1(b)(2)(iv)(b) of the Regulations. Such items so allocated for tax
purposes shall not be reflected in the Members' Capital Accounts.
(c) Notwithstanding the foregoing, it is the intention of the Members
that their Capital Accounts in the Company be maintained strictly in
accordance with the capital account maintenance requirements of section
1.704-1(b) of the Regulations, and that their Capital Accounts be adjusted
to the extent required by the provisions of such Regulations or any
successor provisions thereto.
(d) A loan by a Member to the Company shall not be considered a
contribution of money to the capital of the Company, and the balance of
such Member's Capital Account shall not be increased by the amount so
loaned, unless such loan is determined by the Internal Revenue Service in a
final administrative proceeding to be a Capital Contribution by such
Member. No repayment of principal or interest on any such loan, or
reimbursement made to a Member respecting advances or other payments made
by such Member on behalf of the Company, or payments of fees to a Member or
its Affiliates which are made by the Company shall be considered a return
of capital or in any manner affect the balance of such Member's Capital
Account.
(e) Notwithstanding any other provision in this Agreement to the
contrary, in the event that a Member has a negative balance in its Capital
Account following the Liquidation of such Member's interest in the Company
or the occurrence of a Terminating Transaction or other event resulting in
the termination of the Company (such Member's Capital Account balance to be
determined after it has been adjusted to reflect (i) all Company
transactions during the Fiscal Year in question, including gain or loss
realized in connection with a Terminating Transaction and (ii) the gain or
loss which would be recognized by the Company if it were to sell its
remaining assets for the fair market value thereof), such Member shall
contribute to the Company an amount of money equal to such negative balance
by the later of (1) the end of the Fiscal Year during which the Member's
interest is liquidated or the Terminating Transaction occurs or (2) ninety
(90) days after the date on which the Member's interest is liquidated or
the Terminating Transaction occurs. Amounts contributed to the Company
pursuant to this Section 3.3(e) shall be paid to the Company's creditors or
distributed to the other Members in accordance with the positive balances
in their respective Capital Accounts (after such Capital Accounts have been
adjusted in the manner provided herein).
3.4 Return of Capital. Except to the extent provided in Article IV below,
no Member shall have the right to demand or receive the return of such Member's
Capital Contributions to the Company.
3.5 No Interest on Capital Contributions. Except as otherwise provided
herein, no Member shall receive any interest on such Member's Capital
Contributions to the Company or such Member's Capital Account, notwithstanding
any disproportion therein as between the Members.
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
4.1 Distributions of Available Cash. The Manager, in its sole discretion,
shall determine whether the Company should distribute its Available Cash;
provided, however, that the Manager shall use its best efforts to distribute
sufficient Available Cash to allow the Members to meet their obligations to
federal and state taxing authorities. In the event that the Manager decides
that part or all of the Company's Available Cash should be distributed to the
Members, such Available Cash shall be distributed to the Members pro rata in
accordance with their respective Ownership Percentages. Notwithstanding the
foregoing, the net proceeds of a Terminating Transaction shall be distributed in
accordance with Section 8.2 hereof.
4.2 Allocations of Income and Loss. Subject to the provision of Section
4.3, the Company's items of Net Income and Loss from Operations for each Fiscal
Year and gain and loss realized by the Company in connection with each Capital
Transaction, after giving effect to all Capital Account adjustments attributable
to contributions and distributions of money and property made during such Fiscal
Year (but excluding income and loss, if any, that is required to be separately
determined and allocated to the Members for federal income tax purposes in the
same manner as prescribed under section 704(c) of the Code), shall be allocated
to the Members, pro rata in accordance to their respective Ownership
Percentages.
4.3 Limitations and Qualifications Regarding Allocations. Notwithstanding
the provisions of Section 4.2, Net Income and Loss for each Fiscal Year and gain
and loss realized by the Company (or items of income, gain, loss, deduction, or
credit, as the case may be) shall be allocated in accordance with the following
provisions. If the allocation of Net Loss (or items thereof) as provided in
Section 4.2 hereof would cause or increase a deficit balance in a Member's
Capital Account, there shall be allocated to such Member only that amount of net
loss (or items thereof) as will not cause or increase a deficit balance in the
Member's Capital Account. The net loss (or items thereof) that would, absent
the application of the preceding sentence, otherwise be allocated to such Member
shall be allocated (i) first, to other Members having positive balances in their
Capital Accounts, in proportion to such positive balances; and (ii) second, to
all the Members in accordance with their respective Ownership Percentages. For
purposes hereof, each Member's Capital Account shall be reduced for the items
described in clauses (4), (5), and (6) of Regulation section 1.704-
1(b)(2)(ii)(d). If any allocation of net loss (or items thereof) is made under
this Section 4.3, any allocation of Net Income and gain (including income and
gain exempt from tax) of the Company allocated thereafter shall first be
allocated as necessary to offset in reverse order the allocation made pursuant
to this Section 4.3.
4.4 Allocation of Income and Loss and Distributions in Respect of Units
Transferred.
(a) If any Units in the Company are transferred, or are increased or
decreased by reason of the admission of a new Member or otherwise, during
any Fiscal Year of the Company, each item of income, gain, loss, deduction,
or credit of the Company for such Fiscal Year shall be assigned pro rata to
each day in the particular period of such Fiscal Year to which such item is
attributable (i.e., the day on or during which it is accrued or otherwise
incurred) and the amount of each such item so assigned to any such day
shall be allocated to the Members based upon their respective Units in the
Company at the close of such day. For purposes of accounting convenience
and simplicity, the Company shall treat a transfer of, or an increase or
decrease in, Units in the Company which occurs at any time during a semi-
monthly period (commencing with the semi-monthly period including the date
hereof) as having been consummated on the first day of such semi-monthly
period, regardless of when during such semi-monthly period such transfer,
increase, or decrease actually occurs (i.e., sales and dispositions made
during the first fifteen (15) days of any month will be deemed to have been
made on the first day of the month and sales and dispositions thereafter
will be deemed to have been made on the 16th day of the month).
(b) Distributions of assets of the Company in respect of Units in the
Company shall be made only to the persons or entities who, according to the
books and records of the Company, are the holders of record of Units in
respect of which such distributions are made on the actual date of
distribution or, if authorized by the record holder of such Units as
evidenced by written notice to the Manager, such holder's designee.
Neither the Company nor the Manager shall incur any liability for making
distributions in accordance with the provisions of the preceding sentence,
whether or not the Company, the Members, or the Manager have knowledge or
notice of any transfer or purported transfer of ownership of any Units in
the Company.
(c) Notwithstanding any provision above to the contrary, gain or loss
of the Company realized in connection with a sale or other disposition of
any of the assets of the Company shall be allocated solely to the parties
owning Units in the Company as of the date such sale or other disposition
occurs.
ARTICLE V
STATUS OF MEMBERS AND MANAGEMENT OF THE COMPANY
5.1 Participation in Management. Except as otherwise provided herein, the
Members shall not participate in the management or control of the Company's
business nor shall they transact any business for the Company, nor shall they
have the power to act for or bind the Company, said powers being vested solely
and exclusively in the Manager.
5.2 Limited Liability. Except as otherwise provided herein to the
contrary, the Members shall not be bound by, or personally liable for, the
expenses, liabilities, or obligations of the Company, except as provided in the
Act.
5.3 Management. Unless the Articles of Organization have dispensed with
or limited the authority of the Manager, all power of the Company shall be
exercised by or under the authority of, and the business and affairs of the
Company shall be managed under the direction of, the Manager. The Manager shall
have exclusive power and control over the business of the Company; only the
Manager shall have the power to bind the Company. The initial Manager shall be
Capco. The Manager shall act as such until (a) its resignation, withdrawal,
removal, bankruptcy, or dissolution; or (b) the dissolution of the Company,
whichever occurs first. Manager vacancies shall be filled by the Members.
5.4 Removal of Manager. The Members shall have the right, without further
obligation to the Manager other than for reimbursement of expenses previously
incurred, to remove, with or without cause, the Manager.
5.5 Members, Manner of Acting.
(a) Unless the Articles of Organization provide otherwise, any or all
Members may participate in a meeting by, or conduct the meeting through the
use of, any means of communication by which all Members participating may
simultaneously speak to and be heard by each other during the meeting. A
Member participating in a meeting by this means is deemed to be present in
person at the meeting.
(b) A Member who is present at a meeting of the Members when an
action is taken is deemed to have assented to the action taken unless: (1)
it objects at the beginning of the meeting (or promptly upon its arrival)
to holding it or transacting business at the meeting; or (2) its dissent or
abstention from the action taken is entered in the minutes of the meeting;
or (3) it delivers written notice of its dissent or abstention to the
presiding officer of the meeting before its adjournment or to the Company
immediately after adjournment of the meeting. The right of dissent or
abstention is not available to a Member who votes in favor of the action
taken.
(c) Unless the Articles of Organization provide otherwise, any action
required or permitted to be taken by the Members at a meeting may be taken
without a meeting if the required majority of the Members as set forth in
subparagraph (d) below sign a written consent (unless the action which is
the subject of the consent requires a greater percentage under the Articles
of Organization or this Agreement) describing the action taken, and the
consents are filed with the records of the Company. Action taken by
consents is effective when the last Member signs the consent, unless the
consent specifies a subsequent effective date. A signed consent has the
effect of a meeting vote and may be described as such in any document.
(d) Unless this Agreement or the Articles of Organization require a
greater percentage, the Members shall determine all matters based upon the
approval or consent of at least 75% in Ownership Interest in the Company.
In the event that, for any reason, at least 75% in Ownership Interest of
the Members shall not be able to agree on a matter under consideration by
the Members, within five days after the matter is submitted to the Members,
the resolution thereof shall be determined by the majority decision of a
panel consisting of one unrelated, independent third party selected by each
Member (which appointment shall have been made within 15 days after the
disputed matter is submitted to the Members or the Member who shall not
have made such appointment shall have been deemed to have consented to the
disputed matter) and one unrelated, independent third party selected by the
persons so selected. All matters submitted to dispute resolution as
described in this Section 5.5(d) shall have been finally resolved within 30
days.
5.6 Manager; Specific Powers. Except as otherwise specifically provided
in this Agreement, all matters in connection with the day-to-day conduct of the
Company's business and the use or disposition of its assets shall be decided
solely by the Manager. Without limiting the generality of the foregoing, the
Manager shall have the power and authority on behalf of the Company to:
(a) acquire such tangible and intangible personal property as may be
necessary or desirable to carry on the business of the Company;
(b) negotiate leases for and execute and deliver leases for office
space for the operation of the Company's business;
(c) purchase equipment, supplies, and materials and produce and
market products as, in its sole discretion, it shall deem advisable;
(d) employ, terminate the employment of, supervise, and compensate
such persons, firms, or corporations as, in its sole discretion and
judgment, it shall deem advisable for the proper operation and management
of the business of the Company;
(e) invest Company funds in interest-bearing accounts, commercial
paper, government securities, certificates of deposit, or similar
investments;
(f) execute promissory notes, deeds of trust, regulatory agreements,
and all other documents, agreements, or certifications;
(g) sell, transfer, exchange (whether or not qualifying as a tax-free
exchange under section 1031 of the Internal Revenue Code), assign, convey,
lease, further encumber, hypothecate or otherwise dispose of all or any
part of the assets of the Company in the ordinary course of the business of
the Company;
(h) execute and file all reports and maintain all records required by
law or by this Agreement; and
(i) coordinate the management and operation of the Company and
perform other normal business functions and otherwise operate and manage
the business and affairs of the Company in accordance with and as limited
by this Agreement.
5.7 Limitation on Powers and Authority of Manager. Notwithstanding the
provisions of this Article V or any other provisions herein, the Manager shall
not have the right or power to do any of the following without the consent of
Members holding 75% or more of all of the outstanding Units.
(a) Take any action respecting the Company's rights and obligations
as successor in interest to that certain Letter of Intent dated November
12, 1990, between Hancock-Geisler R.I.C., Inc., an Idaho corporation, which
appears therein as "Seller," for the sale of the Property to Crysen
Refining, Inc., which has thereafter assigned its rights under the Purchase
Arrangement to Refinery Technologies, Inc., which has in turn assigned
certain of its rights to the Company.
(b) Submit any corrective action plan or other remediation proposal
to the Utah Department of Environmental Quality or any other governmental
authority or bind the Company in any way respecting any such matter;
(c) Perform any act that would make it impossible to carry on the
ordinary business of the Company;
(d) Confess a judgment against the Company;
(e) Use the Company name, credit or assets for other than Company
purposes;
(f) Perform any act in contravention of this Agreement;
(g) Amend this Agreement;
(h) Commingle the funds of the Company with the funds of any other
person or entity;
(i) Submit any dispute involving the Company to binding arbitration;
(j) Execute or deliver any assignment for the benefit of the
creditors of the Company;
(i) Cause the Company to borrow any sums for which the Members have
recourse liability;
(k) Transact any business on behalf of the Company in any
jurisdiction, unless the Members would not, as a result thereof, become
Manager and have any liability greater than that provided in this
Agreement;
(l) Cause the Company to borrow or incur any indebtedness, in the
aggregate, in excess of $100,000;
(m) Obligate the Company to make capital expenditures in excess of
$100,000 in any calendar year;
(n) Dispose of all or any part of the Property described in Exhibit
"A" or the buildings, fixtures, or improvements from time to time located
thereon or dispose of all or substantially all of the assets or the
goodwill of any business of the Company or any of its businesses, all
except for routine sales, leases, other transfers, replacements,
renovations, and repairs in the ordinary course of the Company's business
that do not, singly or in the aggregate, have a material adverse effect on
the business of the Company;
(o) Admit a person or entity as a Member, except as provided herein,
except that Capco shall be entitled to transfer its interest as a Member in
the Company at any time to Crown Asphalt Distribution, L.L.C., a Utah
limited liability company ("CAD") without obtaining the consent of any
Member or Manager of the Company; and
(p) In case of an actual emergency, the Manager may take on behalf of
the Company any reasonable action it deems necessary to protect life or
property, to protect the assets of the Company, or to comply with
applicable law, without the approval of the Members as required elsewhere
within this Section 5.7 if time does not permit obtaining such approval.
The Manager shall promptly notify the Members of the emergency or
unexpected expenditure. Any Member may thereafter dispute the
reasonableness or necessity of an expenditure incurred by the Manager for
any such action by giving written notice of such dispute to the Manager.
Thereafter, the Manager and the Member shall negotiate in good faith to
resolve such dispute. In the event any dispute is not resolved, the
provisions of Section 5.5(d) shall apply.
5.8 Standard of Conduct. The Manager at all times shall operate and
manage the business and affairs of the Company in a reasonable and prudent
manner.
5.9 Compensation of Manager.
(a) Except as agreed to by the Members, the Manager shall not receive
compensation in consideration of the performance of the duties and
responsibilities of the Manager. However, the Manager shall be reimbursed
for all costs and expenses incurred on behalf of the Company. Except as
otherwise provided herein, neither the Manager nor any other Member shall
be entitled to a fee for services to the Company in its capacity as a
Member.
(b) The Company shall be obligated, and the Manager is authorized, to
pay from Company assets all expenses relating to the organization of the
Company. Such expenses may be paid directly by the Company or paid by the
Manager and then reimbursed by the Company. Without limiting the
generality of the foregoing, such organizational expenses include legal,
accounting, consulting, duplication and printing, telephone, telex,
postage, air freight, travel and entertainment, and other expenses and fees
(including filing fees) paid or incurred in organizing the Company. No
part of the amount so paid pursuant to this section shall be deemed to be a
management fee payable to the Manager.
(c) The Manager shall devote such time, effort, and skill to the
affairs of the Company as the Members may deem to be reasonably required
for the welfare and success of the Company, but shall not be obligated to
devote all of its business time to the affairs of the Company.
5.10 Use of Facilities. The Members shall have the right to use the
facilities comprising the Property without cost or the payment of any
consideration other than the Capital Contributions to the Company. Each Member
shall be entitled to the exclusive use of that portion of the Property more
particularly set forth in Exhibit "C" attached hereto and incorporated herein by
this reference. Each Member shall be entitled to make that portion of the
property marked as Reserved for such Member Exclusive to that Member by written
notice to the Company of its intent to utilize such Property in their respective
businesses ninety (90) days prior to such action. Any revenues generated from
the property marked Exclusive shall be the sole property of that respective
Member. Any revenues generated from the property marked Reserved or Joint will
be allocated according to Sharing Ratio subject to the change of certain
property from Reserved to Exclusive. The portions of the Property not
designated for the exclusive use of either Member shall be available for the use
of both Members, as coordinated from time-to-time by the Members.
5.11 Execution of Documents. Except as limited by Section 5.7, the Manager
is hereby authorized to execute on behalf of the Company any and all documents
in connection with the Company's business including, but not limited to, deeds,
deeds of trust, promissory notes, guaranties, leases, certificates, affidavits,
assignments, security agreements and contracts.
5.12 Tax Matters Member.
(a) The Manager is hereby designated the "tax matters partner" as
that term is defined in section 6231(a)(7) of the Code (referred to herein
as the "Tax Matters Member").
(b) The Tax Matters Member shall take no action in such capacity
without the authorization or consent of the other Members, other than such
action as the Tax Matters Member may be required to take by law. The Tax
Matters Member shall use its best efforts to comply with the
responsibilities outlined in sections 6222 through 6232 of the Code and in
doing so shall incur no liability to the other Members. Notwithstanding
the Tax Matters Member's obligation to use its best efforts in the
fulfillment of its responsibilities, the Tax Matters Member shall not be
required to incur any expenses for the preparation for or pursuance of
administrative or judicial proceedings unless the Members agree on a method
for sharing such expenses.
(c) The Tax Matters Member shall not enter into any extension of the
period of limitations for making assessments on behalf of the other Members
without first obtaining the written consent of the other Members.
(d) No Member shall file, pursuant to section 6227 of the Code, a
request for an administrative adjustment of items for any Company taxable
year without first notifying the other Members. If the other Members agree
with the requested adjustment, then the Tax Matters Member shall file the
request for administrative adjustment on behalf of the Member. If
unanimous consent is not obtained within thirty (30) calendar days from
such notice, or within the period required to timely file the request for
administrative adjustment, if shorter, any Member, including the Tax
Matters Member, may file a request for administrative adjustment on its own
behalf.
(e) Any Member intending to file a petition under sections 6226,
6228, or other section of the Code respecting any item or other matter
involving the Company shall notify the other Members of such intention and
the nature of the contemplated proceeding. In the case where the Tax
Matters Member is the Member intending to file such petition on behalf of
the Company, such notice shall be given within a reasonable period of time
to allow the other Members to participate in the choosing of the forum in
which such petition will be filed. If the Members do not agree on the
appropriate forum, then the appropriate forum shall be decided by vote of a
majority in interest of the Members. Each Member shall have a vote in
accordance with its aggregate percentage right to distributions of
Available Cash for the year under audit. If such a majority cannot agree,
then the Tax Matters Member shall choose the forum. If any Member intends
to seek review of any court decision rendered as a result of a proceeding
instituted under the preceding provisions of this Section 5.12(e), then
such Member shall notify the other Members of such intended action.
(f) The Tax Matters Member shall not bind any Member to a settlement
agreement without obtaining the written concurrence of such Member. For
purposes of this Section 5.12(f), the term "settlement agreement" shall
include a settlement agreement at either an administrative or judicial
level. Any Member who enters into a settlement agreement respecting any
partnership items, as defined in section 6231(a)(3) of the Code, shall
notify the other Members of such settlement agreement and its terms within
ninety (90) calendar days from the date of settlement.
(g) The provisions of this Section 5.12 shall survive the termination
of the Company or the termination of any Member's interest in the Company
and shall remain binding on the Members for a period of time necessary to
resolve with the Internal Revenue Service or the United States Department
of the Treasury any and all matters regarding the United States federal
income taxation of the Company.
5.13 Other Tax Elections. The Manager may, in its sole discretion, make or
revoke the elections referred to in section 754 of the Code or any corresponding
provisions of state tax laws. Each of the Members will upon request supply the
information necessary to properly give effect to such elections. The Manager
shall revalue Company property to its fair market value (taking into account
section 7701(g) of the Code) on the revaluation date in accordance with section
1.704-1(b)(2)(iv)(f) of the Regulations, and shall adjust the Capital Accounts
of the Members as described herein when any new or existing Member contributes
money or other property (other than a de minimis amount) to the Company in
exchange for an interest in the Company or when the Company distributes money or
other property (other than a de minimis amount) to a withdrawing or continuing
Member in exchange for all or a portion of such Member's interest in the
Company.
5.14 Inconsistent Treatment of Item. If any Member intends to file a
notice of inconsistent treatment under section 6222(b) of the Code, then such
Member shall give reasonable notice under the circumstances to the other Members
of such intent and the manner in which the Member's intended treatment of an
item is (or may be) inconsistent with the treatment of that item by the other
Members.
ARTICLE VI
MEMBERS' RESPONSIBILITIES AMONG THEMSELVES
6.1 Liability of Manager to the Other Members. The Manager, its
directors, officers, shareholders, representatives, employees and agents shall
not be liable to the Company or to the other Members for losses sustained or
liabilities incurred as a result of any good faith error in judgment or mistake
of law or fact, or for any act done or omitted to be done in good faith in
conducting the Company's business, unless such error, mistake, act or omission
was performed or omitted fraudulently, or constituted willful misconduct or a
breach of this Agreement. This provision is not for the benefit of any third
party.
6.2 Company Indemnity to Manager. The Company shall protect, defend,
indemnify and hold harmless the Manager and each of its directors, officers,
shareholders, representatives, employees and agents (collectively, the
"Indemnified Parties"), from and against any loss, expense, damage or injury
suffered or sustained by any of them by reason of any acts, omissions, or
alleged acts or omissions arising out of the activities of any Indemnified Party
on behalf of the Company or in furtherance of the interests of the Company,
including, but not limited to, any judgment, award, settlement, reasonable
attorneys' fees and other costs or expenses incurred in connection with the
defense of any actual or threatened action, proceeding or claim if the acts,
omissions or alleged acts or omissions upon which such actual or threatened
action, proceeding or claim is based were for a purpose believed in good faith
by any Indemnified Party, to be in the best interest of the Company or were not
performed or omitted fraudulently and did not constitute willful misconduct or a
breach of this Agreement by such Indemnified Party. The Company shall further
indemnify and hold harmless each Indemnified Party for losses or liabilities due
to the negligence, including gross negligence, dishonesty, willful misconduct,
or bad faith of any employee, broker, or other agent of the Company if such
employee, broker, or agent was solicited, engaged, or retained and supervised by
the Manager with reasonable care. The Members each acknowledge that the
intention of the preceding provisions is to cause the Company to indemnify the
Manager respecting the Manager's negligence, but in no event shall the Manager
be indemnified respecting its gross negligence or willful misconduct.
6.3 Conflicts of Interest. This Agreement shall not preclude the Company
from dealing with any Member or any Member's Affiliates in connection with the
business of the Company as independent contractors or as agents for others, and
such Affiliates may receive from such others or the Company normal profits,
compensation, commissions or other income incident to such dealings. The amount
payable by the Company to any Member or any Affiliate of any Member shall not be
greater than the amount which the Company would have to pay under an arms-length
contract with a non-related entity.
6.4 Members Look Solely to Company Assets. Each Member shall look solely
to the assets of the Company for all distributions respecting the Company and
return of its Capital Contributions, and no Member shall have any recourse in
connection therewith against any Member except as provided in Section 6.1.
6.5 Dealings Outside the Company. Neither the Manager nor any Member shall
be required to devote full time to Company business, and the Manager and Members
may, at any time and from time to time, engage in and possess an interest in
other business ventures of any and every type and description, independently or
with others. Specifically, the Members anticipate that Capco will exploit the
facilities and services of the Company, in conjunction with improvements to the
Property made by Capco pursuant to Section 3.2(d), solely to operate an
integrated paving asphalt business and that Foreco will exploit the facilities
and services of the Company, in conjunction with improvements to the Property
made by Foreland pursuant to Section 3.2(d), solely to operate an integrated
roofing asphalt business, Neither the Company nor any Member shall by virtue of
this Agreement have any right, title or interest in or to such independent
venture of any Member.
6.6 Respective Responsibilities for Damages. Each Member agrees to
indemnify and hold harmless the Company and the other Member from any injury,
damages, costs, liability, fines, causes of action or fees (including reasonable
attorney's fees) resulting from, or alleged to result from, the business
activities of such Member as described in Section 6.5 which are conducted upon
the Property or in conjunction with improvements to the Property made by such
Member pursuant to Section 3.2(d),.
6.7 Non-Solicitation. No Member shall solicit, divert, hire, or induce,
or attempt to solicit, divert, or hire any of the other's employees who are
providing substantially full-time services to such party while they are Members
of the Company or affiliated with any Member of the Company.
6.8 Confidentiality. Each Member agrees to keep confidential and not use,
reveal, provide, or transfer to any third party any confidential information
("Confidential Information") it obtains or has obtained concerning any other
Member, except (a) disclosure to actual or prospective sources of debt or equity
funding for such Member, including their legal, accounting, and other advisors,
(b) to the extent that disclosure to a third party is required by applicable
law; (c) information that, at the time of disclosure, is generally available to
the public (other than as a result of a breach of this Agreement or any other
confidentiality agreement to which the party is subject or which it has
knowledge), as evidenced by generally available documents or publications; (d)
information that was in its possession prior to disclosure (as evidenced by
appropriate written materials) and was not acquired directly or indirectly from
the other Members; (e) to its employees, consultants, or advisors for the
purposes of carrying out their duty hereunder to the extent disclosure is
necessary or advisable; (f) to third parties to the extent necessary to enforce
this Agreement; provided, however, that in the case of disclosure pursuant to
(e), the party or parties to whom disclosure is made shall agree to be bound by
this confidentiality provision. The obligation of each Member not to disclose
Confidential Information except as provided herein shall not be affected by
either the termination of this Agreement or the resignation or removal of any
Member of the Company.
ARTICLE VII
TRANSFERS OF MEMBER INTERESTS
7.1 Assignment of Member's Interest. Subject to the provisions of this
Article VII, a Member may assign or transfer that Member's interest in the
Company at any time, either voluntarily by an instrument in writing or
involuntarily by court order or by operation of law. Upon the assignment or
transfer of a Member's interest in the Company, (i) the Company shall not be
required to recognize any such assignment or transfer until the Company has
received written notice of the same; (ii) no such assignment or transfer of an
interest in the Company, whether voluntary or involuntary, shall of itself,
dissolve the Company; (iii) the assignee or transferee of the Member's interest
in the Company shall not thereby become entitled to vote or otherwise
participate in the management of the Company's business and affairs, or to
require any information or accounts of Company transactions, or to inspect the
Company books and records, or to become a Member; (iv) the assignee or
transferee shall only be entitled to receive, in accordance with the contract or
order of assignment or transfer, the share of profits or other compensation by
way of income and the return of contributions to which the assigning Member
would otherwise be entitled under this Agreement and, in case of the winding-up
of the Company, the assignee or transferee shall be entitled to receive such
distributions as would otherwise be made to the assigning Member.
7.2 Admission as Substituted Member. With the exception of permitted
transfers as provided in Section 7.7 of this Agreement, no purchaser, assignee
or other transferee (by conveyance, operation of law or otherwise) of all or any
part of an interest in the Company shall have the right to become a substituted
Member in place of that person's seller, assignor or transferor, and, thereby,
become entitled to vote and participate in the management of the business and
affairs of the Company, unless all of the following conditions are satisfied
(all subsequent references in this agreement to "assignor" and "assignee" shall
be construed to include sellers and purchasers, transferors and transferees,
donors and donees, and otherwise, as the case may be):
(a) The fully-exercised and acknowledged written instrument or order
of sale, assignment or transfer, which sets forth the intention of the
assignor that the assignee become a substituted Member in that Member's
place, has been filed with the Company;
(b) The assignor and assignee execute and acknowledge such other
instruments as the Members may from time to time reasonably require, in
order to effect such admission, including the written acceptance and
adoption by the assignee of the provisions of this Agreement;
(c) The assignee shall bear all reasonable expenses incurred in
effecting the substitution; and
(d) Members (other than the assignor) have consented in writing to
the substitution, which consent shall be exercisable in the Member's sole
discretion.
7.3 Right of First Refusal to Purchase Units.
(a) If any Member desires to assign, transfer or otherwise dispose of
all or any portion of such Member's interest in the Company for value other
than in accordance with the provisions of Section 7.4, the other Member
shall have the option to purchase all or any part of such interest.
(b) The Member(s) desiring to so dispose of its Transferable Interest
(a "Transferring Member") shall give written notice (a "Transfer Notice")
to the other Member setting forth (i) that the Transferring Member desires
to transfer its Units or other interest in the Company (the "Transferable
Interest"); (ii) the identity and address of the proposed purchaser or
other transferee thereof; (iii) that the Transferring Member has received a
bona fide offer for all or a portion of the Transferable Interest, if a
sale is contemplated; (iv) the cash and other consideration (per Unit and
in the aggregate) to be received by the Transferring Member in connection
with such disposition; (v) a true copy of the offer or agreement, if any,
for such sale or other disposition and a certification by the Transferring
Member that, to the best of his knowledge and belief, the offer or
agreement is genuine and in all respects what it purports to be; (vi) an
offer to sell to the other Member the Transferable Interest in accordance
with this Section 7.3; and (vii) such other information as may be necessary
or desirable in order to afford to the other Member the benefits intended
to be conferred by this Section 7.3. To the extent the terms of such sale
or other transfer provide for the receipt by the Transferring Member of
consideration other than cash or cash equivalents, the Transfer Notice
shall also include a fair market appraisal of such consideration prepared
by a qualified independent appraiser.
(c) The other Member shall have ten (10) days after the effective
date of the Transfer Notice to elect to purchase all, but not less than
all, of the Transferable Interest, without regard to whether the
Transferring Member proposed initially to sell only a portion of such
Transferring Member's Units or other interest in the Company.
(d) If the other Member has timely elected to purchase all of the
Transferable Interest, then the other Member shall purchase all, but not
less than all, of the Transferable Interest, on a date and at a time
designated by the other Member in a written notice to be given at least two
(2) days in advance to the Transferring Member by the other Member, and at
the principal place of business of the Company. At the closing, the
Transferring Member shall deliver certificates or other evidence of
ownership representing the Transferable Interest being purchased, duly
endorsed in blank or accompanied by duly executed transfer documents
acceptable to the other Member.
(e) The purchase by the other Member shall be at the price per Unit
or per percentage interest and upon the same terms and conditions as
contained in the Transfer Notice unless the parties shall agree otherwise;
provided, however, that if the Transfer Notice provides for payment of all
or any portion of the purchase price by delivery of consideration other
than cash or cash equivalents, the other Member may make payment of such
portion of the purchase price in cash or cash equivalents in the amount of
the fair market value of such non-cash consideration as set forth in the
appraisal accompanying the Transfer Notice. If, however, the other Member
electing to purchase the Transferable Interest shall object to such
appraisal of the non-cash consideration within the period set forth above
for electing to purchase the Transferable Interest, the other Member shall
within such period select an independent appraiser to determine such fair
market value. In the event that the independent appraisers selected by
each of the Transferring Member and the other Member cannot agree on the
fair market value, then the two independent appraisers shall mutually
select a third independent appraiser to determine the fair market value,
and the value selected by such third independent appraiser shall be binding
on all of the parties hereto. Each such independent appraiser may use any
customary method of determining fair market value. Each party shall bear
the cost of the independent appraiser selected by that party, and the cost
of the independent appraiser, if any, mutually selected by the two
independent appraisers shall be paid one-half by the Transferring Member
and one-half by the other Member electing to purchase.
(f) If the other Member does not timely elect to purchase all of the
Transferable Interest pursuant to this Section 7.3, the Transferring
Member, within thirty (30) days after the expiration of the applicable
option exercise period, may transfer the Transferable Interest to the
purchaser or other transferee named in the Transfer Notice for the
consideration and on the other terms set forth in the Transfer Notice and
not otherwise. Upon failure of the Transferring Member to effect such
transfer pursuant to the terms and conditions contained in the Transfer
Notice within such thirty (30)-day period, the right to transfer such
interest shall lapse, and any desired transfer thereafter shall be made
only upon compliance again with the notice and election procedures of this
Section 7.3.
(g) Purchasing Members shall become substituted Members respecting
interests purchased under this Section 7.3 as soon as the purchase has been
accomplished according to the terms hereof. Any other purchaser or
transferee of a Transferring Member's interest shall not be entitled to
become a substitute Member except as provided in Section 7.2.
7.4 Encumbrances.6 Other Encumbrances{tc \l 2 ".6 Other
Encumbrances"}.
(a) Notwithstanding any other provision in this Article VII respecting
the transfer of a Member's interest in the Company in other circumstances,
in the event that any Member (an "Encumbering Member") desires hereafter to
encumber in any way all or any part of its Units or the capital
improvements of such Encumbering Member on or appurtenant to the Property
as contemplated by Section 3.2(d), it shall be able to do so only if it
gives written notice (an "Encumbrance Notice") to the other Member at least
30 days prior to granting or otherwise creating such encumbrance and
obtains the written consent of the other Member to such encumbrance, which
consent may be granted or withheld at the sole discretion of such other
Member. The Encumbrance Notice shall set forth or otherwise include
(i) the number or other amount of Units or the capital improvements of such
Encumbering Member on or appurtenant to the Property as contemplated by
Section 3.2(d) that the Encumbering Member desires to encumber (the
"Collateral"); (ii) a description of the proposed encumbrance; (iii) the
identity and address of the person to whom or for whose benefit such
encumbrance is to be granted or created (the "Secured Party"); (iv) the
amount of the indebtedness (the "Secured Indebtedness") to be secured by
such encumbrance and the principal terms thereof to be secured by such
encumbrance; and (v) a true copy of the definitive Secured Party
Undertaking (hereafter defined) duly executed by the Secured Party.
(b) The Secured Party Undertaking (herein so called) shall evidence the
obligation of the Secured Party (or any assignee or successor thereof),
before taking any action to enforce any right which the Secured Party may
have to execute on such encumbrance, including a conveyance in lieu of
foreclosure, against the Collateral, to (i) give written notice (a "Sale
Notice") to the other Member and Refinery Technologies, Inc. ("RTI") and
(ii) afford to the other Member and RTI successive options to purchase the
Collateral and the right to notice of any execution or foreclosure sale or
conveyance in lieu thereof and as hereinafter provided in this Section 7.4.
(c) The Sale Notice shall set forth (i) the identity and address of the
Encumbering Member or other then current holder of the Collateral; (ii) the
number or other amount of Units or the capital improvements of such
Encumbering Member on or appurtenant to the Property as contemplated by
Section 3.2(d) then comprising the Collateral; (iii) the fair market value
of such Collateral as determined by a qualified independent appraiser
engaged by the Secured Party; and (iv) the identity and address of the
Secured Party.
(d) During the period consisting of 30 days after the delivery of the
Sale Notice to the other Member and RTI and the date of the proposed
foreclosure sale or conveyance in lieu thereof as provided in subparagraph
(c) above, first the other Member and, if not exercised by such other
Member, then RTI shall have the right to purchase all, but not less than
all, of the Collateral from the Secured Party at a price agreed to by them
or, in the absence of such agreement, at the fair market value of such
Collateral as set forth in the Sale Notice. If, however, the other Member
or RTI shall object to such appraisal of the Collateral within five days
after receipt of such Sale Notice, the other Member (but not RTI) shall
within such five days appoint an independent appraiser to determine such
fair market value. In the event that the independent appraisers selected
by each of the Secured Party and the other Member cannot agree on the fair
market value, then the two independent appraisers shall mutually select a
third independent appraiser to determine the fair market value, and the
value selected by such third independent appraiser shall be binding on all
of the parties hereto. Each such independent appraiser may use any
customary and accepted method of determining fair market value. The Secured
Party and the other Member each shall bear the cost of the independent
appraiser selected by it, and the cost of the independent appraiser, if
any, mutually selected by the two independent appraisers shall be paid
one-half by the Secured Party and one-half by the other Member. The
election of the other Member or RTI to purchase the Collateral shall be
evidenced by its timely written notice to the Secured Party at its address
set forth in the Sale Notice. In the event both the other Member and RTI
both elect to purchase the Collateral, the election of the other Member
shall be accepted, and the Collateral shall be sold to the other Member on
the terms and conditions set forth herein. Capco's and Foreco's rights
under this Section 7.4 with respect to any sale of the Collateral by
Secured Party shall be in lieu of, and not in addition to, Capco's,
Foreco's and RTI's respective rights under the Assignment and Agreement
entered into September 11, 1998, a copy of which is attached hereto as
Exhibit "D" (the "Assignment and Agreement"), which shall otherwise remain
in full force and effect.
(e) If the Collateral is not sold to the other Member or RTI in
accordance with subparagraph (d) above, the Secured Party shall have the
right to take a conveyance in lieu of foreclosure or dispose of such
Collateral (w) at either private or public sale, (x) by way of one or more
contracts, (y) as a unit or in parcels, and (z) on any terms, all as the
Secured Party may determine; provided that such disposition, including the
method, manner, time, place and terms of sale are commercially reasonable.
All of the Collateral shall be offered and sold separate from and not as
part of a unit including other collateral of the Secured Party.
(f) If all or any portion of the Collateral is to be sold to the other
Member or RTI in accordance with this Section 7.4, then such sale shall be
closed not more than 60 days after the determination of the purchase price
in accordance with Section 7.4(d) on a date and at a time designated by the
Secured Party in a written notice given by the Secured Party to the
purchasing other Member or RTI, as the case may be. On such date and at
such time, payment of such purchase price in cash or other immediately
available funds shall be made to the Secured Party at its office, against
receipt of documents evidencing and assigning to the purchasing Company,
other Members or RTI, as the case may be, the Collateral being purchased
and all encumbrances securing the same (or corresponding part thereof
proportional to the Secured Indebtedness so purchased), without
restriction.
(g) If the sale to the other Member or RTI, as the case may be, is not
closed within the 60-day period provided for in subparagraph (f) of this
Section 7.4, Secured Party shall be entitled to exercise its rights under
paragraph (e) of this Section 7.4; provided that RTI shall not have the
right to exercise its rights under the Assignment and Agreement more than
once. Any transfer of any or all of the Collateral upon foreclosure by the
Secured Party following compliance with the preceding provisions of this
Section 7.4 shall thereafter continue to be subject to the provisions of
this Agreement, and the transferee shall assume all obligations hereunder.
(h) Upon compliance by the Secured Party with the provisions of this
Article VII, such Secured Party, or the purchaser on any foreclosure sale,
shall be admitted as a Member of the Company on its written notice to the
Company of its election to become a Member, without the consent of either
the Company or any other Member.
7.5 Purchase of Specialized Improvements. If, upon the withdrawal of a
Member from the Company, whether in connection with a transaction described in
Section 7.3 or otherwise but other than as provided in and in accordance with
Section 7.4, the other Member shall have the option to purchase any equipment
and other improvements (the "Specialized Improvements") at the Property that
were funded solely by the withdrawing Member, were treated as owned by such
withdrawing Member and not by the Company, and respecting which the withdrawing
Member was not treated as having made a contribution to the capital of the
Company pursuant to Section 3.2. The price of such purchase shall be determined
by the mutual consent of the withdrawing Member and the other Member. If the
other Member elects not to purchase the Specialized Improvements, the
withdrawing Member shall have the right to (a) if the withdrawal is in
connection with a transaction described in Section 7.3 respecting which the
other Member did not elect to purchase the Transferable Interest, sell the
Specialized Improvements together with the Transferable Interest, (b) remove the
Specialized Improvements from the Property and restore the premises in all
material respects to their condition prior to the construction or installation
of the Specialized Improvements at the sole cost of the withdrawing Member,
without liability for consequential damages, or (c) abandon the Specialized
Improvements to the Company.
7.6 Option to Purchase Interest Upon Certain Events.
(a) If all or any portion of a Member's interest is proposed to be
transferred other than as provided in and in accordance with Section 7.4
pursuant to (i) an adjudication of the Member as a bankrupt; (ii) an entry
of an order, judgment or decree by any court of competent jurisdiction
appointing a trustee, receiver or liquidator of the assets of the Member;
(iii) an assignment or attempted assignment by the Member for the benefit
of creditors; or (iv) the institution or attempted institution of voluntary
bankruptcy proceedings by the Member, then, in any such event (an "Option
Event"), the Company and, to the extent the Company does not elect to
purchase all of such interest, the other Member shall have the option, but
not the obligation, to purchase from such Member (or from such Member's
legal successor(s)) (the "Subject Member") all or any portion of the
Subject Member's interest in the Company transferred, as the Company or the
other Member may elect, without respect to whether all or only a portion of
such Member's interest was initially subject to the proposed transfer.
(b) Not later than ninety (90) days after the occurrence of an Option
Event, the Subject Member (or the Subject Member's successor(s)) shall
notify the Company of such occurrence, which notice shall set forth (i) a
description of the Option Event; (ii) the Units (the "Option Units") that
the Company and the other Member have the right to purchase pursuant to
this Section 7.6 by reason of such Option Event; (iii) the identity of the
Subject Member; and (iv) such other information as may be necessary or
desirable in order to afford to the Company and the other Member the
benefits intended to be conferred by this Section 7.6. Following the
receipt of such notice, the Company shall give like notice to the other
Member of the occurrence of the Option Event and of its option to purchase
the Subject Member's interest pursuant to this Agreement.
(c) The Company shall have ten (10) days after the effective date of
the Option Notice to elect to purchase all or any part of the Option Units.
To the extent the Company does not elect to purchase all of such interest,
the other Member shall have twenty (20) days after the date of the
expiration of the Company's option to elect to purchase all or any part of
the Option Units, such election to be made by delivering written notice of
such election to the Subject Member within such twenty (20)-day period.
(d) If the Company and/or the other Member have timely elected to
purchase Option Units, then the Company and the electing other Member shall
purchase that part of the Option Units that it has elected to purchase
within five (5) days after expiration of the applicable option exercise
period on a date and at a time designated by the Company and/or other
Member in a written notice to be given at least two (2) days in advance to
the Subject Member by the Company and/or other Member, and at the principal
place of business of the Company.
(e) The purchase price for the Option Units purchased by the Company
or other Member shall be the fair market value ("FMV") of the interest as
of the date of the occurrence of the Option Event as determined herein.
The Company shall pay for and obtain an independent appraisal of all real
estate. Listed securities shall be valued at the latest closing price for
such securities. All other assets shall be valued at their book value, net
of depreciation and amortization. The FMV of the interest being purchased
shall be based on the relative percentage of ownership of the Company based
on the total number of Units outstanding as of the valuation date
multiplied by the sum of (i) the fair market value of the real estate as
determined by appraisal; plus (ii) the market price for any listed
securities; plus (iii) the book value, net of depreciation and
amortization, of all other assets; minus (iv) total Company liabilities at
the valuation date.
(f) Payment by the Company or the Members of the purchase price for
Option Units shall be made in cash or other immediately available funds at
closing.
(g) If and to the extent that the Company and/or the other Member do
not purchase all of the Option Units pursuant to the preceding provisions
of this Section 7.6, then the remaining Option Units shall be transferred
to the person or persons to whom the same would have passed in the absence
of the provisions of this Agreement.
7.7 Option to Purchase Property.
(a) If the Company desires to assign, transfer or otherwise dispose
of the Property for value, Capco and Foreco shall have the option,
exercisable first by Capco and thereafter by Foreco, to purchase all of the
Property desired to be sold by the Company. If the Company has not
received an offer from a third party for the purchase of the Property, the
price and terms of such sale shall be as agreed to by Capco or Foreco and
the Company.
(b) If the Company has received an offer from a third party
purchaser, the Company shall notify Capco and Foreco setting forth (i) the
identity and address of the proposed purchaser or other transferee thereof;
(ii) that the Company has received a bona fide offer therefor, if a sale is
contemplated; (iii) the cash and other consideration to be received by the
Company in connection with such disposition; (iv) a true copy of the offer
or agreement, if any, for such sale or other disposition and a
certification by the Company that, to the best of its knowledge and belief,
the offer or agreement is genuine and in all respects what it purports to
be; (v) an offer to sell the Property to Capco and Foreco in accordance
with this Section 7.7; and (vi) such other information as may be necessary
or desirable in order to afford to Capco and Foreco the benefits intended
to be conferred by this Section 7.7. To the extent the terms of such sale
or other transfer provide for the receipt by the Company of consideration
other than cash or cash equivalents, the notice shall also include a fair
market appraisal of such consideration prepared by a qualified independent
appraiser.
(c) Capco shall have ten (10) days after the effective date of the
notice to elect to purchase all of the Property. To the extent Capco does
not elect to purchase all of the Property, Foreco shall have ten (10) days
after the date of the expiration of Capco's option to elect to purchase all
of the Property. Any such election to be made by delivering written notice
of such election to the Company within such applicable ten (10)-day period.
(d) If Capco or Foreco has timely elected to purchase all of the
Property, then such electing party shall purchase the Property within five
(5) days after expiration of the applicable period set forth herein, on a
date and at a time designated by the electing party in a written notice to
be given at least two (2) days in advance to the Company by the electing
party, and at the principal place of business of the Company. At the
closing, the Company shall deliver a special warranty deed and other
transfer documents acceptable to the electing party duly executed on behalf
of the Company.
(e) The purchase by the electing party shall be at the price and upon
the same terms and conditions as contained in the notice unless the Company
and all Members shall agree otherwise; provided, however, that if the
notice provides for payment of all or any portion of the purchase price by
delivery of consideration other than cash or cash equivalents, the electing
party may pay such portion of the purchase price in cash or cash
equivalents in the amount of the fair market value of such non-cash
consideration as set forth in the appraisal accompanying the notice. If,
however, the electing party shall object to such appraisal of the non-cash
consideration within the period set forth above for electing to purchase
the Property, the fair market value shall be determined as set forth in
Section 7.3(f).
(f) If neither Capco nor Foreco timely elects to purchase all of the
Property pursuant to this Section 7.7, the Company, within thirty (30) days
after the expiration of the applicable option exercise period, may transfer
the Property to the purchaser or other transferee named in the notice for
the consideration and on the other terms set forth in the notice and not
otherwise. Upon failure of the Company to effect such transfer pursuant to
the terms and conditions contained in the notice within such thirty (30)-
day period, the right to transfer such interest shall lapse, and any
desired transfer thereafter shall be made only upon compliance again with
the notice and election procedures of this Section 7.7.
7.8 Permitted Transfers. Nothing in this Agreement shall be deemed to
prohibit or limit the sale, assignment or transfer from a Member of all or any
part of the Member's interest in the Company to
(a) another existing Member of the Company,
(b) either (i) a Member's wholly owned subsidiary corporation or
limited liability company (ii) a limited partnership of which only entities
described in clause (i) hereof are the general partners, (iii) a limited
liability company of which only entities described in clause (i) hereof are
the managers;
(c) a general partnership or joint venture consisting only of
entities described in clauses (i) through (iii) of subparagraph (b),
(d) in the case of Capco, the transfer to CAD; or
(e) any other person to which all other Members consent in writing;
provided, that in each case the interest in the Company so sold, assigned or
transferred continues to be subject to the provisions of this Agreement in all
respects. No such sale, assignment or transfer shall create a right, interest
or power in any other Member, or in the Company, or any other person, to
purchase or acquire such interest in the Company, nor shall the Member who
desires to sell, assign or transfer all or any part of that Member's interest in
the Company to another Member be required to obtain the prior consent of the
other Members or the Company or to offer such interest to the other Members or
to the Company.
ARTICLE VIII
DISSOLUTION AND TERMINATION
8.1 Events of Dissolution. The Company shall, without further action of
the Members, be dissolved upon the first to occur of the following:
(a) The dissolution of the Company by judicial decree;
(b) The merger or consolidation of the Company with another limited
liability company or other entity where the Company is not the surviving
entity;
(c) The sale of all or substantially all of the assets of the
Company;
(d) December 31, 2048; or
(e) The written consent to dissolve of Members holding in the
aggregate at least 75% of the outstanding Units.
Unless approved by Members holding, in the aggregate, at least 75% of the
outstanding Units, no Member shall have the right, and all Members hereby agree
not, to dissolve, terminate, partition, or liquidate, or to petition a court for
the dissolution, termination, partition, or liquidation of, the Company except
as provided in this Agreement.
8.2 Winding Up and Liquidation. Upon the occurrence of an event of
dissolution as provided in Section 8.1, the Company shall be wound up and
liquidated as rapidly as business circumstances will permit by selling Company
assets and distributing the proceeds from any such sale or sales of the assets
of the Company as follows and in the following order of priority:
(a) to pay the expenses of winding up and to pay or provide for
payment of all amounts owing by the Company to creditors other than
Members;
(b) to establish any reserves which the Members may deem necessary
for any anticipated, contingent or unforeseen liabilities or obligations of
the Company arising out of, or in connection with, the conduct of the
Company business;
(c) to pay all amounts owing by the Company to any Member as a
creditor;
(d) thereafter to the Members in accordance with their Ownership
Percentages up to the amount of $2,500,000; and
(e) then in equal portions to Capco and Foreland.
8.3 Authority to Wind Up. The winding up of the Company and liquidation
of its assets shall be conducted by the Manager or, if there is no Manager, as
determined by the remaining Members.
ARTICLE IX
BOOKS OF ACCOUNT, ACCOUNTING, REPORTS, AND BANKING
9.1 Books of Account. The Company books and records of account shall be
maintained at the principal office of the Company or at such other location and
by such person or persons as may be designated by the Manager. The Company
shall pay the direct expense of maintaining its books of account.
9.2 Method of Accounting. The Company books of account shall be
maintained and kept on a basis of accounting determined by the Members and
consistently applied.
9.3 Financial Statements. Upon receipt of a written request from any
Member, within ninety (90) days after the close of each Fiscal Year of the
Company, the Company shall provide to each Member either unaudited or audited
(as determined by the Members in their reasonable discretion) financial
statements which fairly represent the financial condition of the Company as of
the end of such Fiscal Year. Such financial statements shall indicate the share
of each Member in the net income, net loss, depreciation and other relevant
fiscal items of the Company for such Fiscal Year. Each Member shall be entitled
to receive copies of all federal, state and local income tax returns and
information returns, if any, which the Company is required to file.
Additionally, quarterly, to the extent both requested by any Member and
regularly prepared by the Company, the Company shall make available to any
Member copies of the Company's financial documentation respecting the prior
quarter, including, without limitation, balance sheets and income statements.
9.4 Bank Accounts. The funds of, and all monies actually received by the
Company shall be deposited in a separate bank account or accounts in a national
or state banking institution in the name of the Company. The Manager or agent
of the Company shall be authorized to draw checks upon such account or accounts;
provided, however, that no funds shall be withdrawn from any such account or
accounts except for Company purposes.
9.5 Tax Returns. The Manager shall, for each Fiscal Year, file or caused
to be filed at the expense of the Company and on behalf of the Company, a
partnership return within the time prescribed by law (including extensions) for
such filing and shall deliver to each Member a copy of such Member's K-1
relating to such return. The Manager shall also file or caused to be filed at
the expense of the Company and on behalf of the Company such state and/or city
income tax returns as may be required by law.
9.6 Audit. Each Member shall have the right at all reasonable times
during usual business hours to audit, examine, and make copies of or extracts
from the books of accounts and other records of the Company. Such right may be
exercised through any agent or employee of such Member designated by such
Member. Each Member shall bear all expenses incurred in any examination made
for such Member's account.
9.7 Meetings. The Company shall hold an annual meeting of the Members at
a time, date and place as determined by the Members. Special meetings of the
Members, for any purpose or purposes described in the meeting notice, may be
called by the Manager or by Members holding in the aggregate at least 33% of the
outstanding Units.
9.8 Records. The Company shall keep at its place of business the
following records: (a) a current list in alphabetical order of the full name
and last known business street address of each Member; (b) a copy of the stamped
Articles of Organization and all certificates of amendment thereto, together
with executed copies of any powers of attorney pursuant to which any certificate
of amendment has been executed; (c) copies of the Company's federal, state, and
local income tax returns and reports, if any, for the three (3) most recent
fiscal years; (d) copies of any financial statements of the Company for the
three (3) most recent fiscal years; (e) a copy of this Agreement plus all
amendments thereto; (f) unless otherwise set forth in the Articles of
Organization or this Agreement, a written statement of (i) the amount of cash
and a description and statement of the agreed value of the other property or
services contributed or agreed to be contributed by each Member, (ii) the times
at which, or events on the happening of which, any additional contributions
agreed to be made by each Member are to be made, (iii) the right of any Member
to receive distributions which include a return of all or any of the Member's
contributions, and (iv) any event upon the happening of which the Company is to
be dissolved and its affairs wound up. These records shall be subject to
inspection and copying at the reasonable request, and at the expense, of any
Member during ordinary business hours.
ARTICLE X
MISCELLANEOUS
10.1 Notices. All notices and other communications made or required to be
given pursuant to this Agreement shall be in writing and shall be deemed given
if delivered personally or by facsimile transmission (if receipt is confirmed by
the facsimile operator of the recipient), or delivered by overnight courier
service or mailed by registered or certified mail (return receipt requested),
postage prepaid, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice; provided that notices
of a change of address shall be effective only upon receipt thereof):
If to Capco, to: Crown Asphalt Products Company
215 South State Street, Suite 650
Salt Lake City, Utah 84111
Attention: Jay Mealey, President
Telephone: (801) 537-5610
Facsimile: (801) 537-5609
If to Foreco, to: Foreland Asphalt Corporation
2561 South 1560 West, Suite 200
Woods Cross, Utah 84087
Attention: Bruce C. Decker, President
Telephone: (801) 298-9866
Facsimile: (801) 298-9889
Any notice hereunder delivered in person or by facsimile (if receipt is
confirmed by the facsimile operator of the recipient) shall be deemed given on
the date thereof; any notice by registered or certified mail shall be deemed
given three (3) days after the date of mailing; and any notice by overnight
courier shall be deemed given two (2) days after shipment or the date of
receipt, whichever is earlier.
10.2 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Members, their successors and assigns.
10.3 Duplicate Originals. For the convenience of the Members, any number
of counterparts hereof may be executed, and each of such counterparts shall be
deemed to be an original instrument, and all of which, taken together, shall
constitute one agreement.
10.4 Construction. The title of articles and sections herein have been
inserted as a matter of convenience for reference only and shall not control or
affect the meaning or construction of any of the terms or provisions herein.
10.5 Governing Law. This Agreement is entered into and shall be governed
by the laws of the state of Utah. To the extent permitted by the Act and other
applicable law, the terms and provisions of this Agreement shall control in the
event of any conflict between such terms or provisions and the Act.
10.6 Other Instruments. The parties hereto covenant and agree that they
will execute such assumed name certificates and other and further instruments
and documents which are or may become necessary or convenient to effectuate and
carry out the purposes of the Company created by this Agreement.
10.7 Legal Construction. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if the invalid, illegal or unenforceable provision had never been
contained herein. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be automatically added as part of this
Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
10.8 Gender and Number. Wherever the context shall so require all words
herein in any gender shall be deemed to include the masculine, feminine or
neuter gender, all singular words shall include the plural and all plural words
shall include the singular.
10.9 Reliance. No person dealing with any Manager shall be required to
determine his authority to make any commitment or undertaking on behalf of the
Company, nor to determine any fact or circumstances bearing upon the existence
of such authority. In addition, no purchaser of any asset of the Company from a
Manager shall be required to see to the application or distribution of revenues
or proceeds paid or credited in connection therewith, unless such purchaser
shall have received notice affecting same.
10.10 Entirety and Modifications. This Agreement embodies the entire
agreement between the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No term, condition or provision of this Agreement shall be
altered, amended or modified without the prior written consent of Members
holding at least 75% of the issued and outstanding Units, except as provided to
the contrary in this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as
of the date first above written.
Capco:
CROWN ASPHALT PRODUCTS COMPANY
By /s/ Jay Mealey, President
Foreco:
FORELAND ASPHALT CORPORATION
By /s/ Bruce C. Decker, President
Exhibit A...Property Description
Exhibit B...Memorandum of Closing
Exhibit C...Use of Facilities
Exhibit D...Assignment and Agreement
SECOND AMENDMENT TO FINANCING AGREEMENT
Second Amendment to Financing Agreement dated as of this 4th day of
February, 1999 (the "Amendment"), by and among Foreland Corporation, a Nevada
corporation ("Foreland"), Eagle Springs Production Limited-Liability Company, a
Nevada limited liability company ("Eagle Springs"), Foreland Refining
Corporation, a Texas corporation ("Foreland Refining"), Foreland Asphalt
Corporation, a Utah corporation ("Foreland Asphalt"), Foreland Asset
Corporation, a Nevada corporation ("Foreland Asset") and Foreland
Transportation, Inc., a Utah corporation (formerly known as Petrosource
Transportation) ("Transportation") (each a "Borrower" and collectively referred
to as "Borrowers"), and Energy Income Fund, L.P., a Delaware limited partnership
("EIF"), to that certain Financing Agreement dated as of January 6, 1998, as
amended by that First Amendment to Financing Agreement dated as of August 10,
1998 (as amended, the "Financing Agreement").
RECITALS
WHEREAS, pursuant to the Financing Agreement, EIF agreed to make loans
to Borrowers for the purposes and subject to the terms and conditions set forth
therein;
WHEREAS, Borrowers have failed to pay recent payments due under the
Financing Agreement;
WHEREAS, Borrowers have requested that EIF defer principal payments
under the Financing Agreement and advance additional funds for completion of the
development and improvement of the Cowboy Asphalt Terminal located in Woods
Cross, Utah and for completion of additional capital improvements on the
Refineries;
WHEREAS, Borrowers have requested that EIF grant to them an option to
reacquire all warrants acquired pursuant to the Financing Agreement and all
preferred stock purchased pursuant to the Stock Purchase Agreement dated as of
August 10, 1998 between EIF and Foreland (the "Stock Purchase Agreement");
WHEREAS, EIF is willing to agree to Borrowers' requests on the terms
and conditions set forth in this Amendment;
WHEREAS, Section 11.2(a) of the Financing Agreement provides that the
parties thereto may amend or modify the Financing Agreement by a written
instrument duly executed by the parties;
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. All capitalized terms used herein shall have the meanings
assigned to them in the Financing Agreement unless expressly defined otherwise
in this Amendment.
2. Except as otherwise specifically provided herein, all terms and
conditions of the Financing Agreement shall apply to the interpretation and
enforcement of this Amendment as if explicitly set forth herein.
3. On November 1, 1998, a principal payment of $228,103.93 became
due and payable under the Financing Agreement and Borrowers have made no payment
thereon. On November 10, 1998, a payment of $1,300,000 related to repayment of
the Petro Source Inventory Financing became due and payable under the Financing
Agreement and Borrowers have made no payment thereon. On December 1, 1998, a
principal payment of $228,103.93 became due and payable under the Financing
Agreement and Borrowers have made no payment thereon. On January 1, 1999, a
principal payment of $296,535.21 became due and payable under the Financing
Agreement and Borrowers have made no payment thereon. On February 1, 1999, a
principal payment of $296,535.21 became due and payable under the Financing
Agreement and Borrowers have made no payment thereon. Borrowers acknowledge and
agree that deficiencies of $228,103.93, $1,300,000, $228,103.93, $296,535.21 and
$296,535.21 remain due and unpaid under the Financing Agreement from November 1,
1998, November 10, 1998, December 1, 1998, January 1, 1999 and February 1, 1999
respectively, and that such deficiencies constitute Events of Default pursuant
to Section 8.1 of the Financing Agreement. Borrowers have requested, and EIF
agrees, that EIF (i) shall forbear from accelerating the balance of the Loans,
(ii) shall forbear from exercising its rights and remedies under the Security
Instruments, and (iii) shall forbear from assessing interest at the Default
Rate, each as a result of such payment deficiencies; provided however, that,
nothing contained in this Amendment shall prohibit EIF from declaring an Event
of Default or exercising any and all remedies available to it pursuant to the
terms of the Loan Documents, should any other Default or Event of Default occur.
Borrowers acknowledge that, subject to the forbearance set forth in the
preceding sentence, EIF has not waived any Default or Event of Default or any of
the remedies available to it under the Loan Documents. Borrowers hereby
expressly acknowledge that any failure by EIF to enforce its rights under the
Financing Agreement in the past does not entitle Borrowers to any such
forbearance under any section of the Financing Agreement in the future. Any
breach of the terms of this Amendment shall be a Default under the Financing
Agreement.
4. The preamble to the Financing Agreement is amended by changing
the name of Petrosource Transportation to Foreland Transportation, Inc. to
reflect its corporate name change. By executing this Amendment, Foreland
Transportation, Inc. agrees to be bound by and expressly adopts, ratifies,
confirms and restates all provisions under the Financing Agreement as if it were
an original party to the Financing Agreement, including but not limited to all
representations and warranties, each of which shall be deemed to have been made
as of the date hereof. Prior to any Funding under the Cowboy Improvement
Financing or the Restructuring Closing Financing, Borrowers shall execute and
deliver all certificates and opinions requested by EIF and its counsel.
5. Section 1.1 of the Financing Agreement is amended to include the
following definitions, inserted in the appropriate alphabetical order:
"Common Stock Issuance Agreement" shall mean that certain Common
Stock Issuance Agreement dated February 4, 1999 between EIF and
Foreland relating to the issuance of 250,000 shares of the common
stock of Foreland to EIF.
"Cowboy Asphalt Pledge and Security Agreement" shall mean that
certain Pledge and Security Agreement, dated as of February 4, 1999,
from Foreland Asphalt to EIF, related to Foreland Asphalt's one-third
membership interest in Cowboy Asphalt Terminal, L.L.C., a Utah limited
liability company ("Cowboy Asphalt").
"Cowboy Asphalt Security Agreement" shall mean that certain
Security Agreement, dated February 4, 1999, from Foreland Asphalt to
EIF, related to certain fixtures owned by Foreland Asphalt and located
on the real property of Cowboy Asphalt.
"Restructuring Closing Financing" shall have the meaning set
forth in Section 2.3(a)(x) of the Financing Agreement.
"Stock Purchase Agreement" shall mean that certain Stock Purchase
Agreement dated as of August 10, 1998 between EIF and Foreland
relating to convertible preferred stock of Foreland purchased by EIF.
6 Section 1.1 is further amended to delete the following
definitions, and to replace them in their entirety with the following
definitions, respectively:
"Borrower" shall mean any of Foreland, Eagle Springs, Foreland
Refining, Foreland Asphalt, Foreland Asset and Transportation.
"Borrowers" shall mean Foreland, Eagle Springs, Foreland
Refining, Foreland Asphalt, Foreland Asset and Transportation, jointly
and severally.
7. Article II is amended by deleting Section 2.3(a)(vi) and
replacing it with the following:
" (vi) up to Five Hundred Thousand Dollars ($500,000)
to finance working capital associated with the Refineries (the
"Petro Source Working Capital Financing");
8. Article II is further amended by adding the following Section
2.3(a)(x):
" (x) up to One Hundred Thousand Dollars ($100,000) to
finance certain of EIF's costs related to the closing of the
transactions contemplated by this Amendment (the "Restructuring
Closing Financing");
9. Article II is further amended by deleting Section 2.7 and
replacing it with the following:
2.7 Repayment of Principal and Interest on Refinancing Loan.
The first payment on the funds advanced under the Refinancing Loan
shall be due and payable on February 1, 1998 (the "First Interest Only
Payment Date") and shall be a payment of interest only, but not
principal, such payment to be the amount of interest accrued from the
date on which the Refinancing Loan is first funded until the First
Interest Only Payment Date. The next thirteen (13) payments on the
Refinancing Loan shall be made on the first Business Day of each of
the thirteen (13) calendar months following the First Interest Only
Payment Date and shall be a payment of accrued interest only and not
principal. (The date on which the last of such payments is due will
be hereinafter referred to as the "Last Interest Only Payment Date.")
The principal amount of and the interest accrued on the Refinancing
Loan shall then be repaid in thirty-four (34) monthly installments,
each payment (other than the final payment) equal to an amount set
forth in a schedule to be provided to Borrowers, sufficient to
amortize the principal amount of the Loan over forty-eight (48)
months. Such payments will be due in arrears on the first day of each
month, beginning April 1, 1999, unless such day is not a Business Day,
in which event payment shall be due on the first Business Day
thereafter, with the final payment of interest and all outstanding
principal due on January 1, 2002. All unpaid principal and accrued
and unpaid interest shall be due and payable on the Final Payment
Date.
10. Article IV is amended by deleting subsection 4.1(m) and replacing
it with the following:
" (m) All of each Borrower's right, title and interest in the one-
third membership interest in Cowboy Asphalt, the proceeds thereof and other
properties as defined as Collateral and described in the Cowboy Asphalt Pledge
and Security Agreement.
11. Article IV is amended by adding the following subsection to
Section 4.1:
" (o) All of each Borrower's right, title and interest in certain
fixtures located on the real property of Cowboy Asphalt, the proceeds thereof
and other properties defined as Collateral and described in the Cowboy Asphalt
Security Agreement.
12. Article V is amended by deleting Section 5.23(a) and replacing it
with the following:
" (a) The authorized capital of Foreland consists of (i)
50,000,000 shares of common stock, par value $0.001 per share (the "Shares"), of
which 9,423,190 shares are issued and outstanding as of the date hereof, and
(ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which
2,000,000 preferred shares are designated as 1991 Series Convertible Preferred
Stock with 20,000 of such preferred shares issued and outstanding as of the date
hereof (convertible into 6,667 shares of Common Stock); 1,650,000 preferred
shares are designated as 1994 Series Convertible Redeemable Preferred Stock with
153,140 of such preferred shares issued and outstanding as of the date hereof
(convertible into 51,047 shares of Common Stock); 1,000,000 preferred shares are
designated as 1995 Series Convertible Preferred Stock with 349,103 of such
preferred shares issued and outstanding as of the date hereof (convertible into
116,368 shares of Common Stock); 50,000 preferred shares are designated as
Series A Preferred Stock with none of such preferred shares issued and
outstanding as of the date hereof; 2,000 preferred shares are designated as 1998
Series Convertible Preferred Stock with all of such preferred shares issued and
outstanding as of the date hereof (convertible into 333,333 shares of Common
Stock); and 298,000 preferred shares are not designated (together, the "Capital
Stock"). Foreland has no other shares of Capital Stock of any class or other
equity securities authorized, issued, or outstanding. Foreland has reserved a
sufficient number of authorized Shares for issuance pursuant to the Warrants and
the conversion of the preferred stock. Except as set forth in Schedule 5.23,
there are no outstanding or authorized options, warrants, calls, subscriptions,
rights, agreements or commitments of any character obligating Foreland to issue
any Shares or securities convertible into or exchangeable for or evidencing the
right to purchase or subscribe for any capital stock of Foreland.
13. Article VII is amended by deleting the heading of Section 7.23
and replacing it with the following:
"7.23 Financial Covenants. The following financial covenants
refer to the financial position of the Borrowers on a consolidated basis.
14. Article VII is amended by deleting Section 7.23(e) and replacing
it with the following:
" (e) For the first three fiscal quarters of calendar year
1998, Borrowers' exploration expenses and general and administrative overhead
expenses will not exceed $400,000 per fiscal quarter. For the fourth fiscal
quarter of calendar year 1998 and for the first two fiscal quarters of calendar
year 1999, Borrowers' exploration expense and general and administrative
overhead expenses, excluding delay rentals and third party seismic costs, will
not exceed $650,000 per fiscal quarter and Borrowers shall not increase any
compensation levels without the prior written approval of EIF. For the third
quarter of the calendar year 1999 and thereafter, Borrowers' exploration expense
and general and administrative overhead expenses, excluding delay rentals and
third party seismic costs, will not exceed twenty-five percent (25%) of
Borrowers' net income before income taxes, plus interest expense, depreciation,
depletion, amortization and other non-cash expense items used in or provided by
operating activities, exploration expense and general and administrative
expenses deducted in determining such net income, calculated on the last day of
each fiscal quarter.
15. Article VII is amended by deleting the third paragraph of Section
7.39(b) and replacing it with the following:
"The foregoing provisions of this Section 7.39 shall not apply to (i)
each issuance of additional securities, if any, the proceeds of which are used
to repay the Loans in full within thirty (30) days (ii) each issuance of equity
securities, if any, that is pursuant to an offering with net proceeds to
Foreland of Twenty Million Dollars ($20,000,000) or more or (iii) the issuance
of securities pursuant to the Stock Purchase Agreement or the Common Stock
Issuance Agreement. The occurrence of any issuance described in (i), (ii) or
(iii) above shall not in any way limit the subsequent application of any other
provision of this Section.
16. Article VII is amended by deleting Section 7.40 and replacing it
with the following:
"7.40 Real Property of Cowboy Asphalt. No Borrower other than
Foreland Asphalt shall place fixtures or other property on the real property of
Cowboy Asphalt.
17. Article VII is further amended by deleting Section 7.41 and
replacing it with the following:
"7.41 Repayment of the Petro Source Inventory Financing.
Borrowers shall repay the Petro Source Inventory Financing by April 1, 1999.
18. EIF agrees to waive, until March 31, 1999, Borrowers' compliance
with the (i) financial covenants set forth in subsections 7.23(a), 7.23(b),
7.23(c) and 7.23(d) of the Financing Agreement and (ii) the
collateral/indebtedness ratio covenant set forth in Section 2.14 of the
Financing Agreement; provided that, from and after April 1, 1999, the Borrowers'
failure to comply with any of these covenants will be considered an Event of
Default under the Financing Agreement. EIF agrees to waive, until October 1,
1998, Borrowers' compliance with the financial covenants set forth in subsection
7.23(e); provided that, from and after October 1, 1998, Borrowers' failure to
comply with subsection 7.23(e) will be considered an Event of Default under the
Financing Agreement. These waivers are limited to the circumstances described
in this Amendment and will not be deemed to be a waiver of the covenants
contained in Section 7.23 or Section 2.14 of the Financing Agreement or a waiver
of any other provision of the Financing Agreement, except as expressly set forth
herein. Borrowers hereby expressly acknowledge that failure by EIF to enforce
its rights under Section 7.23 or Section 2.14 of the Financing Agreement in the
past does not entitle Borrowers to any such forbearance under these or any other
Sections of the Financing Agreement in the future.
19. EIF further agrees to waive Borrowers' compliance with Section
7.39(c) of the Financing Agreement regarding consummation of a Qualified
Offering. Borrowers hereby expressly acknowledge that failure by EIF to enforce
its rights under Section 7.39(c) of the Financing Agreement in the past does not
entitle Borrowers to any such forbearance under any other Section of the
Financing Agreement in the future.
20. Until March 31, 1999, EIF grants to Borrowers the option to
reacquire (i) Warrant No. 1, (ii) Warrant No. 2 and (iii) the convertible
preferred stock issued pursuant to the Stock Purchase Agreement upon payment of
(x) Three Million One Hundred Twenty Thousand Dollars ($3,120,000) and (y)
repayment in full of all obligations due under the Financing Agreement. The
prepayment premiums set forth in Section 2.10 of the Financing Agreement shall
not apply to the full prepayment of Loans under this paragraph but are not
waived as to any prepayment of Loans occurring after March 31, 1999.
21. In exchange for EIF's agreements set forth herein, Foreland
agrees to issue to EIF 250,000 shares of restricted Common Stock pursuant to the
terms and conditions set forth in the Common Stock Issuance Agreement and the
Registration Rights Agreement between EIF and Foreland dated August 10, 1998 as
amended by the First Amendment to Registration Rights Agreement dated as of even
date herewith and to extend the term of the Warrants to December 31, 2003. In
addition, if Borrowers fail to repay the Loans in full by the earlier of (i) the
expiration of the Oppenheimer Engagement (as defined in the following sentence)
or any similar engagement, reasonably acceptable to EIF, that replaces the
Oppenheimer Engagement or (ii) December 1, 1999, the exercise price of each of
the Warrants shall be reduced to $3.00 per share, effective as of such date.
The "Oppenheimer Engagement" shall mean Foreland's engagement of CIBC
Oppenheimer Corp. to render certain financial advisory and investment banking
services to Foreland and its affiliates pursuant to the Exclusive Engagement
Letter Agreement between CIBC Oppenheimer Corp. and Foreland dated October 26,
1998.
22. Borrowers and EIF agree that all financing commitments of EIF
under the Financing Agreement, other than the commitments related to $100,000 of
the Cowboy Improvement Financing and the Restructuring Closing Financing, are
terminated and canceled as of the date of this Amendment; provided however,
that, nothing in this paragraph shall limit any of EIF's rights under the
Financing Agreement, including but not limited to, its rights in the Overriding
Royalty Interests, as set forth in Section 2.12 of the Financing Agreement, and
to its additional financing right of first refusal, as set forth in Article 3 of
the Financing Agreement. EIF agrees to fund (i) $100,000 of the Cowboy
Improvement Financing and (ii) the balance of the Escrow Account within five (5)
days of the satisfaction by Borrowers of all conditions precedent to such
funding under Article 6 of the Financing Agreement and this Amendment.
23. EIF agrees to waive Borrowers' compliance with Section 7.27 of
the Financing Agreement as it pertains to the corporate name change of
Petrosource Transportation to Foreland Transportation, Inc. as of December 1,
1998 and the change in the location of the Borrowers' executive offices on or
about November 15, 1998. EIF further agrees to waive Borrowers' compliance with
Sections 3.3(m) of the Security Agreements and Sections 3.3(k) of the Pledge and
Security Agreements to the extent they required Borrowers to notify EIF of the
corporate name change of Petrosource Transportation to Foreland Transportation,
Inc. as of December 1, 1998 and the change in the location of the Borrowers'
executive offices on or about November 15, 1998. EIF further agrees to waive
Borrowers' compliance with those provisions of Sections 3.3(c) of the Security
Agreements that prohibit the removal of Collateral as defined in the Security
Agreements from the locations specified therein to the extent such provisions
prohibited the relocation of such Collateral from the old executive offices of
Borrowers to the new executive offices of Borrowers on or about November 15,
1998. These waivers are limited to the circumstances described in this
paragraph and will not be deemed to be a waiver of the covenants contained in
Section 7.27 of the Financing Agreement, Sections 3.3(c) of the Security
Agreements, Sections 3.3(m) of the Security Agreements, Sections 3.3(k) of the
Pledge and Security Agreements or any other provision of the Financing
Agreement, Security Agreements or Pledge and Security Agreements except as
expressly set forth herein, including that nothing in this paragraph shall be
deemed to waive Borrowers' compliance with the provisions of Sections 3.3(m) of
the Security Agreements and Section 3.3(k) of the Pledge and Security Agreements
to the extent they require that Borrowers take all necessary action required by
EIF to continue perfection of EIF's security interest under such agreements as a
result of the corporate name change and change in executive offices described in
this paragraph or otherwise. Borrowers hereby expressly acknowledge that
failure by EIF to enforce its rights under Section 7.27 of the Financing
Agreement, Sections 3.3(c) of the Security Agreements, Sections 3.3(m) of the
Security Agreements and Sections 3.3(k) of the Pledge and Security Agreements in
the past does not entitle Borrowers to any such forbearance under such Sections
or any other Section of such agreements in the future.
24. Foreland shall execute and deliver to EIF, concurrent with the
signing hereof, the First Amendment to Common Stock Purchase Warrant Dated
January 6, 1998 (Warrant No. 1) between EIF and Foreland dated February 4, 1999
and the First Amendment to Common Stock Purchase Warrant Dated August 10, 1998
(Warrant No. 2) between EIF and Foreland dated February 4, 1999.
25. Foreland shall execute and deliver to EIF, concurrent with the
signing hereof, the First Amendment to Registration Rights Agreement between EIF
and Foreland dated February 4, 1999 and the Common Stock Issuance Agreement.
26. Borrowers and EIF acknowledge that the new amortization
schedules, as set forth in Exhibit A to this Amendment, reflect the changes set
forth in this Amendment, and that Borrowers have accepted the new schedules in
substitution for the existing schedules that are currently attached to the
Notes.
27. To induce EIF to execute this Amendment, and in consideration of
EIF's agreements herein, each Borrower represents and warrants that it does not
have any claims, counterclaims, setoffs, actions or causes of action of any kind
or nature whatsoever against EIF, its directors, officers, partners, employees,
agents, attorneys, legal representatives, successors or assigns, directly or
indirectly, arising out of, based upon or in any manner connected with any
"Prior Related Event" (as hereinbelow defined), and hereby releases, discharges
and forever waives and relinquishes any and all such claims, and causes of
action against EIF, whether known or unknown, to the date hereof. As used
herein the term "Prior Related Event" means any transaction, event,
circumstance, action, failure to act, or occurrence of any sort or type, prior
to the date hereof that occurred pursuant to any of the terms of any of the Loan
Documents, or which was related to the Loans or any of the Loan Documents.
Neither the offer of this release by Borrowers nor its acceptance by EIF shall
constitute an acknowledgment of or admission by EIF of liability for any matter
or a precedent upon which any liability may be asserted.
28. Wherever the term "Borrowers" includes Foreland, Eagle Springs,
Foreland Refining, Foreland Asphalt, Foreland Asset and Transportation, the
remaining language in such section of the Financing Agreement shall be
interpreted to apply to each of Foreland, Eagle Springs, Foreland Refining,
Foreland Asphalt, Foreland Asset and Transportation, as the context requires.
29. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
30. Except as expressly amended hereby, the Financing Agreement
remains in full force and effect. Any references to the Financing Agreement in
the Loan Documents shall refer to the Financing Agreement as amended hereby.
31. This Amendment shall be of no force and effect until receipt and
execution of this Amendment by EIF in its offices in Longmeadow, Massachusetts.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
FORELAND CORPORATION
By: /s/ N. Thomas Steele, President
EAGLE SPRINGS PRODUCTION LIMITED-LIABILITY COMPANY
By: /s/ N. Thomas Steele, Manager
FORELAND REFINING CORPORATION
By: /s/ Bruce C. Decker, President
FORELAND ASPHALT CORPORATION
By: /s/ Bruce C. Decker, President
FORELAND ASSET CORPORATION
By: /s/ Bruce C. Decker, President
FORELAND TRANSPORTATION, INC.
By: /s/ Bruce C. Decker, President
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By: /s/ Robert D. Gershen, A Managing Director
EXECUTION COPY
FIRST AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
First Amendment to Registration Rights Agreement dated as of this 4th
day of February, 1999 (the "Amendment"), by and between Foreland Corporation, a
Nevada corporation ("Foreland") and Energy Income Fund, L.P., a Delaware limited
partnership ("EIF") to that certain Registration Rights Agreement between
Foreland and EIF dated as of August 10, 1998 (the "Registration Rights
Agreement").
WHEREAS, pursuant to the Financing Agreement dated January 6, 1998, by
and among Foreland and certain other borrowers (collectively, the "Borrowers")
and EIF, as amended by that First Amendment to Financing Agreement dated as of
August 10, 1998 and that Second Amendment to Financing Agreement (the "Second
Amendment") dated as of even date herewith (as amended, the "Financing
Agreement"), EIF agreed to make loans to Borrowers for the purposes and subject
to the terms and conditions set forth therein;
WHEREAS, pursuant to the Second Amendment, EIF has agreed to defer
principal payments and advance additional funds under the Financing Agreement in
exchange for, among other consideration, 250,000 shares of Common Stock of
Foreland (the "EIF Shares"), issued pursuant to that certain Common Stock
Issuance Agreement made between EIF and Foreland dated as of the same date
herewith and restricted from resale for one year as described in the Common
Stock Issuance Agreement;
WHEREAS, in connection with the issuance of the EIF Shares, Foreland
and EIF have agreed to amend the Registration Rights Agreement on the terms and
conditions set forth herein to, among other things, include registration rights
related to the EIF Shares;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, EIF and Foreland agree as follows:
1. Amendments to the Registration Rights Agreement:
a. Section 1 of the Registration Rights Agreement is amended by
deleting it and replacing it with the following:
1. For purposes of the Shelf Registration under Sections 2 and 2A hereof,
the term "Registrable Securities" means the shares of the Company's Common Stock
issued to EIF, including but not limited to the EIF Shares on and after the
first anniversary of the date of the Common Stock Issuance Agreement and those
shares issuable or issued upon conversion of the Series 1998 Preferred Stock,
together with any capital stock issued in replacement of, in exchange for or
otherwise in respect of such Common Stock, except that shares that have been
resold in a public transaction shall not constitute "Registrable Securities" for
purposes of a Shelf Registration under Sections 2 or 2A hereof. The number of
"Registrable Securities then outstanding" shall be determined by the number of
shares of Registrable Securities at the time of such determination.
For purposes of a Piggyback Registration under Section 3 hereof or a
Demand Registration under Section 4 hereof, "Registrable Securities" shall have
the meaning set forth above except that EIF Shares and shares of Common Stock
obtainable on conversion of the Preferred Stock (in whole or in part) shall also
not constitute Registrable Securities for purposes of a Piggyback Registration
under Section 3 hereof or a Demand Registration under Section 4 hereof if those
shares of Common Stock may be resold without delay and without limitation in
volume or manner of sale in a public transaction without registration under the
Act, including without limitation pursuant to Rule 144 under the Act.
b. Subsections (a) and (b) of Section 2 of the Registration
Rights Agreement are amended by deleting them and replacing them with the
following:
2. Shelf Registration. (a) At any time but no later in any event than
within 2 months of the date of the First Amendment to the Registration Rights
Agreement, Foreland shall have filed a registration statement ("Registration
Statement") on Form S-3 (or other suitable form, at Foreland's discretion but
subject to the reasonable approval of EIF), covering the resale of all shares of
Registrable Securities then outstanding including an indeterminable number of
shares of Common Stock as required to effect conversion of certain of the
Registrable Securities (the "Shelf Registration").
(b) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
the distribution described in the Registration Statement is completed or until
all shares to be registered thereunder may be resold in a public transaction
without registration pursuant to Rule 144(k) of the 1933 Act. Foreland shall
use its best efforts to have the Registration Statement declared effective
within three (3) months of the date of the First Amendment to the Registration
Rights Agreement (the "Shelf Date").
c. Section 2A is added following Section 2 of the Registration
Rights Agreement:
2A. Shelf Registration of the EIF Shares. (a) At any time but no later in
any event than within 14 months of the date of the First Amendment to the
Registration Rights Agreement, Foreland shall have filed a registration
statement (the "Second Registration Statement") on Form S-3 (or other suitable
form, at Foreland's discretion but subject to the reasonable approval of EIF),
covering the resale of all shares of EIF Shares that are Registrable Securities
(the "Registrable EIF Shares") then outstanding (the "Second Shelf
Registration").
(b) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
the distribution described in the Second Registration Statement is completed or
until all shares to be registered thereunder may be resold in a public
transaction without registration pursuant to Rule 144(k) of the 1933 Act.
Foreland shall use its best efforts to have the Second Registration Statement
declared effective within 15 months of the date of the First Amendment to the
Registration Rights Agreement (the "Second Shelf Date").
(c) If the Second Registration Statement is not declared
effective by the Second Shelf Date, the Company must continue to use its best
efforts to obtain a declaration of effectiveness and shall pay EIF an amount
equal to two percent (2%) per month of the closing trading price of the EIF
Shares as of the Second Shelf Date, compounded monthly and accruing daily, until
the Second Registration Statement or a registration statement filed pursuant to
Section 3 or Section 4 in relation to the Registrable EIF Shares is declared
effective, payable in common stock, which common stock shall also be deemed
"Registrable EIF Shares" for the purpose of this Agreement. The accrual amount
payable will be tolled for any periods occasioned by a delay of the Second
Registration Statement under Section 4 as a result of the choice of EIF to have
such Registration Statement underwritten.
d. Section 3 of the Registration Rights Agreement is amended by
deleting it and replacing it with the following: "Piggyback Registration Rights.
If, at any time, Foreland proposes to file a registration statement for the
public sale of any shares of the Common Stock of Foreland, any capital stock
issued in replacement of, in exchange for or otherwise in respect of such Common
Stock, or any securities or other rights convertible into Common Stock, or
entitled to receive Common Stock, or any other equity security entitled to
participate with the Common Stock in the earnings or assets of Foreland under
the Securities Act of 1933, as amended (the "1933 Act") (other than a
registration statement provided for in Sections 2 or 4 hereof) Foreland shall,
not later than thirty (30) days prior to the initial filing of the registration
statement, deliver notice of its intent to file such registration statement to
EIF, setting forth the minimum and maximum proposed offering price, commissions,
and discounts in connection with the offering, and other relevant information.
Within twenty (20) days after receipt of notice of Foreland's intent to file a
registration statement, EIF shall be entitled to request that any Registrable
Securities owned by EIF or its assigns ("EIF Registrable Securities") be
included in such registration statement, and Foreland will use its best efforts
to cause the EIF Registrable Securities to be included in the offering covered
by such registration statement (a "Piggyback Registration").
e. Section 4 of the Registration Rights Agreement is amended by
deleting it and replacing it with the following: "Demand Registration Rights.
(a) At any time, EIF shall be entitled to request that any EIF Registrable
Securities be registered under the 1933 Act if Foreland is already subject to,
or becomes subject to, periodic reporting requirements under the regulations of
the United States Securities and Exchange Commission. As soon as practicable
after receipt by Foreland of a written request for registration, Foreland shall
file, and use its best efforts to cause to become effective, an appropriate
registration statement under the 1933 Act covering the EIF Registrable
Securities, provided that in the opinion of Foreland's counsel, no events
preclude such registration. EIF shall have the right to demand registration
once EIF pursuant to this Section 4; provided however, that, the right shall not
be deemed exhausted unless the registration statement covering so much of the
EIF Registrable Securities as EIF and its assigns wish to sell pursuant to the
registration statement becomes effective; provided further however, that, if the
right is exhausted once prior to the date upon which the EIF Shares are no
longer Restricted, EIF shall be entitled to make an additional request for
registration pursuant to this Section in relation to Registrable EIF Shares that
are outstanding at the time of such request.
2. Pursuant to Section 2 of the Registration Rights Agreement,
Foreland was required to file a "shelf" registration statement covering the
resale of all shares of Registrable Securities then outstanding by October 10,
1998 and to use its best efforts to have such registration statement declared
effective by November 10, 1998. In the event the registration statement was not
declared effective by November 10, 1998, Section 2(c) of the Registration Rights
Agreement required that Foreland pay certain penalties to EIF. Foreland filed
this shelf registration statement on December 21, 1998, more than two months
after filing was required under the Agreement. Foreland has requested, and EIF
agrees that EIF shall forbear on penalties against Foreland under Section 2(c)
of the Registration Rights Agreement that have accrued as of the date of this
Amendment; provided however that, nothing contained in this Amendment shall
limit EIF's rights to such penalties in the event that any further violations of
Section 2(c) or any violations of Section 2A(c) occur. Foreland acknowledges
that, subject to the forbearance set forth in the preceding sentence, EIF has
not waived any of its rights or any remedies available to it under the
Registration Rights Agreement. Foreland hereby expressly acknowledges that any
failure by EIF to enforce its rights under the Registration Rights Agreement in
the past does not entitle Foreland to any such forbearance under any section of
the Registration Rights Agreement in the future.
3. EIF and Foreland hereby represent and warrant that the
representations and warranties made by each of them, respectively, in the
Registration Rights Agreement, including but not limited to the representations
and warranties contained in Sections 2, 7 and 8 of the Registration Rights
Agreement, are true and correct as of the date of this Amendment.
4. All capitalized terms used herein shall have the meanings
ascribed to them in the Registration Rights Agreement unless expressly defined
otherwise in this Amendment.
5. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
6. Except as expressly amended hereby, the Registration Rights
Agreement remains in full force and effect. Any references to the Registration
Rights Agreement in the Loan Documents (as defined in the Financing Agreement)
shall refer to the Registration Rights Agreement as amended hereby.
7. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each complete set of
which, when so executed by the parties, constitutes an original but all such
counterparts together constituting but one and the same instrument.
IN WITNESS WHEREOF, the undersigned, by each of their respective duly
authorized officers or representatives, have set their hands hereto as of the
4th day of February, 1999.
FORELAND CORPORATION
By: /s/ N. Thomas Steele, President
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By: /s/ Steven P. McDonald, Vice President
EXECUTION COPY
FIRST AMENDMENT TO
COMMON STOCK PURCHASE WARRANT
DATED JANUARY 6, 1998
(WARRANT NO. 1)
WHEREAS, Foreland Corporation, a Nevada corporation (the "Company")
has granted to Energy Income Fund, L.P., a Delaware limited partnership (the
"Holder") a warrant to purchase 750,000 shares of Common Stock of the Company
pursuant to that certain Common Stock Purchase Warrant, dated January 6, 1998
("Warrant No. 1") in connection with that certain Financing Agreement entered
into between the Company and the Holder on January 6, 1996, as amended by that
First Amendment to Financing Agreement dated August 10, 1998 and that Second
Amendment to Financing Agreement (the "Second Amendment") dated as of even date
herewith (as amended, the "Financing Agreement"); and
WHEREAS, in exchange for a deferral of principal payments, an advance
of additional funds and other consideration set forth in the Second Amendment,
the Company has agreed to extend the expiration date of Warrant No. 1; and
WHEREAS, the Company and the Holder desire to amend certain terms of
Warrant No. 1 to reflect these and other changes.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Holder agree
as follows:
1. Amendments to Warrant No. 1.
a. The first sentence of the first paragraph following the
legend of Warrant No. 1 is amended by deleting it and replacing it
with the following:
FOR VALUE RECEIVED, Energy Income Fund, L.P., a Delaware limited
partnership (the "Holder"), is entitled to purchase from Foreland
Corporation, a Nevada corporation (the "Company"), subject to the
terms and conditions herein set forth, at any time before
5:00 p.m. Longmeadow, Massachusetts time on December 31, 2003, or
the first business day thereafter if such day is not a business
day or such other date as may be established in accordance with
the terms of this Warrant (the "Expiration Date"), Seven Hundred
Fifty Thousand (750,000) of the shares of duly authorized,
validly issued, fully paid and nonassessable Common Stock of the
Company, one-tenth of a cent ($.001) par value (the "Warrant
Stock"), subject to adjustment of the number or kind of shares
constituting Warrant Stock as hereinafter provided.
b. Section 1.7 of Warrant No. 1 is deleted and replaced with
the following:
1.7 "Expiration Date" means December 31, 2003, or the first
business day thereafter if such day is not a business day, or
such other date as may be established in accordance with the
terms of this Warrant.
c. The following definition is added to Article 1:
1.20 "Warrant No. 2" means the warrant issued by Foreland
to EIF dated August 10, 1998 for Seven Hundred Fifty Thousand
(750,000) shares of Common Stock with an exercise price of Six
Dollars ($6) per share.
d. Section 4.5 of Warrant No. 1 is deleted and replaced with
the following:
4.5 Anti-dilution Adjustment.
Pursuant to Section 7.39 of the Financing Agreement, if,
during the term of this Warrant or Warrant No. 2, or both,
Foreland issues additional shares of common stock at a price of
less than Six Dollars ($6) or issues securities convertible or
exercisable into common stock of Foreland at a conversion or
exercise price of less than Six Dollars ($6) and such securities
are converted or exercised into common stock or repurchased by
Foreland, the following calculation shall be made and additional
warrants shall be delivered by Foreland to EIF in the number and
manner described below.
Effective December 31, 1998, EIF and Foreland shall jointly
calculate, at six month intervals, the number of shares issued as
described in the above paragraph. In making this determination,
EIF and Foreland shall not consider shares issued pursuant to
stock options of directors and officers of Foreland outstanding
as of the date hereof as set forth on Schedule 5.23 to the
Financing Agreement. Within 10 days of receipt of a written
request from EIF for delivery of additional warrants based on
this calculation, Foreland shall deliver to EIF additional
warrants for the number of shares of common stock of Foreland
equal to 15% of the shares issued as described in the above
paragraph during such six month interval. Such warrants shall be
in the form of Warrant No. 2 with an exercise price of Six
Dollars ($6) per share.
The foregoing provisions of this Section shall not apply to
(i) each issuance of additional securities, if any, the proceeds
of which are used to repay the Loan in full within thirty (30)
days (ii) each issuance of equity securities, if any, that is
pursuant to an offering with net proceeds to Foreland of Twenty
Million Dollars ($20,000,000) or more or (iii) the issuance of
securities pursuant to the Stock Purchase Agreement or Common
Stock Issuance Agreement (as each term is defined in the
Financing Agreement). The occurrence of any issuance described
in (i), (ii) or (iii) above shall not in any way limit the
subsequent application of any other provision of this Section.
e. The following Sections 8.01 and 8.02 are added to Warrant
No. 1 immediately before Section 8.1:
8.01 For purposes of the Shelf Registration under Section
8.2 hereof, the term "Warrant Stock" means the Warrant Stock
together with any capital stock issued in replacement of, in
exchange for or otherwise in respect of such Warrant Stock. The
number of shares of "Warrant Stock then outstanding" shall be
determined by the number of shares of Warrant Stock which have
been issued or are issuable upon exercise of the Warrant at the
time of such determination other than shares of Warrant Stock
that have been resold in a public transaction.
For purposes of a Piggyback Registration under Section 8.1
hereof or a Demand Registration under Section 8.2 hereof,
"Warrant Stock" shall have the meaning set forth above except
that the following shall not constitute "Warrant Stock" for such
purposes:
(i) Warrant Stock that may be resold in a public transaction
without registration under the 1933 Act, including without
delay or limitation as to volume or manner of sale pursuant
to Rule 144 under the 1933 Act; and
(ii) Warrant Stock that has been resold in a public transaction.
8.02 Shelf Registration. (a) At any time but no later in any
event than within two (2) months of written notice by the Holder
of any exercise of the Warrant, as required by Section 2.2 of the
Warrant, the Company shall file a registration statement
("Registration Statement") on Form S-3 (or other suitable form,
at the Company's discretion but subject to the reasonable
approval of the Holder), covering the resale of all shares of
Warrant Stock then outstanding including an indeterminate number
of shares of Common Stock as required to effect exercise of the
Warrant (the "Shelf Registration").
(b) The Registration Statement shall be prepared as a
"shelf" registration statement under Rule 415, and shall be
maintained effective until the distribution described in the
Registration Statement is completed or until all shares to be
distributed thereunder may be resold in a public transaction
pursuant to Rule 144(k) of the 1933 Act. The Company shall use
its best efforts to have the Registration Statement declared
effective within three (3) months after notification by the
Holder of any exercise of the Warrant, as described in Section
8.2(a) above (the "Shelf Date").
(c) If the Registration Statement is not declared effective
by the Shelf Date, the Company must continue to use its best
efforts to obtain a declaration of effectiveness and shall pay
the Holder an amount equal to two percent (2%) per month of the
aggregate amount of the Warrant, compounded monthly and accruing
daily, until the Registration Statement or a registration
statement filed pursuant to Section 8.1 or Section 8.2 is
declared effective, payable in Common Stock, which Common Stock
shall also be deemed "Warrant Stock" for the purpose of this
Agreement. The accrual amount payable will be tolled for any
periods occasioned by a delay of a registration statement under
Section 8.2 as a result of the choice of the Holder to have that
registration statement underwritten.
(d) The Company represents that it is presently eligible to
effect the registration contemplated hereby on Form S-3 and will
use its best efforts to continue to take such actions as
necessary to maintain such eligibility.
f. The first paragraph of Section 8.1 of Warrant No. 1 is
deleted and replaced with the following:
8.1 Piggyback Registration Rights. If, at any time on or
before the expiration of this Warrant, the Company proposes to
file a registration statement for the public sale of any of its
Common Stock or Common Stock Equivalents under the 1933 Act
(other than registration statements (i) provided for in Section
8.2 hereof or (ii) pursuant to Form S-4 and Form S-8 of the
Securities Act of 1933) the Company shall, not later than thirty
(30) days prior to the initial filing of the registration
statement, deliver notice of its intent to file such registration
statement to the Holder, setting forth the minimum and maximum
proposed offering price, commissions, and discounts in connection
with the offering, and other relevant information. Within twenty
(20) days after receipt of notice of the Company's intent to file
a registration statement, the Holder shall be entitled to request
that some or all of the Warrant Stock be included in such
registration statement, and the Company will use its best efforts
to cause such Warrant Stock to be included in the offering
covered by such registration statement. In the event the Warrant
Stock is included in the registration statement (a "Piggyback
Registration"), the Holder may transfer this Warrant to an
underwriter or broker for exercise by such underwriter or broker
in connection with a distribution of the Warrant Stock.
The managing underwriter or underwriters in an underwritten
offering, or the holders of a majority in number of shares of
Warrant Stock requesting registration, may determine that the
number of securities proposed to be sold in the underwriting or
offering exceeds the number that can be sold without having a
materially adverse effect on the price at which the securities
could be sold. If it or they make such a determination in good
faith, then the Company may reduce the number of shares of Common
Stock to be included in the registration to the highest number
that the managing underwriter (or underwriters) or a majority of
the holders (as the case may be) determine will not have a
material adverse effect on the price of the shares to be sold.
If the number of shares of Common Stock to be sold in a
registration are limited pursuant to this paragraph, the Company
will include in the registration:
(i) First, all shares the Company proposes to sell;
(ii) Second, all shares of Common Stock for which
registration was requested pursuant to rights to require the
Company to register shares in the absence of any other
registration reduced, if necessary, to the maximum number of
shares consistent with the limitation required by this Section
8.1; and
(iii) Third, shares of Common Stock for which registration
was requested pursuant to rights to require the Company to
register shares incidental to the registration of other shares
reduced pro rata according to the number of shares for which
registration was requested by each Person so requesting
registration, or in such other proportions as such Persons may
agree.
g. The first paragraph of Section 8.2 of Warrant No. 1 is
deleted and replaced with the following:
8.2 Demand Registration Rights. At any time, the Holder
shall be entitled to request that the Warrant Stock be registered
under the 1933 Act. The Company shall, as soon as practicable
after receipt of a written request for registration, file, and
use its best efforts to cause to become effective, an appropriate
registration statement under the 1933 Act covering the Warrant
Stock, provided that in the opinion of the Company's counsel, no
events preclude such registration. The Company may postpone for
a reasonable period of time (not to exceed 90 days) the filing of
any registration statement otherwise required to be prepared and
filed by it pursuant to this Section if, at the time it receives
a request for registration:
(1) the Company is conducting or about to conduct an
offering of its securities and the Company is advised
by its investment banker that such offering would be
affected adversely by the registration so demanded and
the Company shall have furnished to the Holder seeking
a demand registration a certificate signed by the
President of the Company to that effect;
(2) the Board of Directors of the Company shall determine
in good faith that such offering will interfere with a
pending or contemplated financing, merger, sale of
assets, recapitalization or other similar corporate
action of the Company and the Company shall have
furnished to the Holder seeking a demand registration a
certificate signed by the President of the Company to
that effect, accompanied by a certified copy of the
relevant board resolutions; or
(3) the Board of Directors of the Company shall determine
in good faith that the disclosures required in
connection with registration of the Warrant Stock might
adversely affect the business or prospects of the
Company and the Company shall have furnished to the
Holder seeking a demand registration a certificate
signed by the President of the Company to the effect,
accompanied by a certified copy of the relevant board
resolutions.
If the Holder intends to distribute the Warrant Stock
covered by its request by means of an underwriting, the Holder
shall so advise the Company as a part of its request made
pursuant to this Section. If a registration requested pursuant
to the Section is to involve an underwritten public offering in
which the obligation of the underwriters is to take all of the
securities to be sold if any are to be taken, the Company and
other holders of securities of the Company may include securities
in such registration only if the managing underwriter of such
public offering concludes that such inclusion will not adversely
affect the successful marketing or the price of the Warrant Stock
to be included in such public offering. Such other holders of
securities (together with the Company as provided in subsection
8.5(d)) shall enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such
underwriting by the Holder and reasonably acceptable to the
Company.
h. The references to Section 9.2 in the third and fourth
paragraphs of Section 8.2 of Warrant No. 1 are deleted and replaced
with references to Section 8.2.
i. Section 8.3 is deleted and replaced with the following:
8.3 Filing Obligations of the Company. In connection with
any registration of the Warrant Stock, the Company shall:
(a) prepare and file the registration statement and such
amendments and supplements to the registration statement and the
prospectus or offering circular used in connection therewith as
may be necessary to keep the registration statement effective
until the Holders of the Warrant Stock covered by such
registration statement have completed the distribution described
in the registration statement or until all shares to be
distributed thereunder may be resold in a public transaction
pursuant to Rule 144(k) of the 1933 Act and to comply with the
provisions of the 1933 Act and the rules and regulations
thereunder with respect to the disposition of the Warrant Stock
covered by the registration statement for the period required to
effect the distribution thereof;
(b) furnish to the Holder such number of copies of any
prospectus or offering circular, including a preliminary
prospectus, and of a full registration statement and exhibits in
conformity with the requirements of the 1933 Act and rules and
regulations thereunder, as the Holder may reasonably request in
order to facilitate the disposition of Warrant Stock owned by
such Holder;
(c) use its best efforts to register or qualify the Warrant
Stock covered by the registration statement, as the case may be,
under the securities or blue sky laws of such jurisdictions as
the Holder may reasonably request, and accomplish any and all
other acts and things which may be necessary or advisable to
permit sale in such jurisdictions of such Warrant Stock;
provided, however, that the Company shall not be required to
register as a dealer or to qualify as a foreign corporation in
any such jurisdictions or to escrow any shares of its capital
stock;
(d) in the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter of
such offering. The Holder shall also enter into and perform its
obligations under such an agreement;
(e) furnish, at the request of the Holder, on the date
that such Warrant Stock is delivered to the underwriters for sale
in connection with a registration pursuant to this Agreement, if
such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date
that the registration statement with respect to such securities
becomes effective, (i) an opinion, dated such date, of the
outside counsel of recognized standing (or reasonably acceptable
to the Holder) representing the Company for the purposes of such
registration, in form and substance as is customarily given to
underwriters in such underwritten public offering, addressed to
the underwriters, if any, and to the Holder and (ii) a letter
dated such date, from the independent certified public
accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holder;
(f) as promptly as practicable after becoming aware of such
event, notify the Holder of the happening of any event of which
the Company has knowledge, as a result of which the prospectus
included in the registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts
promptly to prepare a supplement or amendment to the registration
statement to correct such untrue statement or omission, and
deliver a number of copies of such supplement or amendment to the
Holder;
(g) provide the Holder with written notice of the date that
a registration statement registering the resale of the Warrant
Stock is declared effective by the SEC, and the date or dates
when the registration statement is no longer effective;
(h) provide the Holder and their representatives the
opportunity to conduct a reasonable due diligence inquiry of the
Company's pertinent financial and other records and make
available its officers, directors and employees for questions
regarding such information as it related to information contained
in the registration statement; and
(i) provide the Holder and its representatives the
opportunity to review the registration statement and all
amendments thereto no later than three (3) days prior to their
filing with the SEC.
j. The reference to "Sections 9.1 or 9.2" in Section 8.4 of
Warrant No. 1 is deleted and replaced with "Sections 8.2, 8.3 or 8.4."
k. Paragraph (a) of Section 8.5 is deleted and replaced with
the following:
(a) By the Company. In connection with the filing of any
registration statements and sales of the Warrant Stock
thereunder, the Company shall indemnify and hold harmless the
Holder of this Warrant, its directors and officers, any
underwriter, and each other Person, if any, who controls the
Holder or the underwriter within the meaning of the 1933 Act,
against losses, claims, damages or liabilities, joint or several
(or actions in respect thereto) ("Losses"), to which any such
Holder, underwriter, or controlling Person may become subject
under the 1933 Act or otherwise, insofar as such Losses arise out
of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration
statement under which the Warrant Stock was registered under the
1933 Act, any preliminary prospectus, offering circular or final
prospectus contained therein, or any amendment or supplement
thereto, or any report filed with the Securities and Exchange
Commission (the "Disclosure Documents"), or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse any
such Holder, underwriter, or controlling Person for any legal or
any other expenses reasonably incurred in connection with
investigating or defending any such claims, excluding any amounts
paid in settlement of litigation, commenced or threatened, if
such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be
liable in any such case to the extent that any such Losses arise
out of or are based upon any untrue statement, alleged untrue
statement or omission or alleged omission made in such Disclosure
Document in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of the Holder
of this Warrant for use specifically in connection with the
preparation of such Disclosure Document.
l. The following Section 8.7 is added to Warrant No. 1:
8.7 Reports under Securities Exchange Act of 1934 (the
"1934 Act"). With a view to making available to the Holder the
benefits of Rule 144 promulgated under the 1933 Act and any other
rule or regulation of the SEC that may at any time permit the
Holder to sell securities of the Company to the public without
registration, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports
and other documents required of the Company under the 1933
Act and the 1934 Act; and
(c) furnish to the Holder, so long as the Holder owns
any Warrant Stock, forthwith upon request (i) a written
statement by the Company, if true, that it has complied with
the reporting requirements of SEC Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing the
Company of any rule or regulation of the SEC which permits
the selling of any such securities without registration.
2. All capitalized terms used herein shall have the meanings
ascribed to them in Warrant No. 1 unless expressly defined otherwise in this
Amendment.
3. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
4. Except as expressly amended hereby, Warrant No. 1 remains in full
force and effect. Any references to this Warrant in the Loan Documents (as
defined in the Financing Agreement) shall refer to Warrant No. 1 as amended
hereby.
5. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each complete set of
which, when so executed by the parties, constitutes an original but all such
counterparts together constituting but one and the same instrument.
IN WITNESS WHEREOF, the undersigned, by each of their respective duly
authorized officers or representatives, have set their hands hereto as of the
4th day of
February, 1999.
FORELAND CORPORATION
By: /s/ N. Thomas Steele, President
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By: /s/ Steven P. McDonald, Vice President
EXECUTION COPY
FIRST AMENDMENT TO
COMMON STOCK PURCHASE WARRANT
DATED AUGUST 10, 1998
(WARRANT NO. 2)
WHEREAS, Foreland Corporation, a Nevada corporation (the "Company")
has granted to Energy Income Fund, L.P., a Delaware limited partnership (the
"Holder") a warrant to purchase 750,000 shares of Common Stock of the Company
pursuant to that certain Common Stock Purchase Warrant, dated August 10, 1998
("Warrant No. 2") in connection with that certain Financing Agreement entered
into between the Company and the Holder on January 6, 1996, as amended by that
First Amendment to Financing Agreement dated August 10, 1998 and that Second
Amendment to Financing Agreement (the "Second Amendment") dated as of even date
herewith (as amended, the "Financing Agreement"); and
WHEREAS, in exchange for a deferral of principal payments, an advance
of additional funds and other consideration set forth in the Second Amendment,
the Company has agreed to extend the expiration date of Warrant No. 2; and
WHEREAS, the Company and the Holder desire to amend certain terms of
Warrant No. 2 to reflect these changes.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Holder agree
as follows:
1. Amendments to Warrant No. 2.
a. The first sentence of the first paragraph following the
legend of Warrant No. 2 is amended by deleting it and replacing it
with the following:
FOR VALUE RECEIVED, Energy Income Fund, L.P., a Delaware limited
partnership (the "Holder"), is entitled to purchase from Foreland
Corporation, a Nevada corporation (the "Company"), subject to the
terms and conditions herein set forth, at any time before
5:00 p.m. Longmeadow, Massachusetts time on December 31, 2003, or
the first business day thereafter if such day is not a business
day or such other date as may be established in accordance with
the terms of this Warrant (the "Expiration Date"), Seven Hundred
Fifty Thousand (750,000) of the shares of duly authorized,
validly issued, fully paid and nonassessable Common Stock of the
Company, one-tenth of a cent ($.001) par value (the "Warrant
Stock"), subject to adjustment of the number or kind of shares
constituting Warrant Stock as hereinafter provided.
b. Section 1.7 of Warrant No. 2 is deleted and replaced
with the following:
1.7 "Expiration Date" means December 31, 2003, or the first
business day thereafter if such day is not a business day, or
such other date as may be established in accordance with the
terms of this Warrant.
c. Section 1.19 of Warrant No. 2 is deleted and replaced
with the following:
1.19 "Warrant No. 1" means the warrant dated January 6,
1998 issued by Foreland to EIF for Seven Hundred Fifty Thousand
(750,000) shares of Common Stock with an exercise price of Six
Dollars ($6) per share.
d. The third paragraph of Section 4.5 is deleted and
replaced with the following:
The foregoing provisions of this Section shall not apply to
(i) each issuance of additional securities, if any, the proceeds
of which are used to repay the Loan in full within thirty (30)
days (ii) each issuance of equity securities, if any, that is
pursuant to an offering with net proceeds to Foreland of Twenty
Million Dollars ($20,000,000) or more or (iii) the issuance of
securities pursuant to the Stock Purchase Agreement or Common
Stock Issuance Agreement (as each term is defined in the
Financing Agreement). The occurrence of any issuance described
in (i), (ii) or (iii) above shall not in any way limit the
subsequent application of any other provision of this Section.
e. The first paragraph of Section 8.3 of Warrant No. 2 is
deleted and replaced with the following:
8.3 Piggyback Registration Rights. If, at any time on or
before the expiration of this Warrant, the Company proposes to
file a registration statement for the public sale of any of its
Common Stock or Common Stock Equivalents under the 1933 Act
(other than registration statements (i) provided for in Section
8.4 hereof or (ii) pursuant to Form S-4 and Form S-8 of the
Securities Act of 1933) the Company shall, not later than thirty
(30) days prior to the initial filing of the registration
statement, deliver notice of its intent to file such registration
statement to the Holder, setting forth the minimum and maximum
proposed offering price, commissions, and discounts in connection
with the offering, and other relevant information. Within twenty
(20) days after receipt of notice of the Company's intent to file
a registration statement, the Holder shall be entitled to request
that some or all of the Warrant Stock be included in such
registration statement, and the Company will use its best efforts
to cause such Warrant Stock to be included in the offering
covered by such registration statement. In the event the Warrant
Stock is included in the registration statement (a "Piggyback
Registration"), the Holder may transfer this Warrant to an
underwriter or broker for exercise by such underwriter or broker
in connection with a distribution of the Warrant Stock.
f. The first paragraph of Section 8.4 of Warrant No. 2 is
deleted and replaced with the following:
8.4 Demand Registration Rights. At any time, the Holder
shall be entitled to request that the Warrant Stock be registered
under the 1933 Act. The Company shall, as soon as practicable
after receipt of a written request for registration, file, and
use its best efforts to cause to become effective, an appropriate
registration statement under the 1933 Act covering the Warrant
Stock, provided that in the opinion of the Company's counsel, no
events preclude such registration. The Company may postpone for
a reasonable period of time (not to exceed 90 days) the filing of
any registration statement otherwise required to be prepared and
filed by it pursuant to this Section if, at the time it receives
a request for registration:
2. All capitalized terms used herein shall have the meanings
ascribed to them in Warrant No. 2 unless expressly defined otherwise in this
Amendment.
3. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
4. Except as expressly amended hereby, Warrant No. 2 remains in
full force and effect. Any references to this Warrant in the Loan Documents (as
defined in the Financing Agreement) shall refer to Warrant No. 2 as amended
hereby.
5. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each complete set
of which, when so executed by the parties, constitutes an original but all such
counterparts together constituting but one and the same instrument.
IN WITNESS WHEREOF, the undersigned, by each of their respective duly
authorized officers or representatives, have set their hands hereto as of the
4th day of February, 1999.
FORELAND CORPORATION
By: /s/ N. Thomas Steele, President
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By: /s/ Steven P. McDonald, Vice President
COMMON STOCK ISSUANCE AGREEMENT
This Common Stock Issuance Agreement (this "Agreement") dated as of
February 4, 1999, is made between Energy Income Fund, L.P., a Delaware limited
partnership ("EIF") and Foreland Corporation, a Nevada Corporation ("Foreland").
RECITALS
WHEREAS, pursuant to the Financing Agreement dated as of January 6,
1998 by and among Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt,
Foreland Asset, Transportation and Cowboy Asphalt (collectively referred to as
the "Borrowers") and EIF, as amended from time to time (the "Financing
Agreement"), EIF agreed to make loans to the Borrowers for the purposes and
subject to the terms and conditions set forth therein;
WHEREAS, pursuant to the Second Amendment to the Financing Agreement
dated as of even date herewith (the "Second Amendment"), EIF agreed to, among
other things, defer principal payments and advance additional funds under the
Financing Agreement;
WHEREAS, in exchange for this deferral and advance and other
consideration set forth in the Second Amendment, Foreland agreed to issue to EIF
250,000 shares of the Common Stock of Foreland (the "EIF Common Stock")
restricted from resale for one year from the date of this Agreement;
NOW THEREFORE, in consideration of the premises, and other good and
valuable consideration the adequacy of which is expressly acknowledged, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
I.1 Defined Terms. The following terms shall have the meanings set
forth herein:
"Affiliate", an, an "affiliate of", or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified.
"Business Day" shall mean any day other than a (i) Saturday, (ii)
Sunday, or (iii) any day on which commercial banking institutions in New York,
New York are authorized or obligated to close, provided that if four (4)
consecutive days are not Business Days, the next day shall be deemed a Business
Day whether or not banks located in New York are authorized or obligated to
close.
"Closing Date" shall mean the date when Closing actually occurs.
"Common Stock" shall mean the common stock, par value $.001 per share,
of Foreland.
"Eagle Springs" shall mean Eagle Springs Production Limited-Liability
Company, a Nevada limited liability company.
"Foreland Asphalt" shall mean Foreland Asphalt Corporation, a Utah
corporation.
"Foreland Asset" shall mean Foreland Asset Corporation, a Nevada
corporation.
"Foreland Refining" shall mean Foreland Refining Corporation, a Texas
corporation.
"Lien" shall mean any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
otherwise), charge, preference, priority or other security agreement, option,
warrant, attachment, right of first refusal, preemptive, conversion, put, call
or other claim or right, restriction on transfer (other than restrictions
imposed by federal and state securities laws), or preferential arrangement of
any kind or nature whatsoever (including any restriction on the transfer of any
assets, any conditional sale or other title retention agreement, any financing
lease involving substantially the same economic effect as any of the foregoing
and the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction).
"Losses" shall mean losses, damages, claims, demands, suits, costs,
expenses, liabilities and sanctions of every kind and character, including
without limitation reasonable attorneys' fees, court costs and costs of
investigation.
"Person" shall mean any natural person, sole proprietorship,
corporation, general partnership, limited partnership, limited liability
company, union, association, court, agency, agreement, tribunal,
instrumentality, commission, arbitrator, board, bureau, or other entity or
authority.
"Preferred Stock" shall mean all of the shares of the 1998 Series
Convertible Preferred Stock of Foreland.
"Qualified Offering" means an offering of the Common Stock in which
the aggregate net proceeds to Foreland shall be at least Four Million Dollars
($4,000,000).
"Registration Rights Agreement" shall mean that certain Registration
Rights Agreement by and between EIF and Foreland dated August 10, 1998 as
amended by the First Amendment to Registration Rights Agreement dated as of even
date herewith.
"Shareholder" shall mean any holder of Shares.
"Shares" shall mean any and all issued and outstanding shares of
capital stock of Foreland, including, without limitation, the Common Stock and
the Preferred Stock.
"Transportation" shall mean Foreland Transportation, Inc., a Utah
Corporation (formerly known as Petrosource Transportation).
In addition, the following terms are defined elsewhere in this
Agreement:
"Closing" Section 3.1
"Effective Time" Section 2.2
"EIF" Introductory paragraph
"Indemnified Party" Section 6.3
"Indemnifying Party" Section 6.3
"Indemnity Obligation" Section 6.3
"Liability" Section 4.1(h)
Terms used but not defined herein shall have the meanings ascribed to
them in the Financing Agreement.
I.2 Accounting Terms. Accounting terms used herein and not otherwise
defined herein shall be construed in accordance with generally accepted
accounting definitions and principles consistently applied.
I.3 Singular and Plural. Words used herein in the singular, where
the context so permits, shall be deemed to include the plural and vice versa.
The definitions of words in the singular herein shall apply to such words when
used in the plural where the context so permits and vice versa.
ARTICLE II
ISSUANCE
II.1 Issuance. Pursuant to the terms and subject to the conditions
hereof, on the Closing Date, but effective as of the Effective Time, Foreland
shall issue to EIF the EIF Common Stock in consideration of EIF's deferral of
principal payments and waiver of certain covenants under the Financing Agreement
and other consideration as described in the Second Amendment.
II.2 Effective Time. The issuance of the EIF Common Stock shall be
effective as of February 4, 1999 (the "Effective Time"); provided however, that
this Agreement shall be of no force and effect until receipt by EIF and
execution of this Agreement by EIF in Massachusetts.
ARTICLE III
THE CLOSING
III.1 Date of Closing. Subject to the conditions stated in this
Agreement, the consummation of the transactions contemplated hereby (the
"Closing") shall be held on such date as is mutually satisfactory to the parties
hereto.
III.2 Place of Closing. The Closing shall be held at such place as
the parties hereto may agree in writing.
III.3 Conditions to Foreland's Closing. The obligations of Foreland
hereunder are subject to the following conditions, each of which must be
satisfied or waived by Foreland prior to Closing:
(a) Execution of the Second Amendment. At the Closing, the
Second Amendment shall have been executed by EIF and Foreland.
(b) Other Deliveries. EIF shall have delivered such
documents, certificates and/or instructions as may be reasonably necessary or
advisable to carry out EIF's obligations under, and to fulfill the purpose of,
this Agreement.
(c) Representations and Warranties True. Foreland shall be
satisfied that all representations and warranties of EIF contained in this
Agreement are true in all material respects at and as of the Closing as if such
representations and warranties were made at and as of the Closing, and that EIF
shall have performed and satisfied all material agreements in all material
respects as required by this Agreement to be performed and satisfied by EIF at
or prior to the Closing.
III.4 Conditions to EIF's Closing. The obligations of EIF hereunder
are subject to the following conditions, each of which must be satisfied or
waived by EIF prior to Closing:
(a) Execution of the Second Amendment. At the Closing, the
Second Amendment shall have been executed by EIF and Foreland.
(b) Resolutions. Prior to or at Closing, EIF shall have
received resolutions of the Board of Directors and/or Shareholders of Foreland,
as required by law and Foreland's By-laws, authorizing and approving the
transactions contemplated by this Agreement, certified by the respective
Secretary or Assistant Secretary of Foreland, together with certified copies of
Foreland's Articles of Incorporation and By-laws and a good-standing certificate
with respect to Foreland from the State of Nevada.
(c) Stock Certificates. At the Closing, Foreland shall
deliver to EIF a certificate representing the EIF Common Stock, with all
necessary transfer taxes paid or other revenue stamps affixed thereto.
(d) Opinion of Counsel. Prior to or at Closing, EIF shall
have received an opinion of Kruse, Landa & Maycock, L.L.C. in form and substance
reasonably acceptable to EIF.
(e) Registration Rights Agreement. Prior to or at Closing,
Foreland shall deliver the Registration Rights Agreement to EIF, executed by
Foreland.
(f) Other Deliveries. Foreland shall have delivered such
additional instruments, as may be reasonably necessary or advisable to carry out
EIF's obligations under, and to fulfill the purpose of, this Agreement and any
other document, certificate or other instructions delivered pursuant hereto.
(g) Representations and Warranties True. EIF shall be
satisfied that all representations and warranties of Foreland contained in this
Agreement shall be true in all material respects as at and as of the Closing as
if such representations and warranties were made at and as of the Closing, and
that Foreland have performed and satisfied all material agreements in all
material respects as required by this Agreement to be performed and satisfied by
Foreland at or prior to the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
IV.1 Representations and Warranties of Foreland. Foreland represents
and warrants as of the date hereof and as of the Closing Date as follows:
(a) Organization. Foreland is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada and
is duly qualified to carry on its business as now being conducted.
(b) Capital Stock. On the date hereof, the authorized capital
of Foreland consists of (i) 50,000,000 shares of Common Stock, par value $0.001
per share, of which 9,423,190 shares are issued and outstanding as of the date
hereof, and (ii) 5,000,000 shares of preferred stock, par value $0.001 per
share, of which:
(A) 2,000,000 preferred shares are designated as 1991
Series Convertible Preferred Stock with 20,000 of such preferred
shares issued and outstanding (convertible into 6,667 shares of
Common Stock);
(B) 1,650,000 preferred shares are designated as 1994
Series Convertible Redeemable Preferred Stock with 153,140 of
such preferred shares issued and outstanding (convertible into
51,047 shares of Common Stock);
(C) 1,000,000 preferred shares are designated as 1995
Series Convertible Preferred Stock with 349,103 of such preferred
shares issued and outstanding (convertible into 116,368 shares of
Common Stock);
(D) 50,000 preferred shares are designated as Series A
Preferred Stock with none of such preferred shares issued and
outstanding;
(E) 2,000 preferred shares are designated as 1998 Series
Convertible Preferred Stock with all of such preferred shares
issued and outstanding (convertible into 333,333 shares of Common
Stock); and
(F) 298,000 preferred shares are not designated.
Foreland has no other Shares or capital stock of any class or other equity
securities or equity equivalents authorized, issued or outstanding. Foreland
has reserved a sufficient number of authorized shares of Common Stock for
issuance pursuant to Warrant No. 1 and Warrant No. 2 and for conversion of the
Preferred Stock. Except as set forth in Schedule 4.1, there are no outstanding
or authorized options, warrants, calls, subscriptions, rights, agreements or
commitments of any character obligating Foreland to issue any Shares or
securities convertible into or exchangeable for or evidencing the right to
purchase or subscribe for any capital stock of Foreland. All issued and
outstanding shares of the capital stock of Foreland (i) are, or shall be upon
the Closing, duly authorized, validly issued, fully-paid and nonassessable,
(ii) are, shall be and have been (other than the 1998 Series Preferred Stock)
free of any preemptive rights, (iii) were not, and shall not be, issued in
violation of the terms of any contract, agreement, lease, plan, instrument or
other document binding on Foreland, and (iv) were and shall be issued in
compliance with all applicable charter documents of Foreland and all applicable
federal and state securities or "blue sky" laws and regulations.
(c) Transfer of the EIF Common Stock. Upon the consummation of
the transactions contemplated hereby, EIF will acquire title to the EIF Common
Stock, free and clear of any and all Liens. The EIF Common Stock has been, or
will be prior to the Closing, duly authorized and, when issued and delivered to
EIF as provided in this Agreement, will be validly issued, fully paid, and
nonassessable, and the issuance of such shares will not violate or contravene
the terms of any contract, agreement, note, bond, mortgage, indenture, deed or
trust, license, franchise, permit, lease, plan, instrument, or other document
binding on Foreland. The EIF Common Stock shall be restricted from resale for
one year from the date of this Agreement and has registration rights pursuant to
the Registration Rights Agreement.
(d) No Conflict. Foreland has all requisite power and authority
to carry on its business as presently conducted, to enter into this Agreement
and to perform its obligations hereunder. The consummation of the transactions
contemplated by this Agreement will not violate, or be in conflict with, any
material provision of the certificate of incorporation of Foreland or any
material provision of any agreement or instrument to which Foreland is a party
or by which it is bound (except for any provision in any agreement relating to
required consents to transfer), noncompliance with which would have a materially
adverse effect upon EIF, upon EIF's acquisition or ownership of the EIF Common
Stock after the Closing Date or upon any of the transactions contemplated by
this Agreement or, to the knowledge of Foreland, any judgment, decree, order,
statute, rule or regulation applicable to Foreland (subject to required
approvals of Federal, state or other governmental agencies).
(e) Authorization. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby have been duly and
validly authorized by all requisite action on the part of Foreland.
(f) Enforceability. This Agreement has been duly executed and
delivered on behalf of Foreland. This Agreement constitutes legal, valid and
binding obligations of Foreland enforceable in accordance with their respective
terms.
(g) Proceedings. There are no actions, suits, proceedings or
governmental investigations or inquiries pending, or, to the knowledge of
Foreland, threatened against Foreland or any of its Affiliates, or their
respective properties, assets, operations or businesses, which would, singly or
in the aggregate, have a material adverse effect on the business of Foreland.
(h) Financial Statements. The financial statements of Foreland
dated as of September 30, 1998 (i) fairly present the assets, liabilities, and
financial condition of Foreland as of the dates thereof and the results of
operations of Foreland for the respective periods ended on such dates, (ii) have
been prepared from the books and records of Foreland in accordance with
generally accepted accounting principles consistently applied, and (iii) include
all adjustments that are necessary for a fair presentation of the information
shown and do not contain any items of a special or nonrecurring nature that are
not identified as such. Foreland has no direct or indirect liability,
indebtedness, obligation, expense, claim, deficiency, guaranty, or endorsement
of or by any Person (other than endorsements of notes, bills, and checks
presented to banks for collection or deposit in the ordinary course of business)
of any type, whether accrued, absolute, contingent, matured, unmatured, or
otherwise ("Liability") other than Liabilities that are reflected, accrued or
reserved for in the Financial Statements or arise in the ordinary course of
Foreland's business consistent with past practice. The Financial Statements do
not contain as of the date hereof any misstatement of material fact and does not
fail to state any facts necessary (in lights of the circumstances in which they
were made) to make the statements therein not misleading. Since the date of
such Financial Statements, there has been no material adverse change in the
assets, business, financial condition or prospects of Foreland.
(i) Compliance with Law. Foreland is not in violation of any
order, injunction, judgment, ruling, law, or regulation of any court or
governmental authority applicable to the property or business of Foreland, which
violation or violations in the aggregate would have a material adverse effect on
Foreland. The licenses, permits and other governmental authorizations held by
Foreland are valid and sufficient for the conduct of Foreland's businesses as
currently conducted, except where the failure to hold such licenses, permits,
and other governmental authorizations would not have a material adverse effect.
(j) Fees. Foreland has not incurred any liability, contingent
or otherwise, for brokers' or finders' fees relating to the transactions
contemplated by this Agreement for which EIF or Foreland shall have any
responsibility whatsoever.
IV.2 Representations and Warranties of EIF. EIF represents and
warrants to Foreland as of the date hereof and as of the Closing Date as
follows:
(a) Organization. EIF is a limited partnership duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified to carry on its business as currently conducted.
(b) No Conflict. EIF has all requisite power and authority to
carry on its business as presently conducted, to enter into this Agreement, and
to perform its obligations under this Agreement. The consummation of the
transactions contemplated by this Agreement will not violate, or be in conflict
with, any material provision of the limited partnership or partnership agreement
of EIF or any agreement or instrument to which EIF is a party or by which it is
bound, noncompliance with which would have a materially adverse effect upon
Foreland or upon EIF's acquisition or ownership of the EIF Common Stock or upon
any of the transactions contemplated by this Agreement, or, to the knowledge of
EIF, any judgment, decree, order, statute, rule or regulation applicable to EIF
(subject to required approvals of Federal, state or other governmental
agencies).
(c) Accredited Investor. EIF is an Accredited Investor as
defined by Regulation D of the Securities Act of 1933, as amended.
(d) Authorization. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby have been duly and
validly authorized by all requisite action on the part of EIF.
(e) Enforceability. This Agreement has been duly executed and
delivered on behalf of EIF. This Agreement constitutes legal, valid and binding
obligations of EIF, enforceable in accordance with their respective terms.
(f) Investment Intent. EIF acknowledges that the EIF Common
Stock has not been registered under the Securities Act of 1933, as amended, or
applicable state securities laws and that the certificates representing such
shares will bear a legend to such effect. EIF is acquiring the EIF Common Stock
hereunder for investment purposes only and not with a view to, or for resale in
connection with, the distribution thereof and with no intention of distributing
or selling any thereof except in compliance with federal or state securities
laws, and will make no sale or other transfer of the EIF Common Stock except in
compliance with federal or state securities laws.
(g) Fees. EIF has incurred no liability, contingent or
otherwise, for brokers' or finders' fees relating to the transactions
contemplated by this Agreement for which Foreland shall have any responsibility
whatsoever.
ARTICLE V
OBLIGATIONS AFTER CLOSING
V.1 Transfer Taxes. Foreland shall pay all transfer, documentary,
sales, use, registration, excise or similar taxes in connection with the
transactions contemplated by this Agreement.
V.2 Financial Information. During the term of the Loans, Foreland
shall prepare financial statements in accordance with generally accepted
accounting principles consistently applied as of each March 31, June 30,
September 30, and December 31 for the periods then ended. Quarterly statements
shall contain consolidated financial statements including a balance sheet,
statement of income, and statements of the source and application of cash flow
for the period then ended. Annual statements prepared as of each December 31
and for the year period then ended shall be audited and accompanied by an
opinion from an independent certified public accountant. Copies of the
financial statements required by this subsection shall be furnished to EIF
within 45 days after the end of each fiscal period except for the annual
statements, copies of which shall be furnished within 90 days after the end of
the fiscal period to which they relate. EIF acknowledges that, while the
Financing Agreement is in place, delivery of such financial information as is
required pursuant to the Financing Agreement will satisfy Foreland's obligation
under this Section 5.2.
V.3 Registration. In addition to any and all rights set forth in
this Agreement, EIF shall have registration rights as set forth in the
Registration Rights Agreement.
V.4 Further Assurances. After Closing, Foreland and EIF shall each
execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered such instruments and take such other action as may be necessary or
advisable to assure to the other the rights, titles, interests, estates, and
privileges intended to be assigned, delivered, or reserved to such party and to
consummate the transactions and to carry out their obligations under this
Agreement and under any document, certificate, or other instrument delivered
pursuant hereto.
ARTICLE VI
INDEMNIFICATION
VI.1 Indemnification by EIF. From and after the Closing Date, EIF
shall defend, indemnify and save and hold harmless Foreland, its directors,
officers, employees and agents against all Losses arising out of or resulting
from any breach of any representation, warranty, covenant or agreement of EIF
under this Agreement (including the Schedules and the Exhibits hereto).
VI.2 Indemnification by Foreland. From and after the Closing Date,
Foreland shall defend, indemnify and save and hold harmless EIF, its directors,
officers, employees and agents against all Losses (a) arising out of or
resulting from any breach of any representation, warranty, covenant or agreement
of Foreland under this Agreement (including the Schedules and the Exhibits
hereto); (b) that relate to claims or other demands by third parties with
respect to any violation by Foreland of any federal or state securities laws in
connection with the transactions contemplated by this Agreement; or (c) in
connection with the operating of the Properties from the Closing Date.
VI.3 Procedures. The parties hereto agree promptly to notify the
other party of the making of any demand, the assertion of any claim, or the
commencement of any suit, action or proceeding by any third party for which
indemnity may be sought under this Agreement (an "Indemnity Obligation") prior
to expending or committing to expend funds for which indemnity may be sought.
The party from whom indemnification is sought (the "Indemnifying Party") shall
have the right, but not the obligation, to assume the defense or settlement of
any Indemnity Obligation of which the party seeking indemnification (the
"Indemnified Party") gives notice; provided, however, that if the Indemnifying
Party does not elect to assume such defense or settlement, the Indemnified Party
shall have the right, but not the obligation, to assume such defense or
settlement but shall not thereby waive any right to indemnity therefor by the
Indemnifying Party pursuant to this Agreement, and the Indemnifying Party shall
at all times have the right, at its option and expense, to participate fully
therein. Each party shall have reasonable access to the books, records and
personnel in the possession or control of the other party which are pertinent to
the defense or settlement of any Indemnity Obligation. The parties shall
cooperate in the defense or settlement of any Indemnity Obligation, but the
party electing to assume such defense or settlement shall have full authority to
determine all action to be taken with respect thereto and the terms of the
settlement; provided, however, that without the consent of the Indemnified
Party, no settlement shall be entered into that does not include as an
unconditional term thereof the giving by the Person asserting such claims of an
unconditional release of the Indemnified Party from all personal liability with
respect to such claim. The Indemnified Party may join the Indemnifying Party in
any suit, action or proceeding to which any such right of indemnity created by
this Agreement would or might apply, for the purpose of enforcing any such
right.
ARTICLE VII
MISCELLANEOUS
VII.1 Survival. The representations, warranties, covenants,
agreements and indemnities set forth in this Agreement shall survive the
Closing; provided, however, that any claim or demand for breach of a
representation or warranty under Sections 6.1 or 6.2(a) and any claim or demand
under Section 6.2 must be asserted in writing on or before the one (1) year
anniversary date of the Closing Date, after which date such indemnities shall
expire except to the extent this Agreement expressly provides that any such
provision shall survive for a longer period. If the Closing occurs, all
conditions of Closing shall be deemed to have been satisfied or waived, and,
after the Closing, neither party shall have any liability whatsoever to the
other arising out of, resulting from or attributable to any such conditions of
Closing, regardless of whether such conditions of Closing were, in fact,
satisfied or waived.
VII.2 Exhibit and Schedules. The Exhibit and Schedules referred
to in this Agreement are hereby incorporated in this Agreement by reference and
constitute a part of this Agreement. Each party to this Agreement and its
counsel has received a copy of the Exhibits and Schedules prior to and as of the
execution of this Agreement.
VII.3 Expenses. Foreland shall be responsible for payment of all
expenses, including legal fees, incurred by Foreland and EIF to negotiate,
document, and close the transactions contemplated hereby.
VII.4 Notices. All notices and communications required or
permitted under this Agreement shall be in writing and any communication or
delivery hereunder shall be deemed to have been duly made when personally
delivered to the individual indicated below, or if sent by telecopier or mailed,
when received by the party charged with such notice and addressed as follows:
If to EIF:
Energy Income Fund, L.P.
136 Dwight Road
Longmeadow, MA 01106
Attn: Robert D. Gershen
Facsimile No.: (413) 567-7926
If to Foreland:
Foreland Corporation
143 Union Blvd.
Suite 210
Lakewood, CO 80228
Attn: N. Thomas Steele
Facsimile No.: (303) 988-3234
Copies of all notices (other than reports or other routine
communications), which shall not constitute notice hereunder, shall be delivered
to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attn: Russell J. Bruemmer
Facsimile No.: (202) 663-6363
- and -
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway (300 South)
Salt Lake City, UT 84101-2034
Attn: James R. Kruse, Esq.
Facsimile No.: (801) 359-3954
Any party may, by written notice so delivered to the other parties,
change the address or individual to which delivery shall thereafter be made.
VII.5 Amendments. Except for waivers specifically provided
herein, this Agreement may not be amended nor any rights hereunder waived except
by an instrument in writing signed by the party to be charged with such
amendment or waiver and delivered by such party to the party claiming the
benefit of such amendment or waiver.
VII.6 Limitation of Remedies. In no event shall either party to
this Agreement be entitled to recover special or consequential damages from the
other party as a result of a breach of this Agreement by such other party,
including, without limitation, special damages in the nature of lost or future
profits.
VII.7 Counterparts. This Agreement may be executed by EIF and
Foreland in any number of counterparts, no one of which need be executed by all
parties hereto, but all of which together shall constitute one and the same
instrument.
VII.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
VII.9 Entire Agreement. This Agreement (including the Exhibits
and Schedules hereto and all other agreements executed in connection herewith)
constitutes the entire understanding among the parties with respect to the
subject matter hereof, superseding all negotiations, prior discussions and prior
agreements and understandings relating to such subject matter.
VII.10 Parties in Interest. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and, except as otherwise
prohibited, their respective heirs, devisees, executors, administrators,
successors and assigns; and except as provided in this Article VII, which is
also intended to benefit and be enforceable by the Indemnified Parties, nothing
contained in this Agreement, express or implied, is intended to confer upon any
other Person any benefits, rights or remedies.
VII.11 Nonwaiver. No course of dealing or any delay or failure to
exercise any right, power or remedy hereunder on the part of EIF shall operate
as a waiver of or otherwise prejudice EIF's rights, powers or remedies.
VII.12 Drafting. Each Party acknowledges that its legal counsel
participated in the preparation of this Agreement. The Parties therefore
stipulate that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement to favor any Party against the other.
IN WITNESS WHEREOF, the parties hereto each has caused this Agreement
to be executed by its duly authorized officer all as of the day and year first
set forth above.
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By: /s/ Robert D. Gershen, A Managing Director
FORELAND CORPORATION
By: /s/ N. Thomas Steele, President
<PAGE>
SCHEDULE 4.1
The following schedule sets forth the number of shares of common stock issuable
pursuant to outstanding options, warrants, calls, subscriptions, rights,
agreements or commitments of any character obligating Foreland to issue any
Shares or securities convertible into or exchangeable for or evidencing the
right to purchase or subscribe for any Capital Stock of Foreland:
Reason for Potential Shares
Issuance Issuable
- ----------------------- -----------
Preferred Stock
1991 Series 6,667
1994 Series 51,047
1995 Series 116,368
1998 Series 333,333
Options 1,222,334
Warrants 1,546,803
Warrants to Purchase 43,874
Preferred Stock
TOTAL ISSUABLE 3,320,426
The foregoing schedule does not include shares that may be issuable pursuant to
applicable anti-dilution provisions respecting the foregoing.
SECURITY AGREEMENT
(FORELAND ASPHALT CORPORATION--FIXTURES)
This Security Agreement (this "Agreement"), dated as of February 4, 1999,
is from FORELAND ASPHALT CORPORATION, a Utah corporation ("Debtor"), to ENERGY
INCOME FUND, L.P., a Delaware limited partnership ("Secured Party").
RECITALS
A. Foreland Corporation, a Nevada corporation ("Foreland Corp.") and
Secured Party are parties to a Financing Agreement dated as of January 6, 1998
(the "Original Financing Agreement") between Foreland Corp. and Eagle Springs
Production Limited Liability Company, a Nevada limited liability company ("Eagle
Springs"), as borrowers, and Secured Party.
B. By a First Amendment to Financing Agreement dated as of August 10,
1998 (the "First Amendment to Financing Agreement") by and among Foreland Corp.,
Eagle Springs, Foreland Refining Corporation, a Texas corporation ("Foreland
Refining"), Foreland Asset Corporation, a Nevada corporation ("Foreland Asset"),
Petrosource Transportation, a Utah corporation now known as Foreland
Transportation, Inc. ("Transportation"), and Debtor, as borrowers, and Secured
Party, the Original Financing Agreement was amended to, among other things, add
Debtor, Foreland Refining, Foreland Asset and Transportation as borrowers
thereunder. Foreland Corp., Eagle Springs, Foreland Refining, Foreland Asset,
Transportation and Debtor are referred to collectively as "Borrowers".
C. By a Second Amendment to Financing Agreement of even date herewith
(the "Second Amendment to Financing Agreement") by and among Borrowers and
Secured Party, Secured Party agreed to, on the terms and conditions set forth
therein, make Loans (as defined below) to Borrowers for the purpose of, among
other things, Debtor's acquisition of a membership interest in Cowboy Asphalt
Terminal, L.L.C., a Utah limited liability company ("Cowboy"). The Original
Financing Agreement as amended by the First Amendment to Financing Agreement and
the Second Amendment to Financing Agreement and as it may be further amended
from time to time is herein referred to as the "Financing Agreement".
D. Pursuant to the Financing Agreement, Secured Party has agreed to
extend credit by agreeing to make, subject to the terms and conditions set forth
in the Financing Agreement, the following loans (collectively, the "Loans") to
Borrowers: (i) a Refinancing Loan (as such term is defined in the Financing
Agreement) in an aggregate principal amount of up to $674,279.34; (ii) a
Development Loan (as such term is defined in the Financing Agreement) in an
aggregate principal amount of up to $7,175,720.66; and (iii) an Acquisition Loan
(as such term is defined in the Financing Agreement) in an aggregate principal
amount of up to $9,050,000, in each case in one or more advances and for the
purposes set forth in the Financing Agreement.
E. Debtor, Foreland Refining, Foreland Asset, and Eagle Springs are
wholly-owned subsidiaries of Foreland Corp., and Transportation is a wholly-
owned subsidiary of Foreland Asset. Debtor is the owner of a 33.33% membership
interest in Cowboy.
F. Cowboy owns the property, rights and interests described on Exhibit A
attached hereto (the "Cowboy Properties").
G. It is a condition precedent to such extension of credit by Secured
Party pursuant to the Financing Agreement that, among other things, Debtor shall
have executed and delivered to Secured Party a pledge and security agreement
granting to Secured Party a security interest in the Collateral (as defined
below).
AGREEMENT
In consideration of the foregoing recitals and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in order to induce Secured Party to extend such credit under the Financing
Agreement, Debtor hereby agrees with Secured Party as follows:
ARTICLE I
DEFINITIONS AND REFERENCES
Section 1.1. General Definitions. As used herein, the terms "Agreement,"
"Debtor," "Secured Party," "Foreland Corp.," "Original Financing Agreement,"
"Eagle Springs," "First Amendment to Financing Agreement," "Foreland Refining,"
"Foreland Asset," "Transportation," "Borrowers," "Second Amendment to Financing
Agreement," "Cowboy," "Financing Agreement," "Loans" and "Cowboy Properties"
shall have the meanings ascribed thereto above, and the following terms shall
have the following meanings:
(a) The term "Acquisition Note" shall mean the Acquisition Note,
dated as of January 6, 1998, in the maximum principal amount of $2,327,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Acquisition Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Debtor as makers and obligors thereunder.
(b) The term "Affiliate" shall mean, with respect to any Person, any
other Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control
with such Person, and any other Person that is an officer, director, or
full-time employee of such other Person.
(c) The term "Business Day" shall mean any day on which national
banking institutions in Massachusetts are open for the transaction of
banking business.
(d) The term "Code" shall mean the Uniform Commercial Code currently
in effect in the Commonwealth of Massachusetts; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, priority or exercise of remedies of Secured Party's
security interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than the Commonwealth of
Massachusetts, the term "Code" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof
relating to such attachment, perfection, priority or exercise of remedies
and for purposes of definitions related to such provisions.
(e) The term "Collateral" shall mean all property of whatever type,
in which Secured Party at any time has a security interest pursuant to
Section 2.1.
(f) The term "Commitment" shall mean the agreement or commitment by
Secured Party to make loans or otherwise extend credit to Borrowers under
the Financing Agreement, and any other agreement, commitment, statement of
terms or other document contemplating the making of loans or advances or
other extension of credit by Secured Party to or for the account of
Borrowers which is now or at any time hereafter intended to be secured by
the Collateral under this Agreement.
(g) The term "Cowboy Real Property" shall mean the real property
described on Exhibit A attached hereto, located in Davis County, Utah, the
legal description of which is attached as Exhibit B hereto.
(h) The term "Default" shall mean any Event of Default or any event
that with the giving of notice or the passage of time, or both, would
constitute an Event of Default.
(i) The term "Development Note" shall mean the Development Note,
dated as of January 6, 1998, in the maximum principal amount of $13,893,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Development Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Debtor as makers and obligors thereunder.
(j) The term "Environmental Laws" shall have the meaning ascribed
thereto in Subsection 3.1(f).
(k) The term "Event of Default" shall have the meaning ascribed
thereto in Section 5.1.
(l) The term "Fixtures" shall have the meaning ascribed thereto in
Subsection 2.1(a).
(m) The term "Hazardous Materials" shall have the meaning ascribed
thereto in Subsection 3.1(f).
(n) The term "Hydrocarbons" shall have the meaning ascribed thereto
in the Refinery Deed of Trust.
(o) The terms "Indemnified Party" and "Indemnified Parties" shall
have the meanings ascribed thereto in Article VI.
(p) The term "Lien" shall mean any lien, security interest, burden,
adverse claim, option, put, call, warrant or other charge, encumbrance or
restriction of any kind.
(q) The term "Notes" shall mean the Refinancing Note, the Development
Note and the Acquisition Note.
(r) The term "Obligations" shall mean all present and future
indebtedness, obligations and liabilities of whatever type which are or
shall be secured pursuant to Section 2.2.
(s) The term "Obligation Documents" shall mean this Agreement, the
Financing Agreement, the Notes, and all other documents and instruments
under, by reason of which, or pursuant to which any or all of the
Obligations are evidenced, governed, secured or otherwise dealt with, and
all other agreements, certificates, legal opinions, documents, instruments
and other writings heretofore or hereafter delivered in connection herewith
or therewith.
(t) The term "Other Collateral" shall mean all property, rights and
interests (present and future, personal and real, tangible and intangible)
of Borrowers (whether now owned or hereafter acquired by operation of law
or otherwise), or in which Borrowers otherwise (whether now or hereafter)
have any rights, including, without limitation, all fixtures, accounts,
goods, inventory, instruments, equipment, chattel paper, documents and
general intangibles (as such terms are defined in the Code), that now or
hereafter constitute or are intended to constitute security for any of the
Obligations under any Obligation Document but that do not constitute
Collateral under this Agreement.
(u) The term "Other Liable Party" shall mean any Person, other than
Debtor, who may now or may at any time hereafter be primarily or
secondarily liable for any of the Obligations or who may now or may at any
time hereafter have granted to Secured Party a security interest or lien
upon any property as security for the Obligations including, without
limitation, Borrowers.
(v) The term "Person" shall mean an individual, corporation,
association, partnership, limited liability company, joint stock company,
joint venture, trust or trustee thereof, estate or executor thereof,
unincorporated organization or joint venture, court or governmental unit or
any agency or subdivision thereof, or any legally recognizable entity.
(w) The term "Proposed Hydrocarbon Contracts" shall have the meaning
ascribed thereto in Section 3.2(t).
(x) The term "Refinancing Note" shall mean the Refinancing Note,
dated as of January 6, 1998, in the maximum principal amount of $680,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Refinancing Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Debtor as makers and obligors thereunder.
(y) The term "Refinery Deed of Trust" shall mean the Deed of Trust,
Security Agreement, Assignment of Rents, Profits and Proceeds, Financing
Statement and Fixture Filing dated as of August 11, 1998, from Foreland
Corp., Foreland Refining and Foreland Asset, as debtors, to First American
Title Company of Nevada, as trustee for the benefit of Secured Party, and
recorded or to be recorded in the real property records of Nye County,
State of Nevada.
(z) The term "Refinery Facilities" shall mean (i) the refinery and
related facilities located in part in the E/2 SE/4 of Section 24, T. 9 N.,
R. 56 E., M.D.M., County of Nye, State of Nevada, and sometimes referred to
as the Eagle Springs Refinery, and (ii) the refinery and related facilities
located in part on 63 acres within or adjacent to the Tonopah Airport,
County of Nye, State of Nevada.
(aa) The term "Related Person" shall mean Secured Party, each
Affiliate of Secured Party, each Other Liable Party and Cowboy.
(bb) The term "RTI Agreement" shall mean that certain Assignment and
Agreement entered into on September 11, 1998 by and among Cowboy, Crown Asphalt
Products Company, a Utah corporation, Debtor and Refinery Technologies, Inc., a
Utah corporation, a true and correct copy of which has previously been furnished
to Secured Party.
Section 1.2. References. Reference is hereby made to the Financing
Agreement for a statement of the terms thereof. All capitalized terms used in
this Agreement which are defined in the Financing Agreement and not otherwise
defined herein shall have the same meanings herein as set forth therein. All
terms used in this Agreement which are defined in Article 9 of the Code and not
otherwise defined herein or in the Financing Agreement shall have the same
meanings herein as set forth therein, except where the context otherwise
requires.
Section 1.3. Exhibits and Schedules. All exhibits and schedules attached
to this Agreement are a part hereof for all purposes.
Section 1.4. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein, references in this
Agreement to a particular agreement, instrument or document (including without
limitation, references in Section 2.1) also refer to and include all renewals,
extensions, amendments, modifications, supplements or restatements of any such
agreement, instrument or document, provided that nothing contained in this
Section 1.4 shall be construed to authorize any Person to execute or enter into
any such renewal, extension, amendment, modification, supplement or restatement.
Section 1.5. References and Titles. All references in this Agreement to
Exhibits, Schedules, Articles, Sections, Subsections, and other subdivisions
refer to the Exhibits, Schedules, Articles, Sections, Subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles and
headings appearing at the beginning of any subdivision are for convenience only
and do not constitute any part of any such subdivision and shall be disregarded
in construing the language contained in this Agreement. The words "this
Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. The phrases "this Section" and "this Subsection"
and similar phrases refer only to the Sections or Subsections hereof in which
the phrase occurs. The word "or" is not exclusive. Pronouns in masculine,
feminine and neuter gender shall be construed to include any other gender.
Words in the singular form shall be construed to include the plural, and words
in the plural form shall be construed to include the singular, unless the
context otherwise requires.
ARTICLE II
SECURITY INTEREST
Section 2.1. Grant of Security Interest. As security for all of the
Obligations, Debtor hereby pledges and assigns to Secured Party and grants to
and for the benefit of Secured Party a continuing security interest in all of
the following whether now owned or hereafter acquired (by operation of law of
otherwise):
(a) Fixtures. All fixtures in any form and of any kind located on
the Cowboy Real Property, whether now or hereafter existing, which are
owned by Debtor or in which Debtor otherwise has any rights (any and all of
the foregoing herein collectively called "Fixtures").
(b) Proceeds. All proceeds and products of, and accessions to, any
and all of the foregoing and, to the extent not otherwise included, any
payments under insurance (whether or not Secured Party is the loss payee
thereof) or under any indemnity, warranty or guaranty by reason of loss to
or otherwise with respect to any of the foregoing.
In each case, the foregoing shall be covered by this Agreement, whether Debtor's
ownership or other rights therein are presently held or hereafter acquired (by
operation of law or otherwise) and howsoever Debtor's interests therein may
arise or appear (whether by ownership, security interest, claim or otherwise).
Section 2.2. Obligations Secured. The security interest created hereby
in the Collateral constitutes a continuing security interest for all of the
following obligations, indebtedness and liabilities, whether now existing or
hereafter incurred or arising:
(a) Credit Payment. The payment by Borrowers, as and when due and
payable, of all amounts from time to time owing by Borrowers, or any of
them, under or with respect to the Financing Agreement, the Notes and the
other Obligation Documents or any other instrument now or hereafter
delivered in connection with or as security for the Financing Agreement,
the Notes or the other Obligation Documents or any part thereof.
(b) Other Indebtedness. All loans and future advances made by
Secured Party to Borrowers, or any of them, and all other debts,
obligations and liabilities of every kind and character of Borrowers, or
any of them, now or hereafter existing in favor of Secured Party, whether
such debts, obligations or liabilities be direct or indirect, primary or
secondary, joint or several, fixed or contingent, and whether originally
payable to Secured Party or to a third party and subsequently acquired by
Secured Party and whether such debts, obligations or liabilities are
evidenced by notes, open account, overdraft, indorsement, security
agreement, guaranty or otherwise (it being contemplated that one or more of
Borrowers may hereafter become indebted to Secured Party in further sum or
sums but Secured Party shall have no obligation to extend further
indebtedness by reason of this Agreement).
(c) Performance. The due performance and observance by Borrowers of
all of their other obligations and undertakings from time to time existing
under or with respect to the Obligation Documents or any other instrument
now or hereafter delivered in connection with or as security for any of the
Obligation Documents.
(d) Renewals. All renewals, extensions, amendments, modifications,
supplements or restatements of or substitutions for any of the foregoing.
Section 2.3 Delivery of Collateral. All certificates and instruments
representing or evidencing the Collateral shall be delivered to and held by or
on behalf of Secured Party pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to
Secured Party. Secured Party shall have the right at any time, in its
discretion and without notice to Debtor, to transfer to or register in the name
of Secured Party or any of its nominees any or all of the Collateral.
Section 2.4 Limitation on Recourse. Except as otherwise provided
herein, in no event shall Debtor have any personal liability for payment of
principal and interest on the Notes. Secured Party shall look solely to the
Collateral for the payment of such principal and interest and shall not seek a
deficiency or other personal judgment against Debtor for such principal and
interest in the event that any sale of the Collateral shall be insufficient to
satisfy the Notes. Nothing herein contained shall, however, impair any right,
remedy or security of Secured Party with respect to the Collateral under this
Agreement, the Notes, the Financing Agreement or any other Obligation Document,
nor limit Debtor's obligations to perform any of Debtor's other obligations
under this Agreement, the Notes, the Financing Agreement or any other Obligation
Document, including, without limitation, Secured Party's obligation to indemnify
Secured Party as set forth in the Obligation Documents. Notwithstanding the
foregoing limitation of recourse, Debtor shall remain fully liable for:
(a) Fraud, breach of trust, or any material misrepresentation by
Debtor or any other Borrower in the Obligation Documents or any other
documents or instruments evidencing, securing or relating to the Loans;
(b) Waste of a material nature to any part of the Collateral or the
Other Collateral caused by Debtor's or any other Borrower's gross
negligence or willful and wanton neglect or abuse of the Collateral or the
Other Collateral or, with respect to portions of the Collateral and Other
Collateral not operated by any of the Borrowers, failure to exert
reasonable control appropriate for an owner that is not also the operator;
(c) Failure to pay taxes, insurance, assessments, charges for labor
or materials, or other charges, fees or assessments that can create or
result in liens on any portion of the Collateral or the Other Collateral;
(d) Any beaches of warranty or defects of title to the Collateral or
the Other Collateral;
(e) Any breach of a warranty or representation contained in this
Agreement or any other Obligation Document; failure to perform any covenant
or other agreement contained in this Agreement or any other Obligation
Document, or any indemnity contained in this Agreement or any other
Obligation Document;
(f) Any attempt to communicate in any manner with the purchasers of
Hydrocarbons or other products from the Collateral or Other Collateral
after the delivery to such purchasers of a notice directing payments to be
made directly to Secured Party (as set forth in section 3.1 of the Refinery
Deed of Trust) in an attempt to hinder or interfere with the rights of
Secured Party;
(g) The return of, or reimbursement for, all monies received by
Debtor or any other Borrower from the purchasers of Hydrocarbons or other
products from the Collateral or Other Collateral for monies attributable to
Hydrocarbons or other products from the Collateral or Other Collateral
after receipt by any such purchaser of a notice directing payments to be
made directly to Secured Party;
(h) Any attempt to hinder or interfere with the foreclosure of or
other realization on the Collateral or the Other Collateral (whether by
judicial action, power of sale, trustee's sale or otherwise), including
without limitation the filing of a lis pendens, the initiation of any
lawsuit or the requesting of injunctive relief from any court or tribunal,
having the effect of hindering or delaying the exercise by Secured Party
(or the Trustee under the Refinery Deed of Trust) of any right or remedy
under this Agreement or any other Obligation Document; and
(i) After an Event of Default, Debtor or any other Borrower shall
fail or refuse to execute and deliver to Secured Party any instrument
reasonably requested by Secured Party and prepared at Borrowers' expense,
which is necessary to fully vest title to the Collateral or the Other
Collateral in Secured Party or the purchaser(s) of all or part of the
Collateral or the Other Collateral pursuant to any sale as provided for in
this Agreement or any other Obligation Document.
Debtor shall be fully and personally liable for all attorneys' fees
and costs and expenses incurred by Debtor arising out of any of the
foregoing paragraphs (a) through (i).
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations and Warranties. Debtor represents and
warrants as follows:
(a) Corporate Matters; Enforceability. Debtor is a corporation duly
organized, validly existing and in good standing in the State of Utah, and
Debtor is duly qualified as a foreign corporation and in good standing in
each jurisdiction where such qualification is necessary or appropriate.
The execution and delivery of this Agreement and the performance by Debtor
of the transactions contemplated herein are within Debtor's corporate
powers and have been duly authorized by all necessary action, corporate and
otherwise. This Agreement constitutes the legal, valid and binding
obligations of Debtor, enforceable against Debtor in accordance with its
terms.
(b) Ownership and Liens. Debtor has good and marketable title to the
Collateral free and clear of all Liens, except for the security interest
created by this Agreement, the RTI Agreement and the security interests and
other encumbrances expressly permitted by the Financing Agreement. No
dispute, right of setoff, counterclaim or defense exists with respect to
all or any part of the Collateral. No effective financing statement or
other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office except such as may have been
filed in favor of Secured Party relating to this Agreement and such as may
have been filed to perfect or protect any security interest expressly
permitted by the Financing Agreement. Cowboy is the owner of record of the
Cowboy Real Property, a true and correct legal description of which is set
forth on Exhibit B hereto.
(c) No Conflicts or Consents. Neither the ownership or the intended
use of the Collateral by Debtor, nor the grant of the security interest by
Debtor to Secured Party herein, nor the exercise by Secured Party of its
rights or remedies hereunder, will (i) conflict with any provision of
(A) any applicable domestic or foreign law, statute, rule or regulation,
(B) the articles or certificate of incorporation, charter or bylaws of
Debtor, or (C) any agreement, judgment, license, order or permit applicable
to or binding upon Debtor, or (ii) result in or require the creation of any
lien, charge or encumbrance upon any assets or properties of Debtor or any
Related Person except as expressly contemplated in the Obligation
Documents. Except as expressly contemplated in the Obligation Documents or
the LLC Agreement, no consent, approval, authorization or order of, and no
notice to or filing with any court, governmental authority or third party
is required in connection with the grant by Debtor of the security interest
herein, or the exercise by Secured Party of its rights and remedies
hereunder.
(d) Security Interest. Debtor has and will have at all times full
right, power and authority to grant a security interest in the Collateral
to Secured Party in the manner provided herein, free and clear of any Lien,
except as expressly permitted in the Financing Agreement. This Agreement
creates a valid and binding security interest in favor of Secured Party in
the Collateral securing the Obligations. The taking possession by Secured
Party of all instruments and cash constituting Collateral from time to
time, the filing of the financing statements delivered concurrently
herewith by Debtor to Secured Party will perfect, and establish the first
priority of, Secured Party's security interest hereunder in the Collateral
securing the Obligations. No further or subsequent filing, recording,
registration, other public notice or other action is necessary or desirable
to perfect or otherwise continue, preserve or protect such security
interest except for continuation statements or filings upon the occurrence
of the events stated in Subsection 3.3(m).
(e) Location of Borrowers, Records and Collateral. Schedule 3.1(e)
sets forth the addresses of Borrowers' chief executive offices and
principal places of business, the offices where the records concerning the
Collateral and the Other Collateral are kept, and the addresses where the
Collateral and the Other Collateral is located.
(f) Environmental. (i) The Collateral and the Other Collateral is,
and, except as previously disclosed to Secured Party in writing, to the
best of Debtor's knowledge, at all times has been, operated in compliance
with all applicable Environmental Laws (as hereinafter defined); and,
except as previously disclosed to Secured Party in writing, to the best of
Debtor's knowledge, no condition exists with respect to the Collateral, the
Other Collateral, or other property owned or operated by Borrowers or any
affiliate of or party related to Borrowers that would or could reasonably
be expected to subject Borrowers, any affiliate of or party related to
Borrowers, or Secured Party to any damages (including without limitation,
actual, consequential, exemplary and punitive damages), material liability
(absolute or contingent, determined or determinable), penalties, injunctive
relief or cleanup costs under any applicable Environmental Laws, or that
require or could reasonably be expected to require cleanup, removal,
remedial action or other response by Borrowers, any affiliate of or party
related to Borrowers, or Secured Party pursuant to any applicable
Environmental Laws.
(ii) Borrowers have not received and, to the best of Debtor's
knowledge, none of their affiliates have received, and none of Borrowers'
or their affiliates' or related parties' predecessors in title to the
Collateral and the Other Collateral have received, any notice from a
governmental agency asserting or alleging a violation of any Environmental
Laws as they relate to the Collateral and the Other Collateral.
(iii) There are no pending or threatened suits, actions,
claims or proceedings against Borrowers or their affiliates or related
parties or, to the best of Debtor's knowledge, Borrowers' or their
affiliates' predecessors in title, arising from or related to, directly or
indirectly, any Environmental Laws as they relate to the Collateral and the
Other Collateral.
(iv) Neither Borrowers, any affiliate of or party related to
Borrowers, any part of the Collateral or the Other Collateral, nor, to the
best of Debtor's knowledge, Borrowers' or any affiliate's or related
parties' predecessors are subject to any judgment, decree, order or
citation related to or arising out of any Environmental Laws, and neither
Borrowers nor any affiliate or party related to Borrowers have been named
or listed as a potentially responsible party by any governmental or other
entity in a matter arising under or relating, directly or indirectly, to
any Environmental Laws.
(v) Borrowers have obtained or caused to be obtained all
permits, licenses, and approvals required under all Environmental Laws to
operate the Collateral and the Other Collateral.
(vi) Except as previously disclosed to Secured Party in writing,
there are not now, nor to the best of Debtor's knowledge have there ever
been, Hazardous Materials (as hereinafter defined) discharged, leaked,
spilled or released in, on, to, from or at the Collateral, the Other
Collateral or other properties owned or operated by Borrowers or any of
their affiliates or stored, treated, or recycled at or in tanks or other
facilities thereon or related thereto which give rise or could reasonably
be expected to give rise to material liability under any Environmental
Laws.
(vii) The use which Borrowers make and intend to make of the
Collateral and the Other Collateral will not result in: (a) the use or
storage of any Hazardous Materials on, in or in connection with the
Collateral or the Other Collateral, or disposal of any Hazardous Materials
from the Collateral or the Other Collateral except in compliance with all
applicable Environmental Laws, or (b) the treatment, processing, discharge
or release of any Hazardous Materials on, in, to or from the Collateral or
the Other Collateral except in compliance with all applicable Environmental
Laws.
(viii) There are no underground storage tanks, surface
impoundments, or wastewater injection wells located on or in the Collateral
or the Other Collateral.
As used herein, the term "Environmental Laws" shall mean any one
or more of the following: (1) the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendment and Reauthorization Act of 1986, 42 U.S.C. S 9601 et seq.
("CERCLA"); (2) the Resource Conservation and Recovery Act, as amended by
the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C. S 6901 et seq.
("RCRA"); (3) the Clean Air Act, 42 U.S.C. S 7401 et seq.; (4) the Federal
Water Pollution Control Act, 33 U.S.C. S 1251 et seq.; (5) the Toxic
Substances Control Act, 15 U.S.C. S 2601 et seq.; (6) the Federal Safe
Drinking Water Act, 42 U.S.C. SS 300f to 300j-11; (7) the Emergency
Planning and Community Right-to-Know Act of 1986, 42 U.S.C. S 1101 et seq.;
(8) the Hazardous Materials Transportation Act, 49 U.S.C. S 1801 et seq.;
and (9) all other foreign, federal, state, tribal and local laws (whether
common or statutory), rules, regulations, consent agreements, compliance
schedules, and orders directly and/or indirectly relating to public health
and safety, air pollution, water pollution, noise control, wetlands,
oceans, waterways, and/or the presence, use, generation, manufacture,
transportation, processing, treatment, handling, discharge, release,
disposal, or recovery of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or materials and/or underground
storage tanks, including, without limitation, all rules, regulations and
orders of all state and local governmental bodies, authorities and agencies
pertaining or relating to the exploration, development, regulation and
conservation of oil and gas resources, as each of the foregoing laws,
rules, regulations, consent agreements, compliance schedules and orders may
be enacted, amended, supplemented, or reauthorized from time to time.
As used herein, the term "Hazardous Materials" shall mean any one
or more of the following substances, wastes and materials: (1) any
substance, waste or material defined as a "hazardous substance," "hazardous
material," "hazardous waste," "pollutant," "contaminant," "toxic material,"
or "toxic substance," in any of the applicable Environmental Laws, or in
the standards, criteria, rules and/or regulations promulgated pursuant to
any of said Environmental Laws (including without limitation Hydrocarbons);
and (2) any substance, waste or material, the presence of which requires
investigation or remediation under any Environmental Laws.
Section 3.2. Affirmative Covenants. Unless Secured Party shall otherwise
consent in writing, Debtor shall at all times comply with the covenants and
agreements contained in this Section 3.2 from the date hereof and so long as any
part of the Obligations or the Commitment is outstanding.
(a) Ownership and Liens. Debtor shall maintain good and marketable
title to all Collateral free and clear of all liens, security interests,
adverse claims or other charges or encumbrances, except for the security
interest created by this Agreement and the security interests and other
encumbrances expressly permitted by the Financing Agreement. Debtor shall
use its best efforts to resolve any dispute, right of setoff, counterclaim
or defense with respect to all or any part of the Collateral. Debtor shall
cause to be terminated any financing statement or other security instrument
with respect to the Collateral, except such as may exist or as may have
been filed in favor of Secured Party and such as may exist or as may have
been filed to perfect or protect any security interest expressly permitted
by the Financing Agreement. Debtor shall defend Secured Party's right,
title and special property and security interest in and to the Collateral
against the claims of any Person.
(b) Further Assurances. Debtor shall, at its expense and at any time
and from time to time, promptly execute and deliver all further instruments
and documents and take all further action that may be necessary or
desirable or that Secured Party may reasonably request in order (i) to
perfect and protect the security interest created or purported to be
created hereby and the first priority of such security interest; (ii) to
enable Secured Party to exercise and enforce its rights and remedies
hereunder with respect to the Collateral; or (iii) to otherwise effect the
purposes of this Agreement, including without limitation (A) executing and
filing such financing or continuation statements, or amendments thereto, as
may be necessary or desirable or that Secured Party may request in order to
perfect and preserve the security interest created or purported to be
created hereby, and (B) furnishing to Secured Party from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as Secured Party
may reasonably request, all in reasonable detail.
(c) Information. Debtor shall furnish to Secured Party any
information that Secured Party may from time to time reasonably request
concerning any covenant, provision or representation contained herein or
any other matter in connection with the Collateral or Obligation Documents.
(d) Chattel Paper, Documents, Instruments and Cash. Debtor shall at
all times cause any certificates, chattel paper, documents or instruments
which are a part of the Collateral to be valid and genuine. Debtor shall
cause all chattel paper included in the Collateral to have only one
original counterpart which constitutes chattel paper or collateral within
the meaning of the Code or the law of any applicable jurisdiction. Upon
request by Secured Party, Debtor shall deliver to Secured Party all cash
and all originals of certificates, chattel paper, documents or instruments
which are included in the Collateral. Upon request by Secured Party,
Debtor shall mark each chattel paper which is a part of the Collateral with
a legend indicating that such chattel paper is subject to the security
interest granted by this Agreement.
(e) Punctual Payment and Performance. Debtor shall, and shall cause
the other Borrowers to, duly and punctually pay the principal and interest
on the Loans and to perform all its obligations and covenants under the
Obligation Documents.
(f) Existence; Maintenance of Collateral. Debtor shall, and shall
cause each other Borrower to, do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate existence,
rights and franchises, except when failure to do so would not have a
material adverse effect on Debtor or such other Borrower, as the case may
be. Debtor shall, and shall cause each other Borrower to, cause all of its
property, rights and interests that constitute Collateral or Other
Collateral under any Obligation Document and its business to be maintained
and kept, in accordance with sound field practices, in good condition,
repair and working order and supplied with all necessary equipment and
shall cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof.
(g) Title to Properties. Debtor shall, and shall cause each other
Borrower to, maintain good and marketable title to all of its property,
rights and interests that constitute Collateral or Other Collateral under
any Obligation Document, free and clear of all Liens, except for Liens
expressly permitted by the Financing Agreement. Debtor shall, and shall
cause each other Borrower to, warrant and forever defend its right, title
and interest in such property and assets against the claims and demands of
every Person whatsoever claiming or which may claim the same or any part
thereof. Debtor shall cause Cowboy Asphalt Terminal, L.L.C. to maintain
good and marketable title to the Cowboy Real Property and the buildings,
improvements and structures described on Exhibit A hereto or located on the
Cowboy Real Property by or on behalf of Cowboy after the date of this
Agreement (excluding buildings, improvements and structures either (i)
located on the Cowboy property by a member of Cowboy other than Debtor on
its own behalf that do not constitute Cowboy property or (ii) designated
for the exclusive use of a member of Cowboy other than Debtor in accordance
with the LLC Agreement), and to warrant and forever defend its right, title
and interest in such property and assets against the claims and demands of
every Person whatsoever claiming or which may claim the same or any part
thereof.
(h) Insurance. Debtor shall, and shall cause each other Borrower to,
acquire and continue to maintain, with financially sound and reputable
insurers, insurance with respect to its respective properties and business
against such liabilities, casualties, risks and contingencies and in such
types and amounts as is customary in the case of Persons engaged in the
same or similar businesses and similarly situated; provided, however, that
Debtor shall, and Debtor shall cause each other Borrower to, maintain
liability insurance in the amount of not less than $2,000,000 with a
deductible not to exceed $25,000 per claim. Debtor shall, and shall cause
each other Borrower to, furnish or cause to be furnished copies of binders
relating to such insurance to Secured Party prior to Funding and from time
to time a summary of the insurance coverage of Debtor and the other
Borrowers in form and substance satisfactory to Secured Party and if
requested to furnish Secured Party copies of the applicable policies. In
the case of any fire, accident or other casualty causing loss or damage to
the properties of Debtor or any other Borrower, Debtor shall, and shall
cause such Borrower to, use the proceeds of such policies (i) to repair or
replace the damaged property, or (ii) subject to Secured Party's prior
written consent and notwithstanding any restriction on prepayment, to
prepay the Obligations without premium or penalty.
(i) Taxes and Other Claims. Debtor shall, and shall cause each other
Borrower to, duly pay and discharge before the same shall become due or
delinquent all taxes, assessments and other governmental charges imposed
upon Debtor or such Borrower, as the case may be, and its respective
properties, sales and activities, or any part thereof, or upon the income
or profits therefrom, or burdening any of Debtor's or such Borrower's
properties or assets, as the case may be, as well as all claims for labor,
materials or supplies, including all claims incurred in connection with the
operation of Debtor's and such Borrower's respective businesses, properties
and assets, which if unpaid might by law become a lien or charge upon any
of Debtor's or such Borrower's property; provided, however, that any such
tax, assessment, charge, levy or claim need not be paid if the validity or
amount thereof shall currently be contested by Debtor or such Borrower, as
the case may be, in good faith by appropriate proceedings and if Debtor or
such Borrower, as the case may be, shall have set aside on its books
adequate reserves with respect thereto; and provided, further, that Debtor
shall, and shall cause each other Borrower to, pay all such taxes,
assessments, charges, levies or claims forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security
therefor.
(j) Securities Filings. Debtor shall, and shall cause each other
Borrower to, duly file or cause to be filed, within the times and within
the manner prescribed by law (including all permitted extensions), all
federal and state securities and blue sky filings that are required to be
filed by, or with respect to, Debtor or such Borrower, as the case may be,
including without limitation all filings required to be made pursuant to
the Securities Exchange Act of 1934, as amended. Debtor shall, and shall
cause each other Borrower to, deliver to Secured Party copies of all
filings made by such Person with the Securities and Exchange Commission and
any state securities commission or agency within three days of such filing.
If a filing to be made by Debtor or any other Borrower with the Securities
and Exchange Commission or a state securities commission or agency refers
to Secured Party, preliminary copies of such filing shall be delivered to
Secured Party and to Secured Party's counsel no later than five Business
Days prior to such filing with a final copy delivered to Secured Party at
the time of filing. Debtor shall, and shall cause each other Borrower to,
deliver to Secured Party copies of all press releases at the time of
release; unless such release refers to Secured Party, in which case advance
copies shall be delivered to Secured Party and to Secured Party's counsel
no later than two Business Days prior to such release.
(k) Inspection of Properties and Books. Debtor shall, and shall
cause each other Borrower to, permit Secured Party and its authorized
representatives to (i) visit and inspect any of its properties and to
examine its books and records (and to make copies thereof and extracts
therefrom; provided, that Secured Party will use its reasonable efforts to
preserve the confidentiality of any information derived therefrom), and
(ii) discuss the affairs, finances and accounts of Debtor or such Borrower,
as the case may be, with, and to be advised as to the same by, the officers
of Debtor and such Borrower, independent accountants, and independent
engineers all at such reasonable times and intervals as Secured Party may
reasonably request.
(l) Compliance with Laws, Contracts, Licenses and Permits. Debtor
shall, and shall cause each other Borrower to, comply with (i) all Permits
and Requirements of Law, (ii) the provisions of its charter or
organizational documents and bylaws, (iii) all agreements and instruments
by which it or any of its properties may be bound, and (iv) all applicable
decrees, orders and judgments, except in each case where noncompliance
would not have a material adverse effect on the business, assets or
financial condition of Debtor or such Borrower, as the case may be. If at
any time while any part of the Obligations or the Commitment is
outstanding, any authorization, consent, approval, permit or license from
any officer, agency or instrumentality of any government shall become
necessary or required in order that Debtor or any other Borrower may
fulfill any of its obligations under any Obligation Document, Debtor shall,
and shall cause such Borrower to, immediately take all reasonable steps
within its power to obtain such authorization, consent, approval, permit or
license and furnish Secured Party with evidence thereof.
(m) Litigation. Debtor shall, and shall cause each other Borrower
to, promptly give Secured Party notice of all legal or arbitral
proceedings, and of all proceedings before any governmental or regulatory
authority or agency, to which Debtor or such Borrower is a party or which
affects Debtor or such Borrower and of which Debtor or such Borrower is
aware, except for proceedings before any governmental or regulatory
authority or agency occurring in the ordinary course of Debtor's or such
Borrower's business, and that would not have a material adverse effect upon
Debtor's or such Borrower's business or its properties and assets if
determined adversely to Debtor or such Borrower, as the case may be.
(n) Notices. Debtor shall, and shall cause each other Borrower to,
promptly after acquiring knowledge thereof, notify Secured Party in writing
of the occurrence of any Event of Default and of any material adverse
change in the business, assets or financial condition of Debtor or such
Borrower, as the case may be. If any Person shall give any notice or take
any other action with respect to a claimed default (whether or not
constituting an Event of Default) under any Obligation Document or any
other note, evidence of indebtedness, indenture or other obligation to
which or with respect to which Debtor or any other Borrower is a party or
obligor, whether as principal or surety, Debtor shall, and shall cause such
Borrower to, forthwith give written notice thereof to Secured Party,
describing the notice or action and the nature of the claimed default.
Debtor shall, and shall cause each other Borrower to, promptly notify
Secured Party (i) if any representation or warranty of Debtor or such
Borrower contained in this Agreement or any other Obligation Document is
discovered to be or becomes untrue, or (ii) if Debtor or such Borrower
fails to perform or comply with any covenant or agreement contained in this
Agreement or any other Obligation Document or it is reasonably anticipated
that Debtor or such Borrower will be unable to perform or comply with any
covenant or agreement contained in this Agreement or any other Obligation
Document. Debtor shall, and shall cause each other Borrower to, cause all
the representations and warranties of Borrowers contained in this Agreement
and the other Obligation Documents to be true and correct in all material
respects from time to time and at all times.
(o) Use of Loan Proceeds. Debtor shall, and shall cause each other
Borrower to, use the proceeds of the Loans solely for the purposes
expressly permitted by the Financing Agreement. Debtor shall, and shall
cause each other Borrower to, maintain any funds that have been advanced
for such purposes, but not expended, at a depository institution
satisfactory to Secured Party and Debtor shall, and shall cause such
Borrower to, deliver copies of all invoices for expenditure of such funds
to Secured Party.
(p) Key Employee. Debtor shall cause Foreland Corp. to continue to
employ N. Thomas Steele as President of Foreland Corp. on a full-time basis
with substantially the same responsibilities as of the date of this
Agreement.
(q) Environmental Laws Compliance. Debtor shall, and shall cause
each other Borrower to:
(i) Comply with all applicable Environmental Laws as they relate
to the Properties and shall, and shall cause each other Borrower to,
maintain and obtain, or cause to be maintained and obtained, all permits,
licenses and approvals now or hereafter required under all applicable
Environmental Laws as they relate to the Collateral and the Other
Collateral;
(ii) Not do or permit anything to be done that will subject the
Collateral or the Other Collateral, Debtor, any other Borrower or Secured
Party to any liability under any applicable Environmental Laws as they
relate to the Collateral and the Other Collateral, assuming disclosure to
governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the Collateral or the Other
Collateral;
(iii) Promptly notify Secured Party in writing of any
Environmental Complaint relating to the Collateral or the Other Collateral
which is known to Debtor or such Borrower, as the case may be, or any other
existing, pending or threatened investigation or inquiry by any
governmental authority relating to the Collateral or the Other Collateral
known to Debtor or such Borrower, as the case may be, and in connection
with any applicable Environmental Laws.
(iv) Take, or cause to be taken, all steps necessary to determine
that no Hazardous Materials have been: (i) used or stored on, in or in
connection with any Collateral or Other Collateral that Debtor or any other
Borrower acquires with any funds that Debtor or such Borrower receives from
Secured Party in accordance with the Financing Agreement, or disposed from
such Collateral or Other Collateral, or (ii) treated, processed,
discharged, or released on, to, in or from such Collateral or Other
Collateral, except, in each case, in full compliance with all applicable
Environmental Laws;
(v) Not cause or permit: (i) the use or storage of Hazardous
Materials on, in or in any manner in connection with the Collateral or
Other Collateral, or (ii) the treatment, processing, discharge or release
of any Hazardous Materials on, to, in or from the Collateral or Other
Collateral, except, in each case, in full compliance with all applicable
Environmental Laws;
(vi) Keep, or cause the Collateral and the Other Collateral to be
kept, free of any and all Hazardous Materials, and shall, and shall cause
each other Borrower to, remove the same (or if removal is prohibited by
applicable law, shall, and shall cause each other Borrower to, take
whatever action is required by applicable law) promptly upon discovery of
such Hazardous Materials at Borrowers' sole cost and expense, except in
full compliance with all applicable Environmental Laws; and
(vii) Provide, upon Secured Party's reasonable request, at
any time, and from time to time, inspections, tests and audits of the
Collateral and the Other Collateral from an engineering or consulting firm
approved by Secured Party indicating the presence or absence of Hazardous
Materials on the Collateral and the Other Collateral and compliance with
all applicable Environmental Laws.
(r) Change of Control. Debtor shall, and shall cause each other
Borrower to, use its best efforts to not permit a Change of Control to
occur and shall, and shall cause each other Borrower to, notify Secured
Party within five Business Days of obtaining information that a Change in
Control of such Person may occur or is contemplated by any Person.
(s) Operation of Assets. Debtor shall operate the Collateral and
shall cause the other Borrowers to operate the Other Collateral, including
without limitation the Refinery Facilities, continuously in a good and
workmanlike manner, in accordance with the best usage of operators of
similar facilities and assets and in accordance with industry standards,
and in conformity in all material respects with all applicable laws, rules,
regulations and orders of all federal, state, tribal and local governmental
bodies, authorities and agencies and in conformity in all material respects
with the provisions of all leases, licenses, subleases, sublicenses,
permits, easements, rights-of-way, servitudes, franchises, grants,
certificates and authorizations or other contracts and agreements
comprising a part of the Collateral or Other Collateral.
(t) Contract Approval. Debtor shall, and shall cause each other
Borrower to, submit to Secured Party for its review and approval at least
ten days in advance of the date such Borrower intends to enter into a
contract (including a modification or amendment of any existing contract),
each proposed contract for the refining, fractionating, treatment,
marketing, purchase, sale, transportation, exchange, manufacturing or
processing of Hydrocarbons if such contract was not in effect as of the
date of this Agreement and has a term of ninety days or more ("Proposed
Hydrocarbon Contracts"). Debtor shall not, and shall cause each other
Borrower not to, enter into any Proposed Hydrocarbon Contracts that
establish pricing and have a term of one year or more or make deliveries
thereunder without obtaining Secured Party's prior written approval, which
approval shall not be unreasonably withheld if Secured Party's security
position is not adversely affected thereby.
(u) Additional Information. For so long as any part of the
Obligations or the Commitment is outstanding, Debtor shall, and shall cause
each other Borrower to, permit Secured Party to substantially participate
in, and influence the conduct of, management of Borrowers through the
exercise of any and all of the following rights (provided, however, that
Secured Party shall have no right to direct the management of any
Borrower):
(i) promptly provide to Secured Party such information as
Secured Party shall reasonably request regarding Debtor's or such
Borrower's business, financial condition and prospects;
(ii) if Secured Party reasonably believes that financial or other
developments affecting Debtor or such Borrower have impaired or are likely
to impair Debtor's or such Borrower's ability to perform its obligations
under this Agreement, permit Secured Party, upon request, reasonable access
to Debtor's and such Borrower's management or Board of Directors to present
its views with respect to such developments;
(iii) provide to Secured Party the financial information
required in Section 7.3 of the Financing Agreement; and
(iv) permit Secured Party to make the examinations and
inspections of properties, books and records, and to consult with Debtor's
and such Borrower's officers, as required in Section 7.11 of the Financing
Agreement.
Section 3.3. Negative Covenants. Unless Secured Party otherwise consents
in writing, Debtor shall at all times comply with the covenants contained in
this Section 3.3 from the date hereof and so long as any part of the Obligations
or the Commitment is outstanding.
(a) Transfer or Encumbrance. Debtor shall not sell, assign (by
operation or law or otherwise), transfer, exchange, lease or otherwise
dispose of any of the Collateral, nor shall Debtor grant a Lien on or in or
execute, file or record any financing statement or other security
instrument with respect to the Collateral, nor shall Debtor deliver actual
or constructive possession of the Collateral to any other Person, other
than (i) Liens or financing statements in favor of Secured Party or
expressly permitted by the Financing Agreement; or (ii) sales or leases,
other than during the continuance of an Event of Default, of Inventory in
the ordinary course of business.
(b) Impairment of Security Interest. Debtor shall not take or fail
to take any action that would in any manner impair the value or
enforceability of Secured Party's security interest in any Collateral.
(c) Possession of Collateral. Debtor shall not cause or permit the
removal of any item of the Collateral from its possession, control or risk
of loss, nor shall Debtor cause or permit the removal of any item of the
Collateral from the location specified herein other than removal in
connection with (i) sales or leases, other than during the continuance of
an Event of Default, of Inventory in the ordinary course of business; or
(ii) possession of Collateral by Secured Party or by a bailee selected by
Secured Party who is holding the Collateral for the benefit of Secured
Party.
(d) Compromise of Collateral. Debtor shall not adjust, settle,
compromise, amend or modify any of the Collateral, other than any
adjustment, settlement, compromise, amendment or modification, other than
during the continuance of an Event of Default, of any General Intangible
which does not detrimentally affect the rights or benefits of Secured Party
hereunder or the value of such General Intangible to Secured Party
hereunder.
(e) Possession of Chattel Paper, Documents or Instruments. Debtor
shall not cause or permit any certificates, chattel paper, documents or
instruments which are included in the Collateral at any time to be in the
actual or constructive possession of any Person other than Debtor or
Secured Party.
(f) Use of Proceeds. Debtor shall not, and shall cause each other
Borrower not to, use the proceeds of the Loans for any purpose not
expressly permitted by the Financing Agreement. Debtor shall not, and
shall cause each other Borrower not to, without Secured Party's prior
written approval, make any expenditure of the Development Loan in an amount
in excess of 110% of the amount stated in the AFE pertaining to such
expenditure that was approved by Secured Party.
(g) Dividends, Distributions and Redemptions. Debtor shall not, and
shall cause each other Borrower not to, declare or pay any dividend,
purchase, redeem or otherwise acquire for value any of its stock now or
hereafter outstanding, or return any capital or make any other distribution
to its stockholders or members, except to the extent such declaration,
payment, purchase, redemption, acquisition or return is solely between
Borrowers.
(h) Nature of Business. Debtor shall not, and shall cause each other
Borrower not to, engage in any business other than oil and gas exploration,
development, production, processing, refining, transportation and
marketing, and business activities ancillary thereto.
(i) Restrictions on Liens. Debtor shall not, and shall cause each
other Borrower not to, create or incur, or suffer to be created or incurred
or to exist, any Lien (other than Liens expressly permitted by the
Financing Agreement) upon any of its properties, rights and interests that
constitute Collateral or Other Collateral under any of the Obligation
Documents, whether now owned or hereafter acquired, or upon the proceeds,
income or profits therefrom, and shall, and shall cause each other Borrower
to, pay all vendor payables and other trade payables when due.
(j) Collateral Sales. Except as set forth in Sections 7.6 and 7.7 of
the Financing Agreement, Debtor shall not, and shall cause each other
Borrower not to, sell, lease, assign, transfer or otherwise dispose of any
of the Collateral or the Other Collateral, except for (i) sales of
Hydrocarbons in the ordinary course of Borrowers' respective businesses,
and (ii) as otherwise permitted pursuant to the Obligation Documents.
(k) Sale or Discount of Receivables. Debtor shall not, and shall
cause each other Borrower not to, discount or sell any of their notes
receivable or accounts receivable.
(l) Affiliate Transactions. Debtor shall not, and shall cause each
other Borrower not to, engage in any transaction with any of their
Affiliates, except on terms no less favorable than are obtainable in arms-
length transactions with third parties.
(m) Financing Statement Filings. Debtor recognizes that financing
statements pertaining to the Collateral and the Other Collateral have been
or may be filed where any Borrower maintains any Collateral or Other
Collateral, has its records concerning any Collateral or Other Collateral
or has its chief executive office or chief place of business. Without
limitation of any other covenant herein, Debtor shall not, and shall cause
each other Borrower not to, cause or permit any change to be made in its
name, identity or corporate structure, or any change to be made to a
jurisdiction other than as represented in Section 3.1(e) in (i) the
location of any Collateral or Other Collateral, (ii) the location of any
records concerning any Collateral or Other Collateral, or (iii) the
location of its chief executive office or principal place of business, or
any change to be made to the record owner of the Cowboy Real Property as
represented in Subsection 3.1(b), unless such Borrower has notified Secured
Party of such change at least thirty days prior to the effective date of
such change, and shall have first taken all action required by Secured
Party for the purpose of further perfecting or protecting the security
interest in favor of Secured Party in the Collateral and Other Collateral.
Each notice furnished to Secured Party pursuant to this Subsection 3.3(m)
shall expressly state that the notice is required by this Agreement and
contains facts that may require additional filings of financing statements
or other notices for the purposes of continuing perfection of Secured
Party's security interest in the Collateral and Other Collateral.
(n) Mergers and Sales of Assets. Debtor shall not, and shall cause
each other Borrower not to, merge or consolidate with or into any other
entity unless Debtor or such other Borrower, as the case may be, is the
surviving entity and no Event of Default has occurred or will occur as a
result of such merger or consolidation. Debtor shall not, and shall cause
each other Borrower not to, lease, sell or transfer all, or substantially
all, of its property assets or business to any other Person, or dispose of
or sell any material portion of its assets, property or business, or
dispose of any equity in any Affiliate.
(o) No Loans or Guarantees to Officers, Directors, Managers or
Shareholders/Partners. Debtor shall not, and shall cause each other
Borrower not to, directly or indirectly, make any guarantee, loan, advance,
extension of credit, commitment to fund, or commitment to satisfy in any
way, any debt, liability, or other obligation to pay any Person (except for
the other Borrowers), including its officers, directors, managers,
employees, shareholders, partners or any Affiliate of such Person,
including, without limitation (a) an obligation to any bank under any
letter of credit, (b) an obligation to maintain working capital or equity
capital of the business other than the initial investment, or (c) an
obligation to otherwise maintain the net worth or solvency of the business,
with respect to any business in which Debtor or such other Borrower is
engaged other than the business described in section 7.18 of the Financing
Agreement. Debtor shall not, and shall cause each other Borrower not to,
make any repayment on any Indebtedness owed to any of their respective
Affiliates, or any shareholder, member, officer, director, manager or
Affiliate of such Person, except as expressly permitted pursuant to the
Financing Agreement.
(p) Foreclosure. Debtor shall not, and shall cause each other
Borrower not to, attempt in any way to hinder or interfere with the
exercise of the power of sale granted in any of the Obligation Documents,
including without limitation the filing of a lis pendens, the initiation of
any lawsuit or the requesting of injunctive relief from any court or
tribunal, or any other action which would have the effect of hindering or
delaying the exercise by Secured Party of any right or remedy under this
Agreement or any other Obligation Document, and Debtor shall, and shall
cause each other Borrower to execute and deliver to Secured Party any
instrument reasonably requested by Secured Party and prepared at Debtor's
expense, which is necessary to fully vest title to the Collateral and the
Other Collateral or the purchaser(s) of all or part of the Collateral or
the Other Collateral pursuant to any sale as provided for in the Obligation
Documents.
ARTICLE IV
POWERS AND AUTHORIZATIONS
Section 4.1. Additional Financing Statement Filings. Debtor hereby
authorizes Secured Party to file, without the signature of Debtor where
permitted by law, one or more financing or continuation statements, and
amendments thereto, relating to the Collateral. Debtor further agrees that a
carbon, photographic or other reproduction of this Agreement or any financing
statement describing any Collateral is sufficient as a financing statement and
may be filed in any jurisdiction Secured Party may deem appropriate.
Section 4.2. Power of Attorney. Debtor hereby irrevocably appoints
Secured Party as Debtor's attorney-in-fact and proxy, with full authority in the
place and stead of Debtor and in the name of Debtor or otherwise, from time to
time in Secured Party's discretion to take any action and to execute any
instrument which Secured Party may deem necessary or advisable to accomplish the
purposes of this Agreement, including without limitation (i) to obtain and
adjust insurance required to be paid to Secured Party pursuant to
Section 3.2(h), (ii) to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral, (iii) to receive, endorse and collect
any drafts or other instruments, documents and chattel paper in connection with
clause (i) or clause (ii) above, (iv) to file any claims or take any action or
institute any proceedings which Secured Party may deem necessary or desirable
for the collection of any of the Collateral or otherwise to enforce the rights
of Secured Party with respect to any of the Collateral, and (v) to execute and
file one or more financing or continuation statements, and amendments thereto,
relating to the Collateral. Such appointment is coupled with an interest and
shall be irrevocable from the date hereof and so long as any part of the
Obligations or the Commitment is outstanding.
Section 4.3. Performance by Secured Party. If Debtor fails to perform
any agreement or obligation contained herein, Secured Party may itself, at its
option and in its sole discretion, perform, or cause performance of, such
agreement or obligation, and the expenses of Secured Party incurred in
connection therewith shall be payable by Debtor under Section 7.4; provided,
however, that nothing herein shall impose any obligation of any kind whatsoever
on Secured Party to perform under any obligation or agreement of Debtor.
ARTICLE V
EVENTS OF DEFAULT AND REMEDIES
Section 5.1. Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" hereunder:
(a) Failure of Debtor to pay any fee or other amount due Secured
Party under this Agreement within 10 days after the date that any such
payment is due;
(b) Failure of Debtor to perform or observe any covenant, agreement,
indemnity, condition or provision in this Agreement and such failure shall
continue for 30 days after written notice of such failure has been given to
Debtor;
(c) Any of Debtor's representations or warranties made in this
Agreement or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in
any material respect as of the date made or deemed made; or
(d) An "Event of Default" as defined in the Financing Agreement shall
occur.
Section 5.2. Remedies. Upon the occurrence of any Event of Default, or
at any time thereafter, in addition to all other rights, powers and remedies
herein conferred, conferred in the other Obligation Documents or conferred by
operation of law, Secured Party may declare the Obligations immediately due,
payable and performable, including all principal and interest remaining unpaid
on the Notes and all other amounts secured hereby or thereby, all without
demand, presentment or notice, all of which are hereby expressly waived; and
from time to time in its discretion, without limitation and without notice
except as expressly provided below Secured Party may:
(a) Exercise with respect to the Collateral all the rights and
remedies of a secured party on default under the Code (whether or not the
Code applies to the affected Collateral);
(b) Require Debtor to, and Debtor hereby agrees that it shall at its
expense and upon request of Secured Party forthwith, assemble all or part
of the Collateral as directed by Secured Party and make it available to
Secured Party at a place to be designated by Secured Party which is
reasonably convenient to both parties;
(c) Reduce its claim to judgment or foreclose or otherwise enforce,
in whole or in part, the security interest created hereby by any available
judicial procedure;
(d) Dispose of, at its office, on the premises of Debtor or
elsewhere, all or any part of the Collateral, as a unit or in parcels, by
public or private proceedings, and by way of one or more contracts (it
being agreed that the sale of any part of the Collateral shall not exhaust
Secured Party's power of sale, but sales may be made from time to time, and
at any time, until all of the Collateral has been sold or until the
obligations have been paid and performed in full), and at any such sale it
shall not be necessary to exhibit any of the Collateral;
(e) Buy the Collateral, or any portion thereof, at any public sale;
(f) Buy the Collateral, or any portion thereof, at any private sale
if the Collateral is of a type customarily sold in a recognized market or
is of a type that is the subject of widely distributed standard price
quotations;
(g) Apply by appropriate judicial proceedings for appointment of a
receiver for the Collateral, or any part thereof, and Debtor hereby
consents to any such appointment; and
(h) At its discretion, retain the Collateral in satisfaction of the
Obligations whenever the circumstances are such that Secured Party is
entitled to do so under the Code or otherwise.
Debtor agrees that, to the extent notice of sale shall be required by law, five
days' notice to Debtor of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. Secured Party shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. Secured Party may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
Section 5.3. Sale of Securities. Debtor recognizes that Secured Party
may be unable to effect a public sale of any or all the portions of Collateral
that constitute securities by reason of certain prohibitions contained in the
Securities Act of 1933, as amended and applicable state securities laws, but may
be compelled to resort to one or more private sales thereof to a restricted
group of purchasers who will be obliged to agree, among other things, to acquire
such securities for their own account for investment and not with a view to the
distribution or resale thereof. Debtor acknowledges and agrees that any such
private sale may result in prices and other terms less favorable to the seller
than if such sale were a public sale and, notwithstanding such circumstances,
agrees that any such private sale shall be deemed to have been made in a
commercially reasonable manner. Secured Party shall be under no obligation to
delay a sale of any of such securities for the period of time necessary to
permit Debtor to register such securities for public sale under the Securities
Act of 1933, as amended, or under applicable state securities laws.
Section 5.4. Application of Proceeds. Upon the occurrence of any Event
of Default, or at any tine thereafter, Secured Party may in its discretion apply
any cash held by Secured Party as Collateral, and any cash proceeds received by
Secured Party with respect to any sale of, collection from, or other realization
upon all or any part of the Collateral, to any or all of the following in such
order as Secured Party may elect:
(a) To the repayment of the reasonable out-of-pocket costs and
expenses, including attorneys' fees and legal expenses, incurred by Secured
Party in connection with (i) the administration of this Agreement, (ii) the
custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any Collateral, (iii) the exercise or
enforcement of any of the rights of Secured Party hereunder; or (iv) the
failure of Debtor to perform or observe any of the provisions hereof;
(b) To the payment or other satisfaction of any liens and other
encumbrances upon any of the Collateral;
(c) To the reimbursement of Secured Party for the amount of any
obligations of Debtor or any Other Liable Party paid or discharged by
Secured Party pursuant to the provisions of this Agreement or the other
Obligation Documents, and of any expenses of Secured Party payable by
Debtor hereunder or under the other Obligation Documents;
(d) To the satisfaction of any other Obligations or any other
indebtedness of Debtor to Secured Party;
(e) By holding the same as Collateral;
(f) To the payment of any other amounts required by applicable law
(including without limitation, Section 9-504(1)(c) of the Code or any
successor or similar, applicable statutory provision); and
(g) By delivery to Debtor or to whomsoever shall be lawfully entitled
to receive the same or as a court of competent jurisdiction shall direct.
Section 5.5. Deficiency. In the event that the proceeds of any sale,
collection or realization of or upon the Collateral by Secured Party are
insufficient to pay all amounts to which Secured Party is legally entitled,
Debtor shall be liable for the deficiency, together with interest thereon as
provided in the governing Obligation Documents or (if no interest is so
provided) at such other rate as shall be fixed by applicable law, together with
the costs of collection and the fees and expenses of any attorneys employed by
Secured Party to collect such deficiency.
Section 5.6. Non-Judicial Remedies. In granting to Secured Party the
power to enforce its rights hereunder without prior judicial process or judicial
hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal
right which might otherwise require Secured Party to enforce its rights by
judicial process. In so providing for non-judicial remedies, Debtor recognizes
and concedes that such remedies are consistent with the usage of trade, are
responsive to commercial necessity, and are the result of a bargain at arm's
length. Nothing herein is intended to prevent Secured Party or Debtor from
resorting to judicial process at either party's option.
Section 5.7. Other Recourse. Debtor waives any right to require Secured
Party to proceed against any other Person, exhaust any Collateral or other
security for the Obligations, or to have any Other Liable Party joined with
Debtor in any suit arising out of the Obligations or this Agreement, or pursue
any other remedy in Secured Party's power. Debtor further waives any and all
notice of acceptance of this Agreement and of the creation, modification,
rearrangement, renewal or extension for any period of any of the Obligations of
any Other Liable Party from time to time. Debtor further waives any defense
arising by reason of any disability or other defense of any Other Liable Party
or by reason of the cessation from any cause whatsoever of the liability of any
other Liable Party. Until all of the Obligations shall have been paid in full
and the Commitment has terminated or expired, Debtor shall have no right to
subrogation and Debtor waives the right to enforce any remedy which Secured
Party has or may hereafter have against any Other Liable Party, and waives any
benefit of and any right to participate in any other security whatsoever now or
hereafter held by Secured Party. No action which Secured Party may take or omit
to take in connection with any of the Obligation Documents or any of the
Obligations shall release or diminish Debtor's obligations, liabilities, duties
or agreements hereunder, including without limitation, from time to time:
(a) taking or holding any other property of any type from any other Person as
security for the obligations, and exchanging, enforcing, waiving and releasing
any or all of such other property, (b) applying the Collateral or such other
property and directing the order or manner of sale thereof as Secured Party may
in its discretion determine which is not inconsistent with the Obligation
Documents, (c) renewing, extending for any period, accelerating, modifying,
compromising, settling or releasing any of the obligations of any Other Liable
Party with respect to any or all of the obligations or other security for the
obligations, (d) waive, enforce, modify, amend or supplement any of the
provisions of any Obligation Document with any Person other than Debtor, and
(e) release or substitute any Other Liable Party.
Section 5.8. Remedies Not Exclusive. All rights, powers and remedies
herein conferred are cumulative, and not exclusive, of (i) any and all other
rights and remedies herein conferred or provided for, (ii) any and all other
rights, powers and remedies conferred or provided for in the Obligation
Documents, and (iii) any and all rights, powers and remedies conferred, provided
for or existing at law or in equity, and Secured Party shall, in addition to the
rights, powers and remedies herein conferred or provided for, be entitled to
avail itself of all such other rights, powers and remedies as may now or
hereafter exist at law or in equity for the collection of and enforcement of the
Obligations and the enforcement of the warranties, representations, covenants,
indemnities and other agreements contained in this Agreement and the Obligation
Documents. Each and every such right, power and remedy may be exercised from
time to time and as often and in such order as may be deemed expedient by
Secured Party and the exercise of any such right, power or remedy shall not be
deemed a waiver of the right to exercise, at the same time or thereafter, any
other right, power or remedy. No delay or omission by Secured Party or other
person in the exercise of any right, power or remedy will impair any such right,
power or remedy or operate as a waiver thereof or of any other right, power or
remedy then or thereafter existing.
ARTICLE VI
ENVIRONMENTAL INDEMNITY
Debtor agrees to indemnify, defend, and hold harmless Secured Party, its
affiliates and related parties, and their respective directors, officers,
shareholders, partners, members, employees, consultants and agents
(individually, an "Indemnified Party," and collectively, "Indemnified Parties")
from and against, and shall reimburse and pay Indemnified Parties with respect
to, any and all claims, demands, liabilities, losses, damages (including without
limitation actual, consequential, exemplary and punitive damages), causes of
action, judgments, penalties, fees, costs and expenses (including without
limitation attorneys' fees, court costs and legal expenses and consultant's and
expert's fees and expenses) of any and every kind or character, known or
unknown, fixed or contingent, that may be imposed upon, asserted against, or
incurred or paid by or on behalf of any Indemnified Party on account of, in
connection with, or arising out of (a) the breach of any representation or
warranty of Debtor relating to Environmental Laws or Hazardous Materials or any
matter that would, but for the disclosure of such matter to Secured Party in
writing in accordance with Section 3.1(f), constitute or give rise to the breach
of any representation or warranty of Debtor relating to Environmental Laws or
Hazardous Materials, (b) the failure of Borrowers to perform any agreement,
covenant or obligation required to be performed by Borrowers relating to
Environmental Laws or Hazardous Materials, (c) any violation of or failure to
comply with any Environmental Law now existing or hereafter occurring, (d) the
removal of Hazardous Materials from the Collateral or the Other Collateral (or
if removal is prohibited by law, the taking of whatever action is required by
law), (e) any act, omission, event or circumstance existing or occurring or
resulting from or in connection with the ownership, construction, occupancy,
operation, use or maintenance of the Collateral or the Other Collateral,
regardless of whether the act, omission, event or circumstance constituted a
violation of or failure to comply with any Environmental Law at the time of its
existence or occurrence, and (f) any and all claims or proceedings (whether
brought by private party or governmental agency) for bodily injury, property
damage, abatement or remediation, environmental damage, or impairment or any
other injury or damage resulting from or relating to any Hazardous Material
located upon or migrating into, on, from or through the Collateral or the Other
Collateral (whether or not any or all of the foregoing was caused by Borrowers,
a prior owner of the Collateral or the Other Collateral, an operator or prior
operator of the Collateral or the Other Collateral, their respective tenants or
subtenants, or any third party and whether or not the alleged liability is
attributable to the handling, storage, use, treatment, processing, distribution,
manufacture, generation, discharge, transportation or disposal of such Hazardous
Material or the mere presence of such Hazardous Material on the Collateral or
the Other Collateral). Without limiting the generality of the foregoing, it is
the intention of Debtor and Debtor agrees that the foregoing indemnities shall
apply to each Indemnified Party with respect to claims, demands, liabilities,
losses, damages (including without limitation actual, consequential, exemplary
and punitive damages), causes of action, judgments, penalties, fees, costs,
court costs and legal expenses and consultant's and expert's fees and expenses,
of any kind or character, known or unknown, fixed or contingent, that in whole
or in part are caused by or arise out of the negligence of such Indemnified
Party; however, such indemnities shall not apply to any Indemnified Party to the
extent the subject of the indemnification is caused by or arises out of the
gross negligence or willful misconduct of such Indemnified Party. Any amount to
be paid hereunder by Debtor to Secured Party or for which Debtor has indemnified
an Indemnified Party shall be a demand obligation owing by Debtor to Secured
Party and shall bear interest at the Default Rate until paid, and shall
constitute a part of the Obligations and shall be indebtedness secured and
evidenced by this Agreement. The foregoing agreements shall be perpetual and
shall survive the payment or satisfaction of the Obligations and the release of
this Agreement and the foreclosure or other termination of the liens and
security interests created by this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Notices. Any notice or communication required or permitted
hereunder shall be given as provided in the Financing Agreement.
Section 7.2. Entire Agreement. This Agreement (including the Exhibits
hereto) and the Obligation Documents constitutes the entire understanding
between the parties with respect to the subject matter hereof and supersedes all
negotiations, prior discussions and prior agreements and understandings relating
to such subject matter.
Section 7.3. Indemnity. Debtor agrees to indemnify, defend and hold
harmless Secured Party, upon request, from and against any and all claims,
losses and liabilities (whether or not caused by Secured Party's negligence)
growing out of or resulting from this Agreement (including without limitation,
enforcement of this Agreement); provided, however, that Debtor shall not be
required to indemnify Secured Party for that portion of any such claims, losses
or liabilities which are proximately caused by Secured Party's gross negligence
or willful misconduct. If any Person (including, without limitation, any
Related Person) ever alleges such gross negligence or willful misconduct by
Secured Party, the indemnification provided for in this section shall
nonetheless be paid upon demand, subject to later adjustment or reimbursement,
until such time as a court of competent jurisdiction enters a final judgment as
to the extent and effect of the alleged gross negligence or willful misconduct.
Section 7.4. Costs and Expenses. Debtor shall upon demand pay to Secured
Party the amount of any and all costs and expenses, including the fees and
disbursements of Secured Party's counsel and of any experts and agents, which
Secured Party may incur in connection with (a) the transactions which give rise
to this Agreement, (b) the preparation of this Agreement and the perfection and
preservation of the security interest created under this Agreement, (c) the
administration of this Agreement, (d) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any
Collateral, (e) the exercise or enforcement of any of the rights of Secured
Party hereunder, or (f) the failure by Debtor to perform or observe any of the
provisions hereof, except expenses resulting from Secured Party's gross
negligence or willful misconduct. This Section 7.4 shall not govern matters
that are covered by Article VI.
Section 7.5. Amendments. No amendment of any provision of this Agreement
shall be effective unless it is in writing and signed by Debtor and Secured
Party, and no waiver of any provision of this Agreement, and no consent to any
departure by Debtor therefrom, shall be effective unless it is in writing and
signed by Secured Party, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given and to
the extent specified in such writing.
Section 7.6. Preservation of Rights. No failure on the part of Secured
Party to exercise, and no delay in exercising, any right hereunder or under any
other Obligation Document shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. Neither the execution nor
the delivery of this Agreement shall in any manner impair or affect any other
security for the Obligations. The rights of Secured Party under any Obligation
Document against any party thereto are not conditional or contingent on any
attempt by Secured Party to exercise any of its rights under any other
Obligation Document against such party or against any other Person.
Section 7.7. Unenforceability. All rights, powers and remedies hereunder
conferred shall be exercisable by Secured Party only to the extent not
prohibited by applicable law; and all waivers or relinquishments of rights and
similar matters shall only be effective to the extent such waiver or
relinquishments are not prohibited by applicable law. If any provision of this
Agreement or of any of the Obligation Documents is invalid or unenforceable in
any jurisdiction, such provision shall be fully and severable from this
Agreement and the other provisions hereof and the Obligation Documents shall
remain in full force and effect in such jurisdiction and the remaining
provisions hereof shall be liberally construed in favor of Secured Party in
order to carry out the provisions and intent hereof. The invalidity of any
provision of this Agreement in any jurisdiction shall not affect the validity or
enforceability of any such provision in any other jurisdiction.
Section 7.8. Survival of Agreements. All representations and warranties
of Debtor herein, and all covenants and agreements herein shall survive the
execution and delivery of this Agreement, the execution and delivery of the
other Obligation Documents and the creation of the Obligations.
Section 7.9. Other Liable Party. Neither this Agreement nor the exercise
by Secured Party or the failure of Secured Party to exercise any right, power or
remedy conferred herein or by law shall be construed as relieving any Other
Liable Party from liability on the Obligations or any deficiency thereon. This
Agreement shall continue irrespective of the fact that the liability of any
Other Liable Party may have ceased or irrespective of the validity or
enforceability of any other Obligation Document to which Debtor or any Other
Liable Party may be a party, and notwithstanding the reorganization, death,
incapacity or bankruptcy of any Other Liable Party, and notwithstanding the
reorganization or bankruptcy or other event or proceeding affecting any Other
Liable Party.
Section 7.10. Binding Effect and Assignment. This Agreement creates a
continuing security interest in the Collateral and (a) shall be binding on
Debtor and its successors and permitted assigns, and (b) shall inure, together
with all rights and remedies of Secured Party hereunder, to the benefit of
Secured Party and its successors, transferees and assigns. Without limiting the
generality of the foregoing, Secured Party may assign or otherwise transfer its
rights under any Obligation Document to any other Person, and such other Person
shall thereupon become vested with all of the benefits with respect thereto
granted to Secured Party, herein or otherwise. None of the rights or
obligations of Debtor hereunder may be assigned or otherwise transferred without
the prior written consent of Secured Party.
Section 7.11. Termination. It is contemplated by the parties hereto that
there may be times when no Obligations are outstanding, but notwithstanding such
occurrences, this Agreement shall remain valid and shall be in full force and
effect as to subsequent outstanding obligations. Upon the satisfaction in full
of the Obligations, upon the termination or expiration of the Commitment and any
other commitment of Secured Party to extend credit to Debtor, and upon written
request delivered by Debtor to Secured Party, the security interest created by
this Agreement shall terminate and all rights to the Collateral shall revert to
Debtor. Upon such event, Secured Party shall, upon Debtor's request and at
Debtor's expense (a) return to Debtor such of the Collateral as shall not have
been sold or otherwise disposed of or applied pursuant to the terms hereof, and
(b) execute and deliver to Debtor such documents as Debtor shall reasonably
request to evidence such termination. The termination of the security interests
created by this Agreement, shall not terminate or otherwise affect Secured
Party's right or ability to exercise any right, power or remedy on account of
any claim for breach of warranty or representation, for failure to perform any
covenant or other agreement, under any indemnity or for fraud, deceit or other
misrepresentation or omission.
Section 7.12. Financing Statement. This Agreement shall be deemed to be
and may be enforced from time to time as an assignment, contract, financing
statement, fixture filing, pledge agreement or security agreement, and from time
to time as one or more thereof is appropriate under applicable state law. A
carbon, photographic or other reproduction of this Agreement or of any financing
statement in connection herewith shall be sufficient as a financing statement
for any and all purposes.
Section 7.13. Rate of Interest. All interest required hereunder and under
the Obligations shall be calculated on the basis of a year of 360 days.
Section 7.14. Execution in Counterparts. This Agreement may be executed
in one or more original counterparts. Each counterpart shall be deemed to be an
original for all purposes, and all counterparts shall together constitute but
one and the same instrument.
Section 7.15 WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. DEBTOR HEREBY:
(A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE
FINANCING AGREEMENT OR ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING
OR RELATING TO THE OBLIGATIONS OR ANY TRANSACTION PROVIDED FOR THEREIN OR
ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES
THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY
HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND
(D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE
NOTES, THE FINANCING AGREEMENT AND ANY OTHER DOCUMENTS AND INSTRUMENTS
EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS AND THE TRANSACTIONS
PROVIDED FOR HEREIN AND THEREIN, BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION.
Section 7.16 USURY SAVINGS. IT IS THE INTENTION OF THE PARTIES HERETO TO
COMPLY WITH ALL APPLICABLE USURY LAWS; ACCORDINGLY, IT IS AGREED THAT
NOTWITHSTANDING ANY PROVISIONS TO THE CONTRARY IN THIS INSTRUMENT, THE NOTES,
THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING,
SECURING OR OTHERWISE RELATING TO THE OBLIGATIONS, IN NO EVENT SHALL SUCH
DOCUMENTS OR INSTRUMENTS REQUIRE THE PAYMENT OR PERMIT THE COLLECTION OF
INTEREST (WHICH TERM, FOR PURPOSES HEREOF, SHALL INCLUDE ANY AMOUNT WHICH, UNDER
APPLICABLE LAW, IS DEEMED TO BE INTEREST, WHETHER OR NOT SUCH AMOUNT IS
CHARACTERIZED BY THE PARTIES AS INTEREST) IN EXCESS OF THE MAXIMUM AMOUNT
PERMITTED BY SUCH LAWS. IF ANY EXCESS INTEREST IS UNINTENTIONALLY CONTRACTED
FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THE TERMS OF THIS INSTRUMENT,
THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING,
SECURING OR RELATING TO THE OBLIGATIONS, OR IN THE EVENT THE MATURITY OF THE
INDEBTEDNESS EVIDENCED BY THE NOTES IS ACCELERATED IN WHOLE OR IN PART, OR IN
THE EVENT THAT ALL OR PART OF THE PRINCIPAL OR INTEREST OF THE NOTES SHALL BE
PREPAID, SO THAT THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED
UNDER THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES
OR UNDER THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR
INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, ON THE AMOUNT
OF PRINCIPAL ACTUALLY OUTSTANDING FROM TIME TO TIME UNDER THE NOTES SHALL EXCEED
THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY THE APPLICABLE USURY LAWS, THEN IN
ANY SUCH EVENT (A) THE PROVISIONS OF THIS SECTION SHALL GOVERN AND CONTROL,
(B) NEITHER DEBTOR OR THE OTHER BORROWERS NOR ANY OTHER PERSON OR ENTITY NOW OR
HEREAFTER LIABLE FOR THE PAYMENT THEREOF, SHALL BE OBLIGATED TO PAY THE AMOUNT
OF SUCH INTEREST TO THE EXTENT THAT IT IS IN EXCESS OF THE MAXIMUM AMOUNT OF
INTEREST PERMITTED BY SUCH APPLICABLE USURY LAWS, (C) ANY SUCH EXCESS WHICH MAY
HAVE BEEN COLLECTED SHALL BE EITHER APPLIED AS A CREDIT AGAINST THE THEN UNPAID
PRINCIPAL AMOUNT THEREOF OR REFUNDED TO BORROWERS AT SECURED PARTY'S OPTION,
AND (D) THE EFFECTIVE RATE OF INTEREST SHALL BE AUTOMATICALLY REDUCED TO THE
MAXIMUM LAWFUL RATE OF INTEREST ALLOWED UNDER THE APPLICABLE USURY LAWS AS NOW
OR HEREAFTER CONSTRUED BY THE COURTS HAVING JURISDICTION THEREOF. IT IS FURTHER
AGREED THAT WITHOUT LIMITATION OF THE FOREGOING, ALL CALCULATIONS OF THE RATE OF
INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS
AGREEMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS
EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS WHICH ARE MADE FOR THE
PURPOSE OF DETERMINING WHETHER SUCH RATE EXCEEDS THE MAXIMUM LAWFUL RATE OF
INTEREST, SHALL BE MADE, TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAWS, BY
AMORTIZING, PRORATING, ALLOCATING AND SPREADING IN EQUAL PARTS DURING THE PERIOD
OF THE FULL STATED TERM OF THE OBLIGATIONS EVIDENCED THEREBY, ALL INTEREST AT
ANY TIME CONTRACTED FOR, CHARGED OR RECEIVED FROM BORROWERS OR OTHERWISE BY
SECURED PARTY IN CONNECTION WITH THE OBLIGATIONS.
Section 7.17 GOVERNING LAW. THIS INSTRUMENT AND ALL MATTERS ARISING UNDER
OR GROWING OUT HEREOF SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO ITS
PRINCIPLES OF CONFLICTS OF LAWS, AND THE LAWS OF THE UNITED STATES OF AMERICA,
EXCEPT TO THE EXTENT THAT PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO
THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS, SECURITY
INTERESTS AND OTHER RIGHTS AND REMEDIES OF THIS AGREEMENT GRANTED HEREIN ARE
PURSUANT TO APPLICABLE LAW GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
COMMONWEALTH OF MASSACHUSETTS. EXCEPT AS TO THE VALIDITY, CREATION, PERFECTION
AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED HEREBY, DEBTOR AND
SECURED PARTY AGREE THAT THE TRANSACTIONS PROVIDED FOR HEREIN BEAR A REASONABLE
RELATIONSHIP TO THE COMMONWEALTH OF MASSACHUSETTS AND THAT THE LAW OF THE
COMMONWEALTH OF MASSACHUSETTS GOVERNS (A) ISSUES RELATING TO THE TRANSACTIONS
PROVIDED FOR HEREIN, INCLUDING THE VALIDITY AND ENFORCEABILITY OF AN AGREEMENT
RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT, AND (B) THE
INTERPRETATION OR CONSTRUCTION OF AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR
A PROVISION OF AN AGREEMENT.
This Agreement is executed and delivered as of the date first above
written.
DEBTOR:
FORELAND ASPHALT CORPORATION, a
Utah corporation
By: /s/ Bruce C. Decker, President
Taxpayer I.D. No. 84-1669800
SECURED PARTY:
ENERGY INCOME FUND, L.P., a
Delaware limited partnership
By: EIF GENERAL PARTNER, L.L.C., a
Delaware limited liability company, its
General Partner
By: /s/ Robert D. Gershen, a Managing Director
Taxpayer I.D. No. 04-3309082
EXECUTION COPY
PLEDGE AND SECURITY AGREEMENT
(COWBOY ASPHALT TERMINAL, L.L.C. MEMBERSHIP INTERESTS)
This Pledge and Security Agreement (this "Agreement"), dated as of February
4, 1999, is from FORELAND ASPHALT CORPORATION, a Utah corporation ("Pledgor"),
to ENERGY INCOME FUND, L.P., a Delaware limited partnership ("Pledgee").
RECITALS
A. Foreland Corporation, a Nevada corporation ("Foreland Corp.") and
Pledgee are parties to a Financing Agreement dated as of January 6, 1998 (the
"Original Financing Agreement") between Foreland Corp. and Eagle Springs
Production Limited Liability Company, a Nevada limited liability company ("Eagle
Springs"), as borrowers, and Pledgee.
B. By a First Amendment to Financing Agreement dated as of August 10,
1998 (the "First Amendment to Financing Agreement") by and among Foreland Corp.,
Eagle Springs, Foreland Refining Corporation, a Texas corporation ("Foreland
Refining"), Foreland Asset Corporation, a Nevada corporation ("Foreland Asset"),
Petrosource Transportation, a Utah corporation now known as Foreland
Transportation, Inc. ("Transportation"), and Pledgor, as borrowers, and Pledgee,
the Original Financing Agreement was amended to, among other things, add
Pledgor, Foreland Refining, Foreland Asset and Transportation as borrowers
thereunder. Foreland Corp., Eagle Springs, Foreland Refining, Foreland Asset,
Transportation and Pledgor are referred to collectively as "Borrowers".
C. By a Second Amendment to Financing Agreement of even date herewith
(the "Second Amendment to Financing Agreement") by and among Borrowers and
Pledgee, Pledgee agreed to, on the terms and conditions set forth therein, make
Loans (as defined below) to Borrowers for the purpose of, among other things,
Pledgor's acquisition of a membership interest in Cowboy Asphalt Terminal,
L.L.C., a Utah limited liability company ("Cowboy"). The Original Financing
Agreement as amended by the First Amendment to Financing Agreement and the
Second Amendment to Financing Agreement and as it may be further amended from
time to time is herein referred to as the "Financing Agreement".
D. Pursuant to the Financing Agreement, Pledgee has agreed to extend
credit by agreeing to make, subject to the terms and conditions set forth in the
Financing Agreement, the following loans (collectively, the "Loans") to
Borrowers: (i) a Refinancing Loan (as such term is defined in the Financing
Agreement) in an aggregate principal amount of up to $674,279.34; (ii) a
Development Loan (as such term is defined in the Financing Agreement) in an
aggregate principal amount of up to $7,175,720.66; and (iii) an Acquisition Loan
(as such term is defined in the Financing Agreement) in an aggregate principal
amount of up to $9,050,000, in each case in one or more advances and for the
purposes set forth in the Financing Agreement.
E. Pledgor, Foreland Refining, Foreland Asset, and Eagle Springs are
wholly-owned subsidiaries of Foreland Corp., and Transportation is a wholly-
owned subsidiary of Foreland Asset. Pledgor is the owner of a 33.33% membership
interest in Cowboy.
F. Cowboy owns the property, rights and interests described on Exhibit A
attached hereto (the "Cowboy Properties").
G. It is a condition precedent to such extension of credit by Pledgee
pursuant to the Financing Agreement that, among other things, Pledgor shall have
executed and delivered to Pledgee a pledge and security agreement granting to
Pledgee a security interest in the Collateral (as defined below).
AGREEMENT
In consideration of the foregoing recitals and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
in order to induce Pledgee to extend such credit under the Financing Agreement,
Pledgor hereby agrees with Pledgee as follows:
ARTICLE I
DEFINITIONS AND REFERENCES
Section 1.1. General Definitions. As used herein, the terms "Agreement,"
"Pledgor," "Pledgee," "Foreland Corp.," "Original Financing Agreement," "Eagle
Springs," "First Amendment to Financing Agreement," "Foreland Refining,"
"Foreland Asset," "Transportation," "Borrowers," "Second Amendment to Financing
Agreement," "Cowboy," "Financing Agreement," "Loans" and "Cowboy Properties"
shall have the meanings ascribed thereto above, and the following terms shall
have the following meanings:
(a) The term "Acquisition Note" shall mean the Acquisition Note,
dated as of January 6, 1998, in the maximum principal amount of $2,327,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Acquisition Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Pledgor as makers and obligors thereunder.
(b) The term "Affiliate" shall mean, with respect to any Person, any
other Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control
with such Person, and any other Person that is an officer, director, or
full-time employee of such other Person.
(c) The term "Business Day" shall mean any day on which national
banking institutions in Massachusetts are open for the transaction of
banking business.
(d) The term "Code" shall mean the Uniform Commercial Code currently
in effect in the Commonwealth of Massachusetts; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, priority or exercise of remedies of Pledgee's
security interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than the Commonwealth of
Massachusetts, the term "Code" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof
relating to such attachment, perfection, priority or exercise of remedies
and for purposes of definitions related to such provisions.
(e) The term "Collateral" shall mean all property of whatever type,
in which Pledgee at any time has a security interest pursuant to
Section 2.1.
(f) The term "Commitment" shall mean the agreement or commitment by
Pledgee to make loans or otherwise extend credit to Borrowers under the
Financing Agreement, and any other agreement, commitment, statement of
terms or other document contemplating the making of loans or advances or
other extension of credit by Pledgee to or for the account of Borrowers
which is now or at any time hereafter intended to be secured by the
Collateral under this Agreement.
(g) The term "Cowboy/Foreland Properties" shall mean the real
property described on Exhibit A attached hereto and the buildings,
improvements and structures described on Exhibit A or located on the real
property described on Exhibit A by or on behalf of Cowboy after the date of
this Agreement (excluding buildings, improvements and structures either (i)
located on such real property by a member of Cowboy other than Pledgor on
its own behalf that do not constitute Cowboy property or (ii) designated
for the exclusive use of Crown in accordance with the LLC Agreement).
(h) The term "Crown" shall mean Crown Asphalt Products Company, a
Utah corporation and a wholly owned subsidiary of Crown Energy Corporation,
a Utah corporation.
(i) The term "Default" shall mean any Event of Default or any event
that with the giving of notice or the passage of time, or both, would
constitute an Event of Default.
(j) The term "Development Note" shall mean the Development Note,
dated as of January 6, 1998, in the maximum principal amount of $13,893,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Development Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Pledgor as makers and obligors thereunder.
(k) The term "Environmental Laws" shall have the meaning ascribed
thereto in Section 3.1(j).
(l) The term "Event of Default" shall have the meaning ascribed
thereto in Section 5.1.
(m) The term "Hazardous Materials" shall have the meaning ascribed
thereto in Section 3.1(j).
(n) The term "Hydrocarbons" shall have the meaning ascribed thereto
in the Refinery Deed of Trust.
(o) The terms "Indemnified Party" and "Indemnified Parties" shall
have the meanings ascribed thereto in Article VI.
(p) The term "Lien" shall mean any lien, security interest, burden,
adverse claim, option, put, call, warrant or other charge, encumbrance or
restriction of any kind.
(q) The term "LLC Agreement" shall mean that certain Operating
Agreement for Cowboy Asphalt Terminal, L.L.C. dated as of February 12, 1999
between Pledgor and Crown.
(r) The term "Notes" shall mean the Refinancing Note, the Development
Note and the Acquisition Note.
(s) The term "Obligations" shall mean all present and future
indebtedness, obligations and liabilities of whatever type which are or
shall be secured pursuant to Section 2.2.
(t) The term "Obligation Documents" shall mean this Agreement, the
Financing Agreement, the Notes, and all other documents and instruments
under, by reason of which, or pursuant to which any or all of the
Obligations are evidenced, governed, secured or otherwise dealt with, and
all other agreements, certificates, legal opinions, documents, instruments
and other writings heretofore or hereafter delivered in connection herewith
or therewith.
(u) The term "Other Collateral" shall mean all property, rights and
interests (present and future, personal and real, tangible and intangible)
of Borrowers (whether now owned or hereafter acquired by operation of law
or otherwise), or in which Borrowers otherwise (whether now or hereafter)
have any rights, including, without limitation, all fixtures, accounts,
goods, inventory, instruments, equipment, chattel paper, documents and
general intangibles (as such terms are defined in the Code), that now or
hereafter constitute or are intended to constitute security for any of the
Obligations under any Obligation Document but that do not constitute
Collateral under this Agreement.
(v) The term "Other Liable Party" shall mean any Person, other than
Pledgor, who may now or may at any time hereafter be primarily or
secondarily liable for any of the Obligations or who may now or may at any
time hereafter have granted to Pledgee a security interest or lien upon any
property as security for the Obligations including, without limitation,
Borrowers.
(w) The term "Person" shall mean an individual, corporation,
association, partnership, limited liability company, joint stock company,
joint venture, trust or trustee thereof, estate or executor thereof,
unincorporated organization or joint venture, court or governmental unit or
any agency or subdivision thereof, or any legally recognizable entity.
(x) The term "Pledged LLC Interests" shall mean all of the issued and
outstanding membership interests in Cowboy owned by Pledgor or in which
Pledgor otherwise has any rights.
(y) The term "Proposed Hydrocarbon Contracts" shall have the meaning
ascribed thereto in Section 3.2(t).
(z) The term "Refinancing Note" shall mean the Refinancing Note,
dated as of January 6, 1998, in the maximum principal amount of $680,000
made by Foreland Corp. and Eagle Springs, as amended and supplemented by
First Allonge to Refinancing Note, dated August 10, 1998, and executed by
Borrowers, which, among other things, added Foreland Refining, Foreland
Asset, Transportation and Pledgor as makers and obligors thereunder.
(aa) The term "Refinery Deed of Trust" shall mean the Deed of Trust,
Security Agreement, Assignment of Rents, Profits and Proceeds, Financing
Statement and Fixture Filing dated as of August 11, 1998, from Foreland
Corp., Foreland Refining and Foreland Asset as debtors, to First American
Title Company of Nevada, as trustee for the benefit of Pledgee, and
recorded or to be recorded in the real property records of Nye County,
State of Nevada.
(bb) The term "Refinery Facilities" shall mean (i) the refinery and
related facilities located in part in the E/2 SE/4 of Section 24, T. 9 N.,
R. 56 E., M.D.M., County of Nye, State of Nevada, and sometimes referred to
as the Eagle Springs Refinery, and (ii) the refinery and related facilities
located in part on 63 acres within or adjacent to the Tonopah Airport,
County of Nye, State of Nevada.
(cc) The term "Related Person" shall mean Pledgor, each Affiliate
of Pledgor, each Other Liable Party and Cowboy.
(dd) The term "RTI Agreement" shall mean that certain Assignment and
Agreement entered into on September 11, 1998 by and among Cowboy, Crown, Pledgor
and Refinery Technologies, Inc., a Utah corporation, a true and correct copy of
which has previously been furnished to Secured Party.
(ee) The term "Securities Act" shall mean the Securities Act of 1933,
as amended.
Section 1.2. References. Reference is hereby made to the Financing
Agreement for a statement of the terms thereof. All capitalized terms used in
this Agreement which are defined in the Financing Agreement and not otherwise
defined herein shall have the same meanings herein as set forth therein. All
terms used in this Agreement which are defined in Article 8 or Article 9 of the
Code and not otherwise defined herein or in the Financing Agreement shall have
the same meanings herein as set forth therein, except where the context
otherwise requires.
Section 1.3. Exhibits and Schedules. All exhibits and schedules attached
to this Agreement are a part hereof for all purposes.
Section 1.4. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein, references in this
Agreement to a particular agreement, instrument or document (including without
limitation, references in Section 2.1) also refer to and include all renewals,
extensions, amendments, modifications, supplements or restatements of any such
agreement, instrument or document, provided that nothing contained in this
Section 1.4 shall be construed to authorize any Person to execute or enter into
any such renewal, extension, amendment, modification, supplement or restatement.
Section 1.5. References and Titles. All references in this Agreement to
Exhibits, Schedules, Articles, Sections, Subsections, and other subdivisions
refer to the Exhibits, Schedules, Articles, Sections, Subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles and
headings appearing at the beginning of any subdivision are for convenience only
and do not constitute any part of any such subdivision and shall be disregarded
in construing the language contained in this Agreement. The words "this
Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. The phrases "this Section" and "this Subsection"
and similar phrases refer only to the Sections or Subsections hereof in which
the phrase occurs. The word "or" is not exclusive. Pronouns in masculine,
feminine and neuter gender shall be construed to include any other gender.
Words in the singular form shall be construed to include the plural, and words
in the plural form shall be construed to include the singular, unless the
context otherwise requires.
ARTICLE II
SECURITY INTEREST
Section 2.1. Grant of Security Interest. As security for all of the
Obligations, Pledgor hereby pledges and assigns to Pledgee and grants to and for
the benefit of Pledgee a continuing security interest in all of the following
whether now owned or hereafter acquired (by operation of law of otherwise):
(a) Membership Interests. All of the following, whether now or
hereafter existing, which are owned by Pledgor or in which Pledgor
otherwise has any rights: (i) the Pledged LLC Interests, and any and all
certificates representing the Pledged LLC Interests, whether now or
hereafter issued by Cowboy, (ii) all membership interests, securities and
other property, rights or interests of any description at any time issued
or issuable by Cowboy as an addition to, in substitution or exchange for or
with respect to the Pledged LLC Interests, including without limitation any
additional membership interests issued by Cowboy and the certificates, if
any, representing such additional membership interests and securities or
other instruments convertible into or exchangeable for membership interests
of Cowboy, and (iii) all dividends and distributions (including, without
limitation, dividends and distributions of membership interests or other
securities of Cowboy), cash, instruments and other property from time to
time received, receivable or otherwise distributed with respect to or in
exchange for any or all of the Pledged LLC Interests or any of the
membership interests, securities or other property described in clause (ii)
of this Subsection 2.1(a) for any reason, including, without limitation,
any change in the number or kind of outstanding membership interests in or
shares of any securities of Cowboy, or any successor to Cowboy, by reason
of any recapitalization, merger, consolidation, reorganization, separation,
liquidation, membership interest split, membership interest dividend,
combination of shares or other similar event.
(b) Proceeds. All proceeds of any and all of the foregoing, whether
such proceeds constitute property of the types described above in this
Section 2.1 or otherwise.
In each case, the foregoing shall be covered by this Agreement, whether
Pledgor's ownership or other rights therein are presently held or hereafter
acquired (by operation of law or otherwise) and howsoever Pledgor's interests
therein may arise or appear (whether by ownership, security interest, claim or
otherwise).
Section 2.2. Obligations Secured. The security interest created hereby
in the Collateral constitutes a continuing security interest for all of the
following obligations, indebtedness and liabilities, whether now existing or
hereafter incurred or arising:
(a) Credit Payment. The payment by Borrowers, as and when due and
payable, of all amounts from time to time owing by Borrowers, or any of
them, under or with respect to the Financing Agreement, the Notes and the
other Obligation Documents or any other instrument now or hereafter
delivered in connection with or as security for the Financing Agreement,
the Notes or the other Obligation Documents or any part thereof.
(b) Other Indebtedness. All loans and future advances made by
Pledgee to Borrowers, or any of them, and all other debts, obligations and
liabilities of every kind and character of Borrowers, or any of them, now
or hereafter existing in favor of Pledgee, whether such debts, obligations
or liabilities be direct or indirect, primary or secondary, joint or
several, fixed or contingent, and whether originally payable to Pledgee or
to a third party and subsequently acquired by Pledgee and whether such
debts, obligations or liabilities are evidenced by notes, open account,
overdraft, indorsement, security agreement, guaranty or otherwise (it being
contemplated that one or more of Borrowers may hereafter become indebted to
Pledgee in further sum or sums but Pledgee shall have no obligation to
extend further indebtedness by reason of this Agreement).
(c) Performance. The due performance and observance by Borrowers of
all of their other obligations and undertakings from time to time existing
under or with respect to the Obligation Documents or any other instrument
now or hereafter delivered in connection with or as security for any of the
Obligation Documents.
(d) Renewals. All renewals, extensions, amendments, modifications,
supplements or restatements of or substitutions for any of the foregoing.
Section 2.3 Delivery of Collateral. All certificates and instruments
representing or evidencing the Collateral shall be delivered to and held by or
on behalf of Pledgee pursuant hereto and shall be in suitable form for transfer
by delivery, or shall be accompanied by duly executed instruments of transfer or
assignment in blank, all in form and substance satisfactory to Pledgee. Pledgee
shall have the right at any time, in its discretion and without notice to
Pledgor, to transfer to or register in the name of Pledgee or any of its
nominees any or all of the Collateral.
Section 2.4 Limitation on Recourse. Except as otherwise provided
herein, in no event shall Pledgor have any personal liability for payment of
principal and interest on the Notes. Pledgee shall look solely to the
Collateral for the payment of such principal and interest and shall not seek a
deficiency or other personal judgment against Pledgor for such principal and
interest in the event that any sale of the Collateral shall be insufficient to
satisfy the Notes. Nothing herein contained shall, however, impair any right,
remedy or security of Pledgee with respect to the Collateral under this
Agreement, the Notes, the Financing Agreement or any other Obligation Document,
nor limit Pledgor's obligations to perform any of Pledgor's other obligations
under this Agreement, the Notes, the Financing Agreement or any other Obligation
Document, including, without limitation, Pledgor's obligation to indemnify
Pledgee as set forth in the Obligation Documents. Notwithstanding the foregoing
limitation of recourse, Pledgor shall remain fully liable for:
(a) Fraud, breach of trust, or any material misrepresentation by
Pledgor or any other Borrower in the Obligation Documents or any other
documents or instruments evidencing, securing or relating to the Loans;
(b) Waste of a material nature to any part of the Collateral or the
Other Collateral caused by Pledgor's or any other Borrower's gross
negligence or willful and wanton neglect or abuse of the Collateral or the
Other Collateral or, with respect to portions of the Other Collateral not
operated by any of the Borrowers, failure to exert reasonable control
appropriate for an owner that is not also the operator;
(c) Failure to pay taxes, insurance, assessments, charges for labor
or materials, or other charges, fees or assessments that can create or
result in liens on any portion of the Collateral or the Other Collateral;
(d) Any beaches of warranty or defects of title to the Collateral or
the Other Collateral;
(e) Any breach of a warranty or representation contained in this
Agreement or any other Obligation Document; failure to perform any covenant
or other agreement contained in this Agreement or any other Obligation
Document, or any indemnity contained in this Agreement or any other
Obligation Document;
(f) Any attempt by Pledgor or any other Borrower to communicate in
any manner with the purchasers of Hydrocarbons or other products from the
Other Collateral after the delivery to such purchasers of a notice
directing payments to be made directly to Pledgee (as set forth in section
3.1 of the Refinery Deed of Trust) in an attempt to hinder or interfere
with the rights of Pledgee;
(g) The return of, or reimbursement for, all monies received by
Pledgor or any other Borrower from the purchasers of Hydrocarbons or other
products from the Other Collateral for monies attributable to Hydrocarbons
or other products from the Other Collateral after receipt by any such
purchaser of a notice directing payments to be made directly to Pledgee;
(h) Any attempt by Pledgor or any other Borrower to hinder or
interfere with the foreclosure of or other realization on the Collateral or
the Other Collateral (whether by judicial action, power of sale, trustee's
sale or otherwise), including without limitation the filing of a lis
pendens, the initiation of any lawsuit or the requesting of injunctive
relief from any court or tribunal, having the effect of hindering or
delaying the exercise by Pledgee (or the Trustee under the Refinery Deed of
Trust) of any right or remedy under this Agreement or any other Obligation
Document; and
(i) After an Event of Default, Pledgor or any other Borrower shall
fail or refuse to execute and deliver to Pledgee any instrument reasonably
requested by Pledgee and prepared at Borrowers' expense, which is necessary
to fully vest title to the Collateral or the Other Collateral in Pledgee or
the purchaser(s) of all or part of the Collateral or the Other Collateral
pursuant to any sale as provided for in this Agreement or any other
Obligation Document.
Pledgor shall be fully and personally liable for all attorneys' fees
and costs and expenses incurred by Pledgor arising out of any of the
foregoing paragraphs (a) through (i).
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations and Warranties. Pledgor represents and
warrants as follows:
(a) Corporate Matters; Enforceability. Pledgor is a corporation duly
organized, validly existing and in good standing in the State of Utah, and
Pledgor is duly qualified as a foreign corporation and in good standing in
each jurisdiction where such qualification is necessary or appropriate.
The execution and delivery of this Agreement and the performance by Pledgor
of the transactions contemplated herein are within Pledgor's corporate
powers and have been duly authorized by all necessary action, corporate and
otherwise. This Agreement constitutes the legal, valid and binding
obligations of Pledgor, enforceable against Pledgor in accordance with its
terms. Cowboy is a limited liability company duly organized, validly
existing and in good standing in the State of Utah, and Cowboy is duly
qualified as a foreign limited liability company and in good standing in
each jurisdiction where such qualification is necessary or appropriate.
(b) Pledged LLC Interests. The Pledged LLC Interests constitute
33.33% of the issued and outstanding membership interests in and to Cowboy
and a 33.33% voting interest in Cowboy. The Pledged LLC Interests and all
other membership interests in and to Cowboy have been duly authorized,
validly issued, and are fully paid and non-assessable. The membership
interests in Cowboy are owned by the Persons set forth on Schedule 3.1(b)
in the percentages set forth on Schedule 3.1(b), and such membership
interests constitute all of the issued and outstanding membership interests
in and to Cowboy. None of the issued and outstanding membership interests
in and to Cowboy, including, without limitation, the Pledged LLC Interests,
was issued in violation of any right of first refusal, right of first
offer, preemptive rights or any similar rights. There are no options,
warrants, convertible or exchangeable securities, or other rights,
agreements, arrangements or commitments of any character relating to the
membership interests in and to Cowboy or obligating Pledgor or Cowboy to
issue or sell any membership interests or any other interest in Cowboy.
There are no outstanding contractual obligations of Cowboy to repurchase,
redeem, or otherwise acquire any membership interest in Cowboy or to create
or issue any other equity interest in Cowboy. Except as expressly set
forth in the LLC Agreement or the RTI Agreement, there are no voting
trusts, member agreements, proxies or other agreements or understandings in
effect with respect to the voting or transfer of any membership interest in
Cowboy. None of the membership interests in Cowboy: are dealt in or traded
on securities exchanges or in securities markets; expressly provide that
they are a security governed by the Code; are an "investment company
security" as defined in the Code; or are held by a securities intermediary
for another person in a securities account whereby the securities
intermediary has expressly agreed to treat such interests as a "financial
asset" under the Code.
(c) Cowboy LLC Documents. Attached hereto as Exhibit B is a true and
complete copy of the LLC Agreement and all amendments, restatements,
supplements and other modifications thereto, and attached hereto as
Exhibit C is a true and complete copy of Cowboy's articles of organization
and all amendments thereto.
(d) Ownership and Liens. Pledgor is the sole legal and beneficial
owner of the Pledged LLC Interests free and clear of any Lien (including,
without limitation, any restriction, contractual or otherwise, on the
transferability of the Pledged LLC Interests) except for (i) the security
interest created by this Agreement, (ii) the RTI Agreement (iii) Liens
expressly permitted by the Financing Agreement, (iv) restrictions imposed
by the Securities Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, and (v) restrictions on
transfer imposed by the LLC Agreement. The Pledged LLC Interests are
registered in the name of Pledgor on the transfer records of Cowboy and are
represented by the certificates described on Schedule 3.1(d)-1 attached
hereto. Except as set forth in Schedule 3.1(d)-2, Cowboy owns the Cowboy
Properties free and clear of any Lien.
(e) Validity and Priority of Security Interest. Pledgor has and will
have at all times full right, power and authority to pledge, assign and
grant a security interest in the Collateral to Pledgee in the manner
provided herein, free and clear of any Lien (including, without limitation,
any restriction, contractual or otherwise, on the transferability of the
Pledged LLC Interests except as expressly provided in Section 7.4 of the
LLC Agreement) except as expressly permitted by the Financing Agreement,
restrictions imposed by the Securities Act and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder, and
restrictions on pledges of the Pledged LLC Interests under the LLC
Agreement. Pledgor represents and warrants that all restrictions under the
LLC Agreement on the pledge, assignment and granting of a security interest
to Pledgee in the Collateral have been fully complied with and that the
Pledgor has full right, power and authority under the LLC Agreement to
pledge, assign and grant a security interest in the Collateral to Pledgee
pursuant to this Agreement. The pledge and assignment of, and grant of a
security interest in the Collateral pursuant to this Agreement, the
delivery to Pledgee of the certificates described on Schedule 3.1(d)-1
together with a stock power endorsed in blank for each such certificate,
and the filing of the financing statements delivered concurrently herewith
by Pledgor to Pledgee will perfect, and establish the first priority of,
Pledgee's security interest hereunder in the Collateral securing the
Obligations. No further or subsequent filing, recording, registration,
other public notice or other action is necessary or desirable to perfect or
otherwise continue, preserve or protect such security interest, except for
continuation statements or filings upon the occurrence of the events stated
in Subsection 3.3(m).
(f) No Conflicts or Consents. Neither the ownership of the
Collateral by Pledgor, nor the pledge and assignment of, and grant of a
security interest in, the Collateral to Pledgee pursuant to this Agreement,
nor the exercise by Pledgee of its rights or remedies hereunder, will
(i) conflict with any provision of (A) any applicable domestic or foreign
law, statute, rule or regulation (including, without limitation, federal
and state securities laws, state "Blue Sky" laws and orders of the
Securities and Exchange Commission), (B) the articles or certificate of
incorporation, charter or bylaws of Pledgor, or (C) any agreement,
judgment, license, order or permit applicable to or binding upon Pledgor,
or (ii) result in or require the creation of any Lien upon any assets or
properties of Pledgor or any Related Person except as expressly
contemplated in the Obligation Documents or the LLC Agreement. Except as
expressly contemplated in the Obligation Documents, no consent, approval,
authorization or order of, and no notice to or filing with any court,
governmental authority or third party is required in connection with the
pledge and assignment of, and grant of a security interest in, the
Collateral to Pledgee pursuant to this Agreement or the exercise by Pledgee
of its rights and remedies hereunder.
(g) Location of Borrowers, Records and Collateral. Borrowers' chief
executive offices and principal places of business and the offices where
the records concerning the Collateral and the Other Collateral are kept is
located at 143 Union Boulevard, Suite 210, Lakewood, Colorado 80228. The
Other Collateral is located at the Refinery Facilities in Nye County,
Nevada.
(h) Litigation. There is no action, suit or proceeding pending
against, or to Pledgor's knowledge threatened against or affecting Cowboy
before any court, any arbiter, or any governmental department, agency,
official or instrumentality except for any actions, suits or proceedings
that would not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on Cowboy.
(i) Compliance with Law. Cowboy is not in violation of any
applicable law, rule, regulation, judgment, injunction, order or decree,
except for violations that have not had and would not reasonably be
expected to have, individually or in the aggregate, a material adverse
effect on Cowboy.
(j) Environmental. (1) The Cowboy Properties are, and, except as
previously disclosed to Pledgee in writing, to the best of Pledgor's
knowledge, at all times have been, operated in compliance with all
applicable Environmental Laws (as hereinafter defined); and to the best of
Pledgor's knowledge, no condition exists with respect to the Cowboy
Properties or any other property owned or operated by Cowboy or any
Affiliate of or party related to Cowboy that would or could reasonably be
expected to subject Cowboy, any Borrower, any Affiliate of or party related
to Cowboy or any Borrower, or Pledgee to any damages (including without
limitation, actual, consequential, exemplary and punitive damages),
material liability (absolute or contingent, determined or determinable),
penalties, injunctive relief or cleanup costs under any applicable
Environmental Laws, or that require or could reasonably be expected to
require cleanup, removal, remedial action or other response by Cowboy, any
Borrower, any Affiliate of or party related to Cowboy or any Borrower, or
Pledgee pursuant to any applicable Environmental Laws.
(2) Neither Pledgor nor Cowboy has received, and, to the best of
Pledgor's knowledge, none of their respective Affiliates have received, and
none of Cowboy's or its Affiliates' or Related Parties' predecessors in
title to the Cowboy Properties have received, any notice from a
governmental agency asserting or alleging a violation of any Environmental
Laws as they relate to the Cowboy Properties.
(3) There are no pending or threatened suits, actions, claims or
proceedings against Cowboy or its Affiliates or Related Parties or, to the
best of Pledgor's knowledge, Cowboy's or its Affiliates' predecessors in
title, arising from or related to, directly or indirectly, any
Environmental Laws as they relate to the Cowboy Properties.
(4) Neither Pledgor, Cowboy, any Affiliate of or party related
to Cowboy or any part of the Cowboy Properties, nor, to the best of
Pledgor's knowledge, Cowboy's or any Affiliate's or Related Parties'
predecessors are subject to any judgment, decree, order or citation related
to or arising out of any Environmental Laws, and neither Cowboy nor any
Affiliate or party related to Cowboy has been named or listed as a
potentially responsible party by any governmental or other entity in a
matter arising under or relating, directly or indirectly, to any
Environmental Laws.
(5) Cowboy has obtained or caused to be obtained all permits,
licenses, and approvals required under all Environmental Laws to operate
the Cowboy Properties.
(6) Except as previously disclosed to Pledgee in writing, there
are not now, nor to the best of Pledgor's knowledge have there ever been,
Hazardous Materials (as hereinafter defined) discharged, leaked, spilled or
released in, on, to, from or at any of the Cowboy Properties or other
properties owned or operated by Cowboy or any of its Affiliates or stored,
treated or recycled at or in tanks or other facilities thereon or related
thereto which give rise or could reasonably be expected to give rise to
material liability under any Environmental Laws.
(7) The use which Cowboy and Pledgor make and intend to make of
the Cowboy Properties will not result in: (a) the use or storage of any
Hazardous Materials on, in or in connection with the Cowboy Properties, or
disposal of any Hazardous Materials from the Cowboy Properties except in
compliance with all applicable Environmental Laws, or (b) the treatment,
processing, discharge or release of any Hazardous Materials on, in, to or
from the Cowboy LLC Properties except in compliance with all applicable
Environmental Laws.
(8) There are no underground storage tanks, surface
impoundments, or wastewater injection wells located on or in the Cowboy
Properties.
As used herein, the term "Environmental Laws" shall mean any one or
more of the following: (i) the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendment and Reauthorization Act of 1986, 42 U.S.C. S 9601 et seq.
("CERCLA"); (ii) the Resource Conservation and Recovery Act, as amended by
the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C. S 6901 et seq.
("RCRA"); (iii) the Clean Air Act, 42 U.S.C. S 7401 et seq.; (iv) the
Federal Water Pollution Control Act, 33 U.S.C. S 1251 et seq.; (v) the
Toxic Substances Control Act, 15 U.S.C. S 2601 et seq.; (vi) the Federal
Safe Drinking Water Act, 42 U.S.C. SS 300f to 300j-11; (vii) the Emergency
Planning and Community Right-to-Know Act of 1986, 42 U.S.C. S 1101 et seq.;
(viii) the Hazardous Materials Transportation Act, 49 U.S.C. S 1801
et seq.; and (ix) all other foreign, federal, state, tribal and local laws
(whether common or statutory), rules, regulations, consent agreements,
compliance schedules, and orders directly and/or indirectly relating to
public health and safety, air pollution, water pollution, noise control,
wetlands, oceans, waterways, and/or the presence, use, generation,
manufacture, transportation, processing, treatment, handling, discharge,
release, disposal, or recovery of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or materials and/or underground
storage tanks, including, without limitation, all rules, regulations and
orders of all state and local governmental bodies, authorities and agencies
pertaining or relating to the exploration, development, regulation and
conservation of oil and gas resources, as each of the foregoing laws,
rules, regulations, consent agreements, compliance schedules and orders may
be enacted, amended, supplemented, or reauthorized from time to time.
As used herein, the term "Hazardous Materials" shall mean any one or
more of the following substances, wastes and materials: (i) any substance,
waste or material defined as a "hazardous substance," "hazardous material,"
"hazardous waste," "pollutant," "contaminant," "toxic material," or "toxic
substance," in any of the applicable Environmental Laws, or in the
standards, criteria, rules and/or regulations promulgated pursuant to any
of said Environmental Laws (including without limitation Hydrocarbons); and
(ii) any substance, waste or material, the presence of which requires
investigation or remediation under any Environmental Laws.
(k) Permits. Cowboy is in possession of all licenses, permits and
authorizations required for the conduct of Cowboy's business, and all such
licenses, permits and authorizations are valid and in full force and
effect. Cowboy is in compliance with all conditions imposed by or in
connection with such licenses, permits and authorizations and with respect
to the conduct of its business and Cowboy has not received notice of or has
any knowledge or reason to believe that any authority intends to cancel,
terminate or modify any of such licenses, permits or authorizations or
adopt or modify rules and regulations which would adversely affect any such
license, permit or authorization.
Section 3.2. Affirmative Covenants. Unless Pledgee shall otherwise
consent in writing, Pledgor shall at all times comply with the covenants and
agreements contained in this Section 3.2 from the date hereof and so long as any
part of the Obligations or the Commitment is outstanding.
(a) Delivery of Collateral. Pledgor agrees to deliver all cash,
instruments and other property described in Section 2.1 above and all
additional membership interests and securities described in Section 2.1
above to Pledgee within three Business Days after receipt by Pledgor and to
execute all pledge agreements, security agreements, stock powers, financing
statements and all other documents that Pledgee deems necessary or
advisable to grant Pledgee a valid, perfected first priority security
interest in such Collateral.
(b) Ownership and Liens. Pledgor shall at all times remain the sole
legal and beneficial owner of the Collateral free and clear of all Liens,
except for the security interest created by this Agreement, Liens expressly
permitted by the Financing Agreement, and restrictions imposed by the
Securities Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder. Pledgor shall defend Pledgee's right,
title and special property and security interest in and to the Collateral
against the claims of any Person.
(c) Further Assurances. Pledgor shall, at its expense and at any
time and from time to time, promptly execute and deliver all further
instruments and documents and take all further action that may be necessary
or desirable or that Pledgee may reasonably request in order (i) to perfect
and protect the security interest created or purported to be created hereby
and the first priority of such security interest; (ii) to enable Pledgee to
exercise and enforce its rights and remedies hereunder with respect to the
Collateral; or (iii) to otherwise effect the purposes of this Agreement,
including, without limitation, (A) executing and filing such financing or
continuation statements, or amendments thereto, and such other instruments
or notices as may be necessary or desirable in order to perfect and
preserve the pledge, assignment and security interest created or purported
to be created hereby, and (B) furnishing to Pledgee from time to time
statements and schedules further identifying and describing the Collateral
and such other reports as Pledgee may reasonably request, all in reasonable
detail.
(d) Information. Pledgor shall, and shall cause the other Borrowers
to, furnish to Pledgee any information that Pledgee may from time to time
reasonably request concerning any covenant, provision or representation
contained herein or any other matter in connection with the Collateral or
the Obligation Documents.
(e) Punctual Payment and Performance. Pledgor shall, and shall cause
the other Borrowers to, duly and punctually pay the principal and interest
on the Loans and to perform all its obligations and covenants under the
Obligation Documents.
(f) Existence; Maintenance of Collateral. Pledgor shall, and shall
cause Cowboy and each other Borrower to, do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate or
limited liability company existence, rights and franchises, as the case may
be, except when failure to do so would not have a material adverse effect
on Pledgor, Cowboy or such other Borrower, as the case may be. Pledgor
shall, and shall cause each other Borrower to, cause all of its property,
rights and interests that constitute Collateral or Other Collateral under
any Obligation Document and its business to be maintained and kept, in
accordance with sound field practices, in good condition, repair and
working order and supplied with all necessary equipment and shall cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof. Pledgor shall cause Cowboy to cause all of the
Cowboy/Foreland Properties and its business to be maintained and kept, in
accordance with sound field practices, in good condition, repair and
working order and supplied with all necessary equipment and shall cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof.
(g) Title to Properties. Pledgor shall, and shall cause each other
Borrower to, maintain good and marketable title to all of its property,
rights and interests that constitute Other Collateral under any Obligation
Document, free and clear of all Liens, except for Liens expressly permitted
by the Financing Agreement. Pledgor shall, and shall cause each other
Borrower to, warrant and forever defend its right, title and interest in
such property and assets against the claims and demands of every Person
whatsoever claiming or which may claim the same or any part thereof.
Pledgor shall cause Cowboy to maintain good and marketable title to the
Cowboy/Foreland Properties and to warrant and forever defend its right,
title and interest in such property and assets against the claims and
demands of every Person whatsoever claiming or which may claim the same or
any part thereof.
(h) Insurance. Pledgor shall, and shall cause each other Borrower
to, acquire and continue to maintain, with financially sound and reputable
insurers, insurance with respect to its respective properties and business
against such liabilities, casualties, risks and contingencies and in such
types and amounts as is customary in the case of Persons engaged in the
same or similar businesses and similarly situated; provided, however, that
Pledgor shall, and Pledgor shall cause each other Borrower to, maintain
liability insurance in the amount of not less than $2,000,000 with a
deductible not to exceed $25,000 per claim. Pledgor shall, and shall cause
each other Borrower to, furnish or cause to be furnished copies of binders
relating to such insurance to Pledgee prior to Funding and from time to
time a summary of the insurance coverage of Pledgor and the other Borrowers
in form and substance satisfactory to Pledgee and if requested to furnish
Pledgee copies of the applicable policies. In the case of any fire,
accident or other casualty causing loss or damage to the properties of
Pledgor or any other Borrower, Pledgor shall, and shall cause such Borrower
to, use the proceeds of such policies (i) to repair or replace the damaged
property, or (ii) subject to Pledgee's prior written consent and
notwithstanding any restriction on prepayment, to prepay the Obligations
without premium or penalty.
(i) Taxes and Other Claims. Pledgor shall, and shall cause Cowboy
and each other Borrower to, duly pay and discharge before the same shall
become due or delinquent all taxes, assessments and other governmental
charges imposed upon Pledgor, Cowboy or such Borrower, as the case may be,
and its respective properties, sales and activities, or any part thereof,
or upon the income or profits therefrom, or burdening any of Pledgor's,
Cowboy's or such Borrower's properties or assets, as the case may be, as
well as all claims for labor, materials or supplies, including all claims
incurred in connection with the operation of Pledgor's, Cowboy's and such
Borrower's respective businesses, properties and assets, which if unpaid
might by law become a lien or charge upon any of Pledgor's, Cowboy's or
such Borrower's property; provided, however, that any such tax, assessment,
charge, levy or claim need not be paid if the validity or amount thereof
shall currently be contested by Pledgor, Cowboy or such Borrower, as the
case may be, in good faith by appropriate proceedings and if Pledgor,
Cowboy or such Borrower, as the case may be, shall have set aside on its
books adequate reserves with respect thereto; and provided, further, that
Pledgor shall, and shall cause Cowboy and each other Borrower to, pay all
such taxes, assessments, charges, levies or claims forthwith upon the
commencement of proceedings to foreclose any lien which may have attached
as security therefor.
(j) Securities Filings. Pledgor shall, and shall cause Cowboy and
each other Borrower to, duly file or cause to be filed, within the times
and within the manner prescribed by law (including all permitted
extensions), all federal and state securities and blue sky filings that are
required to be filed by, or with respect to, Pledgor, Cowboy or such
Borrower, as the case may be, including without limitation all filings
required to be made pursuant to the Securities Exchange Act of 1934, as
amended. Pledgor shall, and shall cause Cowboy and each other Borrower to,
deliver to Pledgee copies of all filings made by such Person with the
Securities and Exchange Commission and any state securities commission or
agency within three days of such filing. If a filing to be made by Pledgor
or any other Borrower or Cowboy with the Securities and Exchange Commission
or a state securities commission or agency refers to Pledgee, preliminary
copies of such filing shall be delivered to Pledgee and to Pledgee's
counsel no later than five Business Days prior to such filing with a final
copy delivered to Pledgee at the time of filing. Pledgor shall, and shall
cause each other Borrower to, deliver to Pledgee copies of all press
releases at the time of release; unless such release refers to Pledgee, in
which case advance copies shall be delivered to Pledgee and to Pledgee's
counsel no later than two Business Days prior to such release.
(k) Inspection of Properties and Books. Pledgor shall, and shall
cause Cowboy and each other Borrower to, permit Pledgee and its authorized
representatives to (i) visit and inspect any of its properties and to
examine its books and records (and to make copies thereof and extracts
therefrom; provided, that Pledgee will use its reasonable efforts to
preserve the confidentiality of any information derived therefrom), and
(ii) discuss the affairs, finances and accounts of Pledgor, Cowboy or such
Borrower, as the case may be, with, and to be advised as to the same by,
the officers of Pledgor, Cowboy and such Borrower, independent accountants,
and independent engineers all at such reasonable times and intervals as
Pledgee may reasonably request.
(l) Compliance with Laws, Contracts, Licenses and Permits. Pledgor
shall, and shall cause Cowboy and each other Borrower to, comply with (i)
all Permits and Requirements of Law, (ii) the provisions of its charter or
organizational documents and bylaws, (iii) all agreements and instruments
by which it or any of its properties may be bound, and (iv) all applicable
decrees, orders and judgments, except in each case where noncompliance
would not have a material adverse effect on the business, assets or
financial condition of Pledgor, Cowboy or such Borrower, as the case may
be. If at any time while any part of the Obligations or the Commitment is
outstanding, any authorization, consent, approval, permit or license from
any officer, agency or instrumentality of any government shall become
necessary or required in order that Pledgor or any other Borrower may
fulfill any of its obligations under any Obligation Document, Pledgor
shall, and shall cause such Borrower to, immediately take all reasonable
steps within its power to obtain such authorization, consent, approval,
permit or license and furnish Pledgee with evidence thereof.
(m) Litigation. Pledgor shall, and shall cause each other Borrower
to, promptly give Pledgee notice of all legal or arbitral proceedings, and
of all proceedings before any governmental or regulatory authority or
agency, to which Pledgor or such Borrower or Cowboy is a party or which
affects Pledgor, Cowboy or such Borrower and of which Pledgor or such
Borrower is aware, except for proceedings before any governmental or
regulatory authority or agency occurring in the ordinary course of
Pledgor's, Cowboy's or such Borrower's business, and that would not have a
material adverse effect upon Pledgor's, Cowboy's or such Borrower's
business or its properties and assets if determined adversely to Pledgor,
Cowboy or such Borrower, as the case may be.
(n) Notices. Pledgor shall, and shall cause each other Borrower to,
promptly after acquiring knowledge thereof, notify Pledgee in writing of
the occurrence of any Default or Event of Default and of any material
adverse change in the business, assets or financial condition of Pledgor,
Cowboy or such Borrower, as the case may be. If any Person shall give any
notice or take any other action with respect to a claimed default (whether
or not constituting an Event of Default) under any Obligation Document or
any other note, evidence of indebtedness, indenture or other obligation to
which or with respect to which Pledgor or any other Borrower is a party or
obligor, whether as principal or surety, Pledgor shall, and shall cause
such Borrower to, forthwith give written notice thereof to Pledgee,
describing the notice or action and the nature of the claimed default.
Pledgor shall, and shall cause each other Borrower to, promptly notify
Pledgee (i) if any representation or warranty of Pledgor or such Borrower
contained in this Agreement or any other Obligation Document is discovered
to be or becomes untrue, or (ii) if Pledgor or such Borrower fails to
perform or comply with any covenant or agreement contained in this
Agreement or any other Obligation Document or it is reasonably anticipated
that Pledgor or such Borrower will be unable to perform or comply with any
covenant or agreement contained in this Agreement or any other Obligation
Document. Pledgor shall, and shall cause each other Borrower to, cause all
the representations and warranties of Pledgor and the other Borrowers
contained in this Agreement and the other Obligation Documents to be true
and correct in all material respects from time to time and at all times.
(o) Use of Loan Proceeds. Pledgor shall, and shall cause each other
Borrower to, use the proceeds of the Loans solely for the purposes
expressly permitted by the Financing Agreement. Pledgor shall, and shall
cause each other Borrower to, maintain any funds that have been advanced
for such purposes, but not expended, at a depository institution
satisfactory to Pledgee and Pledgor shall, and shall cause such Borrower
to, deliver copies of all invoices for expenditure of such funds to
Pledgee.
(p) Key Employee. Pledgor shall cause Foreland Corp. to continue to
employ N. Thomas Steele as President of Foreland Corp. on a full-time basis
with substantially the same responsibilities as of the date of this
Agreement.
(q) Environmental Laws Compliance. Pledgor shall, and shall cause
Cowboy and each other Borrower to:
(i) Comply with all applicable Environmental Laws as they relate
to the Properties and the Cowboy/Foreland Properties and shall, and shall
cause each other Borrower to, maintain and obtain, or cause to be
maintained and obtained, all permits, licenses and approvals now or
hereafter required under all applicable Environmental Laws as they relate
to the Other Collateral or the Cowboy/Foreland Properties;
(ii) Not do or permit anything to be done that will subject the
Other Collateral, the Cowboy/Foreland Properties, Pledgor, Cowboy, any
other Borrower or Pledgee to any liability under any applicable
Environmental Laws as they relate to the Other Collateral or the
Cowboy/Foreland Properties, assuming disclosure to governmental authorities
of all relevant facts, conditions and circumstances, if any, pertaining to
the Other Collateral and the Cowboy/Foreland Properties;
(iii) Promptly notify Pledgee in writing of any Environmental
Complaint relating to the Other Collateral or the Cowboy Properties which
is known to Pledgor or such Borrower, as the case may be, or any other
existing, pending or threatened investigation or inquiry by any
governmental authority relating to the Other Collateral or the Cowboy
Properties known to Pledgor or such Borrower, as the case may be, and in
connection with any applicable Environmental Laws.
(iv) Take, or cause to be taken, all steps necessary to determine
that no Hazardous Materials have been: (i) used or stored on, in or in
connection with any Other Collateral that Pledgor or any other Borrower
acquires with any funds that Pledgor or such Borrower receives from Pledgee
in accordance with the Financing Agreement, or disposed from such Other
Collateral, or (ii) treated, processed, discharged, or released on, to, in
or from such Other Collateral, except, in each case, in full compliance
with all applicable Environmental Laws;
(v) Not cause or permit: (i) the use or storage of Hazardous
Materials on, in or in any manner in connection with the Other Collateral
or the Cowboy/Foreland Properties, or (ii) the treatment, processing,
discharge or release of any Hazardous Materials on, to, in or from the
Other Collateral or the Cowboy/Foreland Properties, except, in each case,
in full compliance with all applicable Environmental Laws;
(vi) Keep, or cause the Other Collateral and the Cowboy/Foreland
Properties to be kept, free of any and all Hazardous Materials, and shall,
and shall cause Cowboy and each other Borrower to, remove the same (or if
removal is prohibited by applicable law, shall, and shall cause Cowboy and
each other Borrower to, take whatever action is required by applicable law)
promptly upon discovery of such Hazardous Materials at Borrowers' or
Cowboy's sole cost and expense, except in full compliance with all
applicable Environmental Laws; and
(vii) Provide, upon Pledgee's reasonable request, at any
time, and from time to time, inspections, tests and audits of the Other
Collateral and the Cowboy/ Foreland Properties from an engineering or
consulting firm approved by Pledgee indicating the presence or absence of
Hazardous Materials on the Other Collateral and the Cowboy/Foreland
Properties and compliance with all applicable Environmental Laws.
(r) Change of Control. Pledgor shall, and shall cause each other
Borrower to, use its best efforts to not permit a Change of Control to
occur and shall, and shall cause each other Borrower to, notify Pledgee
within five Business Days of obtaining information that a Change in Control
of such Person may occur or is contemplated by any Person.
(s) Operation of Assets. Pledgor shall, and shall cause Cowboy and
the other Borrowers to, operate the Other Collateral and the
Cowboy/Foreland Properties continuously in a good and workmanlike manner,
in accordance with the best usage of operators of similar facilities and in
accordance with industry standards, and in conformity in all material
respects with all applicable laws, rules, regulations and orders of all
federal, state, tribal and local governmental bodies, authorities and
agencies and in conformity in all material respects with the provisions of
all leases, licenses, subleases, sublicenses, permits, easements, rights-
of-way, servitudes, franchises, grants, certificates and authorizations or
other contracts and agreements comprising a part of the Other Collateral or
the Cowboy/Foreland Properties.
(t) Contract Approval. Pledgor shall, and shall cause each other
Borrower to, submit to Pledgee for its review and approval at least ten
days in advance of the date such Borrower intends to enter into a contract
(including a modification or amendment of any existing contract), each
proposed contract for the refining, fractionating, treatment, marketing,
purchase, sale, transportation, exchange, manufacturing or processing of
Hydrocarbons if such contract was not in effect as of the date of this
Agreement and has a term of ninety days or more ("Proposed Hydrocarbon
Contracts"). Pledgor shall not, and shall cause each other Borrower not
to, enter into any Proposed Hydrocarbon Contracts that establish pricing
and have a term of one year or more or make deliveries thereunder without
obtaining Pledgee's prior written approval, which approval shall not be
unreasonably withheld if Pledgee's security position is not adversely
affected thereby.
(u) Additional Information. For so long as any part of the
Obligations or the Commitment is outstanding, Pledgor shall, and shall
cause each other Borrower to, permit Pledgee to substantially participate
in, and influence the conduct of, management of Borrowers through the
exercise of any and all of the following rights (provided, however, that
Pledgee shall have no right to direct the management of any Borrower):
(i) promptly provide to Pledgee such information as Pledgee
shall reasonably request regarding Pledgor's or such Borrower's business,
financial condition and prospects;
(ii) if Pledgee reasonably believes that financial or other
developments affecting Pledgor or such Borrower have impaired or are likely
to impair Pledgor's or such Borrower's ability to perform its obligations
under this Agreement, permit Pledgee, upon request, reasonable access to
Pledgor's and such Borrower's management or Board of Directors to present
its views with respect to such developments;
(iii) provide to Pledgee the financial information required
in Section 7.3 of the Financing Agreement; and
(iv) permit Pledgee to make the examinations and inspections of
properties, books and records, and to consult with Pledgor's and such
Borrower's officers, as required in Section 7.11 of the Financing
Agreement.
Section 3.3. Negative Covenants. Unless Pledgee otherwise consents in
writing, Pledgor shall at all times comply with the covenants contained in this
Section 3.3 from the date hereof and so long as any part of the Obligations or
the Commitment is outstanding.
(a) Additional Shares. Pledgor shall not vote in favor of or approve
any request to increase Cowboy's authorized membership interests, or to
issue additional membership interests or securities convertible into or
exchangeable for membership interests or other equity interests in Cowboy
or to otherwise take any action that would render the Pledged LLC Interests
less than 33.33% of Cowboy's issued and outstanding membership interests.
(b) Transfer or Encumbrance. Pledgor shall not assign, sell or
otherwise dispose of any Collateral and shall not create or suffer to exist
any Lien (including, without limitation, any restriction, contractual or
otherwise, on the transferability of the Pledged LLC Interests) on or with
respect to the Collateral, nor shall Pledgor deliver actual or constructive
possession of the Collateral to any other Person, except for (i) the
security interest created by this Agreement, (ii) Liens expressly permitted
by the Financing Agreement, (iii) restrictions imposed by the Securities
Act and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, (iv) with respect to Pledgor's ability to transfer
its membership interests in Cowboy, restrictions on transfer imposed by the
LLC Agreement (provided that any such restrictions on transfer shall not
restrict Pledgee's ability to transfer Pledgor's membership interests in
Cowboy in accordance with this Agreement and applicable law except as
provided in the LLC Agreement attached to this Agreement), and (v)
possession by Pledgee or its nominee pursuant to this Agreement.
(c) Governing Documents; Form of Membership Interests. Pledgor shall
not consent to, cause or permit any amendment or modification to the LLC
Agreement, Cowboy's articles of organization or other governing documents.
Pledgor shall not consent to, cause or permit the Pledged LLC Interests to
be in other than certificated form.
(d) Possession of Collateral. Pledgor shall not cause or permit any
certificates, chattel paper, documents or instruments which are included in
the Collateral at any time to be in the actual or constructive possession
of any Person other than Pledgor or Pledgee.
(e) Impairment of Security Interest. Pledgor shall not take or fail
to take any action that would in any manner impair the value or
enforceability of Pledgee's security interest in any Collateral.
(f) Use of Proceeds. Pledgor shall not, and shall cause each other
Borrower not to, use the proceeds of the Loans for any purpose not
expressly permitted by the Financing Agreement. Pledgor shall not, and
shall cause each other Borrower not to, without Pledgee's prior written
approval, make any expenditure of the Development Loan in an amount in
excess of 110% of the amount stated in the AFE pertaining to such
expenditure that was approved by Pledgee.
(g) Dividends, Distributions and Redemptions. Pledgor shall not, and
shall cause each other Borrower not to, declare or pay any dividend,
purchase, redeem or otherwise acquire for value any of its stock now or
hereafter outstanding, or return any capital or make any other distribution
to its stockholders or members, except to the extent such declaration,
payment, purchase, redemption, acquisition or return is solely between
Borrowers.
(h) Nature of Business. Pledgor shall not, and shall cause each
other Borrower not to, engage in any business other than oil and gas
exploration, development, production, processing, refining, transportation
and marketing, and business activities ancillary thereto. Pledgor shall
cause Cowboy not to engage in any business other than those businesses
permitted by the LLC Agreement as of the date hereof.
(i) Restrictions on Liens. Pledgor shall not, and shall cause each
other Borrower not to, create or incur, or suffer to be created or incurred
or to exist, any Lien (other than Liens expressly permitted by the
Financing Agreement) upon any of its properties, rights and interests that
constitute Collateral or Other Collateral under any of the Obligation
Documents, whether now owned or hereafter acquired, or upon the proceeds,
income or profits therefrom, and shall, and shall cause each other Borrower
to, pay all vendor payables and other trade payables when due.
(j) Collateral Sales. Except as set forth in Sections 7.6 and 7.7 of
the Financing Agreement, Pledgor shall not, and shall cause each other
Borrower not to, sell, lease, assign, transfer or otherwise dispose of any
of the Collateral or the Other Collateral, except for (i) sales of
Hydrocarbons in the ordinary course of Borrowers' respective businesses,
and (ii) as otherwise permitted pursuant to the Obligation Documents.
(k) Sale or Discount of Receivables. Pledgor shall not, and shall
cause each other Borrower not to, discount or sell any of their notes
receivable or accounts receivable.
(l) Affiliate Transactions. Pledgor shall not, and shall cause
Cowboy and each other Borrower not to, engage in any transaction with any
of their Affiliates, except on terms no less favorable than are obtainable
in arms-length transactions with third parties.
(m) Financing Statement Filings. Pledgor recognizes that financing
statements pertaining to the Collateral and the Other Collateral have been
or may be filed where any Borrower maintains any Collateral or Other
Collateral, has its records concerning any Collateral or Other Collateral
or has its chief executive office or chief place of business. Without
limitation of any other covenant herein, Pledgor shall not, and shall cause
each other Borrower not to, cause or permit any change to be made in its
name, identity or corporate structure, or any change to be made to a
jurisdiction other than as represented in Section 3.1(g) in (i) the
location of any Collateral or Other Collateral, (ii) the location of any
records concerning any Collateral or Other Collateral, or (iii) the
location of its chief executive office or principal place of business,
unless such Borrower has notified Pledgee of such change at least thirty
days prior to the effective date of such change, and shall have first taken
all action required by Pledgee for the purpose of further perfecting or
protecting the security interest in favor of Pledgee in the Collateral and
Other Collateral. Each notice furnished to Pledgee pursuant to this
Subsection 3.3(m) shall expressly state that the notice is required by this
Agreement and contains facts that may require additional filings of
financing statements or other notices for the purposes of continuing
perfection of Pledgee's security interest in the Collateral and Other
Collateral.
(n) Mergers and Sales of Assets. Pledgor shall not, and shall cause
Cowboy and each other Borrower not to, merge or consolidate with or into
any other entity unless Pledgor, Cowboy or such other Borrower, as the case
may be, is the surviving entity and no Event of Default has occurred or
will occur as a result of such merger or consolidation. Pledgor shall not,
and shall cause Cowboy and each other Borrower not to, lease, sell or
transfer all, or substantially all, of its property assets or business to
any other Person, or dispose of or sell any material portion of its assets,
property or business, or dispose of any equity in any Affiliate.
(o) No Loans or Guarantees to Officers, Directors, Managers or
Shareholders/Partners. Pledgor shall not, and shall cause each other
Borrower not to, directly or indirectly, make any guarantee, loan, advance,
extension of credit, commitment to fund, or commitment to satisfy in any
way, any debt, liability, or other obligation to pay any Person (except for
the other Borrowers), including its officers, directors, managers,
employees, shareholders, partners or any Affiliate of such Person,
including, without limitation (a) an obligation to any bank under any
letter of credit, (b) an obligation to maintain working capital or equity
capital of the business other than the initial investment, or (c) an
obligation to otherwise maintain the net worth or solvency of the business,
with respect to any business in which Pledgor or such other Borrower is
engaged other than the business described in section 7.18 of the Financing
Agreement. Pledgor shall not, and shall cause each other Borrower not to,
make any repayment on any Indebtedness owed to any of their respective
Affiliates, or any shareholder, member, officer, director, manager or
Affiliate of such Person, except as expressly permitted pursuant to the
Financing Agreement.
(p) Foreclosure. Pledgor shall not, and shall cause Cowboy and each
other Borrower not to, attempt in any way to hinder or interfere with the
exercise of the power of sale granted in any of the Obligation Documents,
including without limitation the filing of a lis pendens, the initiation of
any lawsuit or the requesting of injunctive relief from any court or
tribunal, or any other action which would have the effect of hindering or
delaying the exercise by Pledgee of any right or remedy under this
Agreement or any other Obligation Document, and Pledgor shall, and shall
cause each other Borrower to execute and deliver to Pledgee any instrument
reasonably requested by Pledgee and prepared at Borrowers' expense, which
is necessary to fully vest title to the Collateral and the Other Collateral
or the purchaser(s) of all or part of the Collateral or the Other
Collateral pursuant to any sale as provided for in the Obligation
Documents.
ARTICLE IV
POWERS AND AUTHORIZATIONS
Section 4.1 Voting, Dividends and Other Payments.
(a) So long as there exists no Default hereunder:
(i) Pledgor shall be entitled to exercise any and all voting
and/or consensual rights and powers relating or pertaining to the
Collateral or any part thereof for any purpose not inconsistent with the
terms hereof.
(ii) Pledgor shall be entitled to receive and retain any and all
dividends and other distributions paid with respect to the Collateral;
provided, that any and all (A) dividends and other distributions (including
without limitation dividends and distributions of membership interests)
paid or payable other than in cash with respect to, and instruments and
other property received, receivable or otherwise distributed with respect
to, or in exchange for, any of the Collateral for any reason, including,
without limitation, any change in the number or kind of outstanding shares
of any securities of Cowboy or any successor to Cowboy by reason of any
recapitalization, merger, consolidation, reorganization, separation,
liquidation, stock split, stock dividend, combination of shares or other
similar corporate event; (B) dividends and other distributions paid or
payable in cash with respect to any of the Collateral in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus; and (C) cash
paid, payable or otherwise distributed with respect to principal of, or in
redemption of, or in exchange for any of the Collateral, shall be, and
shall be forthwith delivered to Pledgee to hold as, Collateral and shall,
if received by Pledgor, be received in trust for the benefit of Pledgee, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Pledgee as Collateral in the same form as so received, with
any necessary indorsement or assignment.
(b) Upon the occurrence of a Default hereunder or at any time
thereafter:
(i) All rights of Pledgor (A) to exercise or refrain from
exercising the voting and other consensual rights which Pledgor would
otherwise be entitled to exercise pursuant to Section 4.1(a)(i), and (B) to
receive the dividends and distributions to which Pledgor would otherwise be
authorized to receive and retain pursuant to Section 4.1(a)(ii), shall
automatically cease, and all such rights shall thereupon become vested in
Pledgee which shall thereupon have the sole right to exercise or refrain
from exercising such voting and other consensual rights and to receive and
hold as Collateral such dividends. In furtherance of Pledgee's rights
hereunder, Pledgor shall execute an undated letter to Cowboy in the form of
Exhibit D attached hereto directing and authorizing Cowboy to make
dividends and distributions payable to Pledgor directly to Pledgee pursuant
to section 4.4(b) of the LLC Agreement and Pledgor hereby authorizes
Pledgee, at any time a Default exists hereunder, to date and to deliver
such letter to Cowboy. Pledgor further agrees to promptly notify Pledgee
of any change in the name, identity or address of the manager of the
Company, and if any Person other than Bruce Decker becomes president of
Pledgor, and upon any such change to execute a new letter in the form of
Exhibit D hereto reflecting such change.
(ii) All dividends which are received by Pledgor contrary to the
provisions of Section 4.1(b)(i) shall be received in trust for the benefit
of Pledgee, shall be segregated from other property and funds of Pledgor
and shall be forthwith paid over to Pledgee as Collateral in the same form
as so received, with any necessary indorsement or assignment.
Section 4.2. Power of Attorney. Pledgor hereby irrevocably appoints
Pledgee as Pledgor's attorney-in-fact and proxy, with full authority in the
place and stead of Pledgor and in the name of Pledgor or otherwise, from time to
time in Pledgee's discretion, to take any action and to execute any instrument
which Pledgee may deem necessary or advisable to accomplish the purposes of this
Agreement, including without limitation (a) to receive, endorse and collect all
instruments made payable to Pledgor representing any dividend or other
distribution with respect to the Collateral or any part thereof and to give full
discharge for the same, (b) to file any reports or other filings with the
Securities and Exchange Commission or any other governmental authority or
regulatory body that may be substituted therefor, to the extent such reports or
other filings are required by applicable law in order for Pledgee to exercise
its rights under this Agreement or any other Obligation Document, (c) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipts for moneys due and to become due under or with respect to any of the
Collateral, (d) to receive, endorse and collect any drafts or other instruments,
documents and chattel paper in connection with clause (c) of this Section 4.2,
(e) to file any claims or take any action or institute any proceedings which
Pledgee may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce the rights of Pledgee with respect to any of
the Collateral, and (f) to execute and file one or more financing or
continuation statements, and amendments thereto, relating to the Collateral.
Such appointment is coupled with an interest and shall be irrevocable from the
date hereof and so long as any part of the Obligations or the Commitment is
outstanding.
Section 4.3. Performance by Pledgee. If Pledgor fails to perform any
agreement or obligation contained herein, Pledgee may itself, at its option and
in its sole discretion, perform, or cause performance of, such agreement or
obligation, and the expenses of Pledgee incurred in connection therewith shall
be payable by Pledgor under Section 7.4; provided, however, that nothing herein
shall impose any obligation of any kind whatsoever on Pledgee to perform under
any obligation or agreement of Pledgor.
ARTICLE V
EVENTS OF DEFAULT AND REMEDIES
Section 5.1. Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" hereunder:
(a) Failure of Pledgor to pay any fee or other amount due Pledgee
under this Agreement within 10 days after the date that any such payment is
due;
(b) Failure of Pledgor to perform or observe any covenant, agreement,
indemnity, condition or provision in this Agreement and such failure shall
continue for 30 days after written notice of such failure has been given to
Pledgor;
(c) Any of Pledgor's representations or warranties made in this
Agreement or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in
any material respect as of the date made or deemed made; or
(d) An "Event of Default" as defined in the Financing Agreement shall
occur.
Section 5.2. Remedies. Upon the occurrence of any Event of Default, or
at any time thereafter, in addition to all other rights, powers and remedies
herein conferred, conferred in the other Obligation Documents or conferred by
operation of law, Pledgee may declare the Obligations immediately due, payable
and performable, including all principal and interest remaining unpaid on the
Notes and all other amounts secured hereby or thereby, all without demand,
presentment or notice, all of which are hereby expressly waived; and from time
to time in its discretion, without limitation and without notice except as
expressly provided below Pledgee may:
(a) Exercise with respect to the Collateral all the rights and
remedies of a secured party on default under the Code (whether or not the
Code applies to the affected Collateral);
(b) Require Pledgor to, and Pledgor hereby agrees that it shall at
its expense and upon request of Pledgee forthwith, assemble all or part of
the Collateral as directed by Pledgee and make it available to Pledgee at a
place to be designated by Pledgee which is reasonably convenient to both
parties;
(c) Reduce its claim to judgment or foreclose or otherwise enforce,
in whole or in part, the security interest created hereby by any available
judicial procedure;
(d) Dispose of, at its office, on the premises of Pledgor or
elsewhere, all or any part of the Collateral, as a unit or in parcels, by
public or private proceedings, and by way of one or more contracts (it
being agreed that the sale of any part of the Collateral shall not exhaust
Pledgee's power of sale, but sales may be made from time to time, and at
any time, until all of the Collateral has been sold or until the
obligations have been paid and performed in full), and at any such sale it
shall not be necessary to exhibit any of the Collateral;
(e) Buy the Collateral, or any portion thereof, at any public sale;
(f) Buy the Collateral, or any portion thereof, at any private sale
if the Collateral is of a type customarily sold in a recognized market or
is of a type that is the subject of widely distributed standard price
quotations;
(g) Apply by appropriate judicial proceedings for appointment of a
receiver for the Collateral, or any part thereof, and Pledgor hereby
consents to any such appointment; and
(h) At its discretion, retain the Collateral in satisfaction of the
Obligations whenever the circumstances are such that Pledgee is entitled to
do so under the Code or otherwise.
Pledgor agrees that, to the extent notice of sale shall be required by law, five
days' notice to Pledgor of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. Pledgee shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. Pledgee may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.
Section 5.3. Sale of Securities. Pledgor recognizes that Pledgee may be
unable to effect a public sale of any or all of the portions of Collateral that
constitute securities by reason of certain prohibitions contained in the
Securities Act and applicable state securities laws, but may be compelled to
resort to one or more private sales thereof to a restricted group of purchasers
who will be obliged to agree, among other things, to acquire such securities for
their own account for investment and not with a view to the distribution or
resale thereof. Pledgor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable to the seller than if such sale
were a public sale and, notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner. Pledgee shall be under no obligation to delay a sale of any of such
securities for the period of time necessary to permit Pledgor to register such
securities for public sale under the Securities Act or under applicable state
securities laws.
Section 5.4. Application of Proceeds. Upon the occurrence of any Event
of Default, or at any time thereafter, Pledgee may in its discretion apply any
cash held by Pledgee as Collateral, and any cash proceeds received by Pledgee
with respect to any sale of, collection from, or other realization upon all or
any part of the Collateral, to any or all of the following in such order as
Pledgee may elect:
(a) To the repayment of the out-of-pocket costs and expenses,
including attorneys' fees and legal expenses, incurred by Pledgee in
connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or the sale of, collection from, or
other realization upon, any Collateral, (iii) the exercise or enforcement
of any of the rights of Pledgee hereunder; or (iv) the failure of Pledgor
to perform or observe any of the provisions hereof;
(b) To the payment or other satisfaction of any liens and other
encumbrances upon any of the Collateral;
(c) To the reimbursement of Pledgee for the amount of any obligations
of Pledgor or any Other Liable Party paid or discharged by Pledgee pursuant
to the provisions of this Agreement or the other Obligation Documents, and
of any expenses of Pledgee payable by Pledgor hereunder or under the other
Obligation Documents;
(d) To the satisfaction of any other Obligations or any other
indebtedness of Pledgor to Pledgee;
(e) By holding the same as Collateral;
(f) To the payment of any other amounts required by applicable law
(including without limitation, Section 9-504(1)(c) of the Code or any
successor or similar, applicable statutory provision); and
(g) By delivery to Pledgor or to whomsoever shall be lawfully
entitled to receive the same or as a court of competent jurisdiction shall
direct.
Section 5.5. Deficiency. In the event that the proceeds of any sale,
collection or realization of or upon the Collateral by Pledgee are insufficient
to pay all amounts to which Pledgee is legally entitled, Pledgor shall be liable
for the deficiency, together with interest thereon as provided in the governing
Obligation Documents or (if no interest is so provided) at such other rate as
shall be fixed by applicable law, together with the costs of collection and the
fees and expenses of any attorneys employed by Pledgee to collect such
deficiency.
Section 5.6. Non-Judicial Remedies. In granting to Pledgee the power to
enforce its rights hereunder without prior judicial process or judicial hearing,
Pledgor expressly waives, renounces and knowingly relinquishes any legal right
which might otherwise require Pledgee to enforce its rights by judicial process.
In so providing for non-judicial remedies, Pledgor recognizes and concedes that
such remedies are consistent with the usage of trade, are responsive to
commercial necessity, and are the result of a bargain at arm's length. Nothing
herein is intended to prevent Pledgee or Pledgor from resorting to judicial
process at either party's option.
Section 5.7. Other Recourse. Pledgor waives any right to require Pledgee
to proceed against any other Person, exhaust any Collateral or other security
for the Obligations, or to have any Other Liable Party joined with Pledgor in
any suit arising out of the Obligations or this Agreement, or pursue any other
remedy in Pledgee's power. Pledgor further waives any and all notice of
acceptance of this Agreement and of the creation, modification, rearrangement,
renewal or extension for any period of any of the Obligations of any Other
Liable Party from time to time. Pledgor further waives any defense arising by
reason of any disability or other defense of any Other Liable Party or by reason
of the cessation from any cause whatsoever of the liability of any other Liable
Party. Until all of the Obligations shall have been paid in full and the
Commitment has terminated or expired, Pledgor shall have no right to subrogation
and Pledgor waives the right to enforce any remedy which Pledgee has or may
hereafter have against any Other Liable Party, and waives any benefit of and any
right to participate in any other security whatsoever now or hereafter held by
Pledgee. No action which Pledgee may take or omit to take in connection with
any of the Obligation Documents or any of the Obligations shall release or
diminish Pledgor's obligations, liabilities, duties or agreements hereunder,
including without limitation, from time to time: (a) taking or holding any
other property of any type from any other Person as security for the
obligations, and exchanging, enforcing, waiving and releasing any or all of such
other property, (b) applying the Collateral or such other property and directing
the order or manner of sale thereof as Pledgee may in its discretion determine
which is not inconsistent with the Obligation Documents, (c) renewing, extending
for any period, accelerating, modifying, compromising, settling or releasing any
of the obligations of any Other Liable Party with respect to any or all of the
obligations or other security for the obligations, (d) waive, enforce, modify,
amend or supplement any of the provisions of any Obligation Document with any
Person other than Pledgor, and (e) release or substitute any Other Liable Party.
Section 5.8. Remedies Not Exclusive. All rights, powers and remedies
herein conferred are cumulative, and not exclusive, of (a) any and all other
rights and remedies herein conferred or provided for, (b) any and all other
rights, powers and remedies conferred or provided for in the Obligation
Documents, and (c) any and all rights, powers and remedies conferred, provided
for or existing at law or in equity, and Pledgee shall, in addition to the
rights, powers and remedies herein conferred or provided for, be entitled to
avail itself of all such other rights, powers and remedies as may now or
hereafter exist at law or in equity for the collection of and enforcement of the
Obligations and the enforcement of the warranties, representations, covenants,
indemnities and other agreements contained in this Agreement and the Obligation
Documents. Each and every such right, power and remedy may be exercised from
time to time and as often and in such order as may be deemed expedient by
Pledgee and the exercise of any such right, power or remedy shall not be deemed
a waiver of the right to exercise, at the same time or thereafter, any other
right, power or remedy. No delay or omission by Pledgee or other person in the
exercise of any right, power or remedy will impair any such right, power or
remedy or operate as a waiver thereof or of any other right, power or remedy
then or thereafter existing.
ARTICLE VI
ENVIRONMENTAL INDEMNITY
Pledgor agrees to indemnify, defend, and hold harmless Pledgee, its affiliates
and related parties, and their respective directors, officers, shareholders,
partners, members, employees, consultants and agents (individually, an
"Indemnified Party," and collectively, "Indemnified Parties") from and against,
and shall reimburse and pay Indemnified Parties with respect to, any and all
claims, demands, liabilities, losses, damages (including without limitation
actual, consequential, exemplary and punitive damages), causes of action,
judgments, penalties, fees, costs and expenses (including without limitation
attorneys' fees, court costs and legal expenses and consultant's and expert's
fees and expenses) of any and every kind or character, known or unknown, fixed
or contingent, that may be imposed upon, asserted against, or incurred or paid
by or on behalf of any Indemnified Party on account of, in connection with, or
arising out of (a) the breach of any representation or warranty of Pledgor
relating to Environmental Laws or Hazardous Materials or any matter that would,
but for the disclosure of such matter to Pledgee in writing in accordance with
Section 3.1(j), constitute or give rise to the breach of any representation or
warranty of Pledgor relating to Environmental Laws or Hazardous Materials,
(b) the failure of Borrowers to perform any agreement, covenant or obligation
required to be performed by Borrowers relating to Environmental Laws or
Hazardous Materials, (c) any act or omission by Cowboy or Crown with respect to
any of the Cowboy Properties that, if taken or omitted by Pledgor or Cowboy with
respect to any of the Cowboy/Foreland Properties, would constitute a failure of
Pledgor to perform any agreement, covenant or obligation of Pledgor under
Section 3.2(q), (d) any violation of or failure to comply with any Environmental
Law now existing or hereafter occurring, (e) the removal of Hazardous Materials
from the Cowboy Properties or the Other Collateral (or if removal is prohibited
by law, the taking of whatever action is required by law), (f) any act,
omission, event or circumstance existing or occurring or resulting from or in
connection with the ownership, construction, occupancy, operation, use or
maintenance of the Cowboy Properties or the Other Collateral, regardless of
whether the act, omission, event or circumstance constituted a violation of or
failure to comply with any Environmental Law at the time of its existence or
occurrence, and (g) any and all claims or proceedings (whether brought by
private party or governmental agency) for bodily injury, property damage,
abatement or remediation, environmental damage, or impairment or any other
injury or damage resulting from or relating to any Hazardous Material located
upon or migrating into, on, from or through the Cowboy Properties or the Other
Collateral (whether or not any or all of the foregoing was caused by Cowboy,
Borrowers, a prior owner of the Cowboy Properties or the Other Collateral, an
operator or prior operator of the Cowboy Properties or the Other Collateral,
their respective tenants or subtenants, or any third party and whether or not
the alleged liability is attributable to the handling, storage, use, treatment,
processing, distribution, manufacture, generation, discharge, transportation or
disposal of such Hazardous Material or the mere presence of such Hazardous
Material on the Cowboy Properties or the Other Collateral). Without limiting
the generality of the foregoing, it is the intention of Pledgor and Pledgor
agrees that the foregoing indemnities shall apply to each Indemnified Party with
respect to claims, demands, liabilities, losses, damages (including without
limitation actual, consequential, exemplary and punitive damages), causes of
action, judgments, penalties, fees, costs, court costs and legal expenses and
consultant's and expert's fees and expenses, of any kind or character, known or
unknown, fixed or contingent, that in whole or in part are caused by or arise
out of the negligence of such Indemnified Party; however, such indemnities shall
not apply to any Indemnified Party to the extent the subject of the
indemnification is caused by or arises out of the gross negligence or willful
misconduct of such Indemnified Party. Any amount to be paid hereunder by
Pledgor to Pledgee or for which Pledgor has indemnified an Indemnified Party
shall be a demand obligation owing by Pledgor to Pledgee and shall bear interest
at the Default Rate until paid, and shall constitute a part of the Obligations
and shall be indebtedness secured and evidenced by this Agreement. The
foregoing agreements shall be perpetual and shall survive the payment or
satisfaction of the Obligations and the release of this Agreement and the
foreclosure or other termination of the liens and security interests created by
this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Notices. Any notice or communication required or permitted
hereunder shall be given as provided in the Financing Agreement.
Section 7.2. Entire Agreement. This Agreement (including the Exhibits
hereto) and the Obligation Documents constitutes the entire understanding
between the parties with respect to the subject matter hereof and supersedes all
negotiations, prior discussions and prior agreements and understandings relating
to such subject matter.
Section 7.3. Indemnity. Pledgor agrees to indemnify, defend and hold
harmless Pledgee, upon request, from and against any and all claims, losses and
liabilities (whether or not caused by Pledgee's negligence) growing out of or
resulting from this Agreement (including without limitation, enforcement of this
Agreement); provided, however, that Pledgor shall not be required to indemnify
Pledgee for that portion of any such claims, losses or liabilities which are
proximately caused by Pledgee's gross negligence or willful misconduct. If any
Person (including, without limitation, any Related Person) ever alleges such
gross negligence or willful misconduct by Pledgee, the indemnification provided
for in this section shall nonetheless be paid upon demand, subject to later
adjustment or reimbursement, until such time as a court of competent
jurisdiction enters a final judgment as to the extent and effect of the alleged
gross negligence or willful misconduct.
Section 7.4. Costs and Expenses. Pledgor shall upon demand pay to
Pledgee the amount of any and all costs and expenses, including the fees and
disbursements of Pledgee's counsel and of any experts and agents, which Pledgee
may incur in connection with (a) the transactions which give rise to this
Agreement, (b) the preparation of this Agreement and the perfection and
preservation of the security interest created under this Agreement, (c) the
administration of this Agreement, (d) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any
Collateral, (e) the exercise or enforcement of any of the rights of Pledgee
hereunder, or (f) the failure by Pledgor to perform or observe any of the
provisions hereof, except expenses resulting from Pledgee's gross negligence or
willful misconduct.
Section 7.5. Amendments. No amendment of any provision of this Agreement
shall be effective unless it is in writing and signed by Pledgor and Pledgee,
and no waiver of any provision of this Agreement, and no consent to any
departure by Pledgor therefrom, shall be effective unless it is in writing and
signed by Pledgee, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given and to the
extent specified in such writing.
Section 7.6. Preservation of Rights. No failure on the part of Pledgee
to exercise, and no delay in exercising, any right hereunder or under any other
Obligation Document shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right. Neither the execution nor the
delivery of this Agreement shall in any manner impair or affect any other
security for the Obligations. The rights of Pledgee under any Obligation
Document against any party thereto are not conditional or contingent on any
attempt by Pledgee to exercise any of its rights under any other Obligation
Document against such party or against any other Person.
Section 7.7. Unenforceability. All rights, powers and remedies hereunder
conferred shall be exercisable by Pledgee only to the extent not prohibited by
applicable law; and all waivers or relinquishments of rights and similar matters
shall only be effective to the extent such waiver or relinquishments are not
prohibited by applicable law. If any provision of this Agreement or of any of
the Obligation Documents is invalid or unenforceable in any jurisdiction, such
provision shall be fully and severable from this Agreement and the other
provisions hereof and the Obligation Documents shall remain in full force and
effect in such jurisdiction and the remaining provisions hereof shall be
liberally construed in favor of Pledgee in order to carry out the provisions and
intent hereof. The invalidity of any provision of this Agreement in any
jurisdiction shall not affect the validity or enforceability of any such
provision in any other jurisdiction.
Section 7.8. Survival of Agreements. All representations and warranties
of Pledgor herein, and all covenants and agreements herein shall survive the
execution and delivery of this Agreement, the execution and delivery of the
other Obligation Documents and the creation of the Obligations.
Section 7.9. Other Liable Party. Neither this Agreement nor the exercise
by Pledgee or the failure of Pledgee to exercise any right, power or remedy
conferred herein or by law shall be construed as relieving any Other Liable
Party from liability on the Obligations or any deficiency thereon. This
Agreement shall continue irrespective of the fact that the liability of any
Other Liable Party may have ceased or irrespective of the validity or
enforceability of any other Obligation Document to which Pledgor or any Other
Liable Party may be a party, and notwithstanding the reorganization, death,
incapacity or bankruptcy of any Other Liable Party, and notwithstanding the
reorganization or bankruptcy or other event or proceeding affecting any Other
Liable Party.
Section 7.10. Binding Effect and Assignment. This Agreement creates a
continuing security interest in the Collateral and (a) shall be binding on
Pledgor and its successors and permitted assigns, and (b) shall inure, together
with all rights and remedies of Pledgee hereunder, to the benefit of Pledgee and
its successors, transferees and assigns. Without limiting the generality of the
foregoing, Pledgee may assign or otherwise transfer its rights under any
Obligation Document to any other Person, and such other Person shall thereupon
become vested with all of the benefits with respect thereto granted to Pledgee,
herein or otherwise. None of the rights or obligations of Pledgor hereunder may
be assigned or otherwise transferred without the prior written consent of
Pledgee.
Section 7.11. Termination. It is contemplated by the parties hereto that
there may be times when no Obligations are outstanding, but notwithstanding such
occurrences, this Agreement shall remain valid and shall be in full force and
effect as to subsequent outstanding obligations. Upon the satisfaction in full
of the Obligations, upon the termination or expiration of the Commitment and any
other commitment of Pledgee to extend credit to Pledgor, and upon written
request delivered by Pledgor to Pledgee, the security interest created by this
Agreement shall terminate and all rights to the Collateral shall revert to
Pledgor. Upon such event, Pledgee shall, upon Pledgor's request and at Pledgor's
expense (a) return to Pledgor such of the Collateral as shall not have been sold
or otherwise disposed of or applied pursuant to the terms hereof, and (b)
execute and deliver to Pledgor such documents as Pledgor shall reasonably
request to evidence such termination. The termination of the security interests
created by this Agreement, shall not terminate or otherwise affect Pledgee's
right or ability to exercise any right, power or remedy on account of any claim
for breach of warranty or representation, for failure to perform any covenant or
other agreement, under any indemnity or for fraud, deceit or other
misrepresentation or omission.
Section 7.12. Financing Statement. This Agreement shall be deemed to be
and may be enforced from time to time as an assignment, contract, financing
statement, pledge agreement or security agreement, and from time to time as one
or more thereof is appropriate under applicable state law. A carbon,
photographic or other reproduction of this Agreement or of any financing
statement in connection herewith shall be sufficient as a financing statement
for any and all purposes and may be filed in any jurisdiction Pledgee may deem
appropriate.
Section 7.13. Rate of Interest. All interest required hereunder and under
the Obligations shall be calculated on the basis of a year of 360 days.
Section 7.14. Execution in Counterparts. This Agreement may be executed
in one or more original counterparts. Each counterpart shall be deemed to be an
original for all purposes, and all counterparts shall together constitute but
one and the same instrument.
Section 7.15. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. PLEDGOR HEREBY:
(A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE
FINANCING AGREEMENT OR ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING
OR RELATING TO THE OBLIGATIONS OR ANY TRANSACTION PROVIDED FOR THEREIN OR
ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES
THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY
HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND
(D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE
NOTES, THE FINANCING AGREEMENT AND ANY OTHER DOCUMENTS AND INSTRUMENTS
EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS AND THE TRANSACTIONS
PROVIDED FOR HEREIN AND THEREIN, BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION.
Section 7.16. USURY SAVINGS. IT IS THE INTENTION OF THE PARTIES HERETO TO
COMPLY WITH ALL APPLICABLE USURY LAWS; ACCORDINGLY, IT IS AGREED THAT
NOTWITHSTANDING ANY PROVISIONS TO THE CONTRARY IN THIS INSTRUMENT, THE NOTES,
THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING,
SECURING OR OTHERWISE RELATING TO THE OBLIGATIONS, IN NO EVENT SHALL SUCH
DOCUMENTS OR INSTRUMENTS REQUIRE THE PAYMENT OR PERMIT THE COLLECTION OF
INTEREST (WHICH TERM, FOR PURPOSES HEREOF, SHALL INCLUDE ANY AMOUNT WHICH, UNDER
APPLICABLE LAW, IS DEEMED TO BE INTEREST, WHETHER OR NOT SUCH AMOUNT IS
CHARACTERIZED BY THE PARTIES AS INTEREST) IN EXCESS OF THE MAXIMUM AMOUNT
PERMITTED BY SUCH LAWS. IF ANY EXCESS INTEREST IS UNINTENTIONALLY CONTRACTED
FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THE TERMS OF THIS INSTRUMENT,
THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING,
SECURING OR RELATING TO THE OBLIGATIONS, OR IN THE EVENT THE MATURITY OF THE
INDEBTEDNESS EVIDENCED BY THE NOTES IS ACCELERATED IN WHOLE OR IN PART, OR IN
THE EVENT THAT ALL OR PART OF THE PRINCIPAL OR INTEREST OF THE NOTES SHALL BE
PREPAID, SO THAT THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED
UNDER THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES
OR UNDER THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR
INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, ON THE AMOUNT
OF PRINCIPAL ACTUALLY OUTSTANDING FROM TIME TO TIME UNDER THE NOTES SHALL EXCEED
THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY THE APPLICABLE USURY LAWS, THEN IN
ANY SUCH EVENT (A) THE PROVISIONS OF THIS SECTION SHALL GOVERN AND CONTROL,
(B) NEITHER PLEDGOR OR THE OTHER BORROWERS NOR ANY OTHER PERSON OR ENTITY NOW OR
HEREAFTER LIABLE FOR THE PAYMENT THEREOF, SHALL BE OBLIGATED TO PAY THE AMOUNT
OF SUCH INTEREST TO THE EXTENT THAT IT IS IN EXCESS OF THE MAXIMUM AMOUNT OF
INTEREST PERMITTED BY SUCH APPLICABLE USURY LAWS, (C) ANY SUCH EXCESS WHICH MAY
HAVE BEEN COLLECTED SHALL BE EITHER APPLIED AS A CREDIT AGAINST THE THEN UNPAID
PRINCIPAL AMOUNT THEREOF OR REFUNDED TO BORROWERS AT PLEDGEE'S OPTION, AND (D)
THE EFFECTIVE RATE OF INTEREST SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM
LAWFUL RATE OF INTEREST ALLOWED UNDER THE APPLICABLE USURY LAWS AS NOW OR
HEREAFTER CONSTRUED BY THE COURTS HAVING JURISDICTION THEREOF. IT IS FURTHER
AGREED THAT WITHOUT LIMITATION OF THE FOREGOING, ALL CALCULATIONS OF THE RATE OF
INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS
AGREEMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS
EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS WHICH ARE MADE FOR THE
PURPOSE OF DETERMINING WHETHER SUCH RATE EXCEEDS THE MAXIMUM LAWFUL RATE OF
INTEREST, SHALL BE MADE, TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAWS, BY
AMORTIZING, PRORATING, ALLOCATING AND SPREADING IN EQUAL PARTS DURING THE PERIOD
OF THE FULL STATED TERM OF THE OBLIGATIONS EVIDENCED THEREBY, ALL INTEREST AT
ANY TIME CONTRACTED FOR, CHARGED OR RECEIVED FROM BORROWERS OR OTHERWISE BY
PLEDGEE IN CONNECTION WITH THE OBLIGATIONS.
Section 7.17. GOVERNING LAW. THIS INSTRUMENT AND ALL MATTERS ARISING
UNDER OR GROWING OUT HEREOF SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO
ITS PRINCIPLES OF CONFLICTS OF LAWS, AND THE LAWS OF THE UNITED STATES OF
AMERICA, EXCEPT TO THE EXTENT THAT PROCEDURAL AND SUBSTANTIVE MATTERS RELATING
ONLY TO THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS,
SECURITY INTERESTS AND OTHER RIGHTS AND REMEDIES OF THIS AGREEMENT GRANTED
HEREIN ARE PURSUANT TO APPLICABLE LAW GOVERNED BY THE LAWS OF A JURISDICTION
OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS. EXCEPT AS TO THE VALIDITY,
CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED
HEREBY, PLEDGOR AND PLEDGEE AGREE THAT THE TRANSACTIONS PROVIDED FOR HEREIN BEAR
A REASONABLE RELATIONSHIP TO THE COMMONWEALTH OF MASSACHUSETTS AND THAT THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS GOVERNS (A) ISSUES RELATING TO THE
TRANSACTIONS PROVIDED FOR HEREIN, INCLUDING THE VALIDITY AND ENFORCEABILITY OF
AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT, AND
(B) THE INTERPRETATION OR CONSTRUCTION OF AN AGREEMENT RELATING TO SUCH
TRANSACTIONS OR A PROVISION OF AN AGREEMENT.
This Agreement is executed and delivered as of the date first above
written.
PLEDGOR:
FORELAND ASPHALT CORPORATION, a
Utah corporation
By:/s/ Bruce C. Decker
Title: President
Taxpayer I.D. No. 84-1669800
PLEDGEE:
ENERGY INCOME FUND, L.P., a
Delaware limited partnership
By: EIF GENERAL PARTNER, L.L.C., a
Delaware limited liability company, its
General Partner
By: Robert D. Gershen, a Managing Director
Taxpayer I.D. No. 04-3309082
April 14, 1999
Foreland Corporation
143 Union Boulevard
Suite 200
Lakewood, CO 80228
Re: Deferral of Principal Payment; Forbearance
Gentlemen:
You ("Borrowers") and we ("EIF") are parties to a Financing Agreement dated
January 6, 1998, as amended by First Amendment to Financing Agreement dated
August 10, 1998, and as further amended by Second Amendment to Financing
Agreement dated February 4, 1999 (as amended, the "Financing Agreement"),
providing that we will make certain loans to you under the conditions and
subject to the terms set forth in the Financing Agreement.
Payment Default. Borrowers have failed to make the principal payments due on
April 1, 1999 under the Refinancing Loan, the Acquisition Loan and the
Development Loan in the aggregate amount of $338,095.53. Borrowers have
requested that EIF defer this payment.
EIF is willing to agree to this request, subject to the conditions set forth in
this letter. Borrowers shall make the regularly scheduled payments as set forth
in the new amortization schedule attached to this letter as Exhibit A.
Borrowers and EIF acknowledge that this new amortization schedule reflects the
changes set forth in this letter, and that Borrowers have accepted the new
schedule in substitution for the existing schedules that are currently attached
to the Notes.
Covenant Defaults. (i) The financial covenants set forth in Sections 7.23(a),
7.23(b), 7.23(c) and 7.23(d) and (ii) the collateral/indebtedness ratio
covenant set forth in Section 2.14 of the Financing Agreement require Borrowers
to maintain certain ratios and percentages as to equity, current assets to
current liabilities, net income to total debt service expense and collateral
value to debt by April 1, 1999, but Borrowers were not in compliance with these
covenants as of that date. EIF agrees to waive compliance until May 15, 1999.
EIF further agrees to waive Borrowers' compliance with Section 7.39(c) of the
Financing Agreement regarding consummation of a Qualified Offering until May 15,
1999.
Release. To induce EIF to execute this letter and to agree to the forbearance
described in this letter, Borrowers represent and warrant that no Borrower has
any claims, counterclaims, setoffs, actions or causes of action of any kind or
nature whatsoever against EIF, its directors, officers, partners, employees,
agents, attorneys, legal representatives, successors or assigns, directly or
indirectly, arising out of, based upon or in any manner connected with any
"Prior Related Event" (as hereinbelow defined), and hereby releases, discharges
and forever waives and relinquishes any and all such claims, counterclaims,
setoffs, actions and causes of action against EIF, whether known or unknown,
asserted or unasserted, established or unestablished, determined or
undetermined, proven or unproven, absolute or inchoate or contingent, held
individually or jointly, arising directly, indirectly, derivatively or in any
other manner, from the beginning of the world to the date hereof. As used
herein the term "Prior Related Event" means any transaction, event,
circumstance, action, failure to act, or occurrence of any sort or type, whether
known or unknown, which occurred, existed, was taken, permitted or begun, prior
to the date hereof, and occurred, existed, was taken, was permitted or begun in
accordance with, pursuant to, or by virtue of, any of the terms of any of the
Loan Documents, or which was related or connected in any manner, directly or
indirectly, to the Loans or any of the Loan Documents. Nothing contained herein
shall be construed to release EIF from liability for any acts after the date of
execution of this release. Neither the offer of this release by Borrowers nor
its acceptance by EIF shall constitute an acknowledgment of or admission by EIF
of liability for any matter or a precedent upon which any liability may be
asserted.
Any waivers by EIF are limited to the circumstances described in this letter and
will not be deemed to be a waiver of any other provision of the Financing
Agreement, except as expressly set forth herein. Borrowers hereby expressly
acknowledge that failure by EIF to enforce its rights under these sections of
the Financing Agreement in the past does not entitle Borrowers to any such
forbearance under these or any other sections of the Financing Agreement in the
future.
Borrowers further agree that it shall be an Event of Default (as that term is
defined in the Financing Agreement) if Borrowers fail to comply with the
conditions set forth above, and that EIF shall be entitled to exercise any and
all remedies available to it upon the happening of an Event of Default.
All capitalized terms used in this letter that are not otherwise defined herein
shall have the meanings ascribed to them in the Financing Agreement. If the
foregoing accurately reflects your understanding of our agreement, please
execute a copy of this letter and return it to us.
Sincerely yours,
ENERGY INCOME FUND, L.P.
By: EIF General Partner, L.L.C.,
its General Partner
By /s/ Steven P. McDonald
Vice President
ACKNOWLEDGED AND AGREED:
FORELAND CORPORATION
By /s/ N. Thomas Steele
President
EAGLE SPRINGS PRODUCTION LIMITED-LIABILITY COMPANY
By /s/ N. Thomas Steele
Manager
FORELAND REFINING CORPORATION
By /s/ Bruce C. Decker
President
FORELAND ASPHALT CORPORATION
By /s/ Bruce C. Decker
President
FORELAND ASSET CORPORATION
By /s/ Bruce C. Decker
President
FORELAND TRANSPORTATION, INC.
By /s/Bruce C. Decker
President
<PAGE>
<TABLE>
<CAPTION>
Foreland Corporation
Combined Loan Amortization Schedule
January 9, 1998
Beginning Ending |------------Payments---------------------|
Days Date Principal Principal Interest Principal Total
<S> <C> <C> <C> <C> <C> <C>
9-Jan-98 - 5,425,279.34 - - -
23 1-Feb-98 5,425,279.34 5,925,279.34 41,593.80 - 41,593.80
28 1-Mar-98 5,925,279.34 5,925,279.34 54,969.27 - 54,969.27
31 1-Apr-98 5,925,279.34 5,925,279.34 61,227.89 - 61,227.89
30 1-May-98 5,925,279.34 5,925,279.34 59,252.79 - 59,252.79
31 1-Jun-98 5,925,279.34 5,925,279.34 61,227.89 - 61,227.89
30 1-Jul-98 5,925,279.34 5,925,279.34 59,252.79 - 59,252.79
31 1-Aug-98 5,925,279.34 12,375,279.34 61,227.89 - 61,227.89
31 1-Sep-98 12,375,279.34 12,375,279.34 104,227.89 - 104,227.89
30 1-Oct-98 12,375,279.34 12,375,279.34 123,752.79 - 123,752.79
31 1-Nov-98 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89
30 1-Dec-98 12,375,279.34 12,375,279.34 123,752.79 - 123,752.79
31 1-Jan-99 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89
31 1-Feb-99 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89
28 1-Mar-99 12,375,279.34 12,575,279.34 115,502.61 - 115,502.61
31 1-Apr-99 12,575,279.34 12,575,279.34 129,744.56 - 129,744.56
30 1-May-99 12,575,279.34 12,227,842.72 125,752.79 347,436.62 473,189.41
31 1-Jun-99 12,227,842.72 11,880,406.10 126,354.38 347,436.62 473,791.00
30 1-Jul-99 11,880,406.10 11,532,969.48 118,804.06 347,436.62 466,240.68
31 1-Aug-99 11,532,969.48 11,185,532.86 119,174.02 347,436.62 466,610.64
31 1-Sep-99 11,185,532.86 10,838,096.24 115,583.84 347,436.62 463,020.46
30 1-Oct-99 10,838,096.24 10,490,659.62 108,380.97 347,436.62 455,817.59
31 1-Nov-99 10,490,659.62 10,143,223.00 108,403.47 347,436.62 455,840.09
30 1-Dec-99 10,143,223.00 9,795,786.38 101,432.23 347,436.62 448,868.85
31 1-Jan-00 9,795,786.38 9,488,438.61 101,223.14 307,347.77 408,570.91
31 1-Feb-00 9,488,438.61 9,181,090.84 98,047.20 307,347.77 405,394.97
29 1-Mar-00 9,181,090.84 8,873,743.07 88,750.55 307,347.77 396,098.32
31 1-Apr-00 8,873,743.07 8,566,395.30 91,695.34 307,347.77 399,043.11
30 1-May-00 8,566,395.30 8,259,047.53 85,663.96 307,347.77 393,011.73
31 1-Jun-00 8,259,047.53 7,951,699.76 85,343.48 307,347.77 392,691.25
30 1-Jul-00 7,951,699.76 7,644,351.99 79,517.01 307,347.77 386,864.78
31 1-Aug-00 7,644,351.99 7,337,004.22 78,991.64 307,347.77 386,339.41
31 1-Sep-00 7,337,004.22 7,029,656.45 75,815.70 307,347.77 383,163.47
30 1-Oct-00 7,029,656.45 6,722,308.68 70,296.56 307,347.77 377,644.33
31 1-Nov-00 6,722,308.68 6,414,960.91 69,463.85 307,347.77 376,811.62
30 1-Dec-00 6,414,960.91 6,107,613.14 64,149.62 307,347.77 371,497.39
31 1-Jan-01 6,107,613.14 5,853,717.16 63,112.00 253,895.98 317,007.98
31 1-Feb-01 5,853,717.16 5,599,821.18 60,488.41 253,895.98 314,384.39
28 1-Mar-01 5,599,821.18 5,345,925.20 52,264.99 253,895.98 306,160.97
31 1-Apr-01 5,345,925.20 5,092,029.22 55,241.23 253,895.98 309,137.21
30 1-May-01 5,092,029.22 4,838,133.24 50,920.31 253,895.98 304,816.29
31 1-Jun-01 4,838,133.24 4,584,237.26 49,994.05 253,895.98 303,890.03
30 1-Jul-01 4,584,237.26 4,330,341.28 45,842.38 253,895.98 299,738.36
31 1-Aug-01 4,330,341.28 4,076,445.30 44,746.86 253,895.98 298,642.84
31 1-Sep-01 4,076,445.30 3,822,549.32 42,123.27 253,895.98 296,019.25
30 1-Oct-01 3,822,549.32 3,568,653.34 38,225.50 253,895.98 292,121.48
31 1-Nov-01 3,568,653.34 3,314,757.36 36,876.08 253,895.98 290,772.06
30 1-Dec-01 3,314,757.36 3,060,861.38 33,147.58 253,895.98 287,043.56
31 1-Jan-02 3,060,861.38 0.00 31,628.90 3,060,861.38 3,092,490.28
$3,896,822.00 $12,575,279.34 $16,472,101.34
</TABLE>
Schedule of Subsidiaries
Exhibit 21.01
State of
Name Incorporation
EAGLE SPRINGS PRODUCTION LIMITED LIABILITY COMPANY NEVADA
FORELAND REFINING CORPORATION TEXAS
FORELAND ASSET CORPORATION NEVADA
FORELAND ASPHALT CORPORATION UTAH
FORELAND TRANSPORATION UTAH
COWBOY ASPHALT TERMINAL, LLC UTAH
KRUTEX ENERGY UTAH
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF DECEMBER 31, 1998, AND STATEMENTS OF OPERATIONS FOR THE
YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,849,782
<SECURITIES> 700,000
<RECEIVABLES> 2,771,085
<ALLOWANCES> 0
<INVENTORY> 1,166,361
<CURRENT-ASSETS> 6,652,149
<PP&E> 20,206,375
<DEPRECIATION> (13,115,997)
<TOTAL-ASSETS> 14,642,687
<CURRENT-LIABILITIES> 15,204,774
<BONDS> 0
<COMMON> 9,673
0
524
<OTHER-SE> (572,284)
<TOTAL-LIABILITY-AND-EQUITY> 14,642,687
<SALES> 10,532,289
<TOTAL-REVENUES> 10,542,237
<CGS> 6,864,301
<TOTAL-COSTS> 972,886
<OTHER-EXPENSES> 16,804,911
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,865,920
<INCOME-PRETAX> (12,154,089)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,154,089)
<DISCONTINUED> 0
<EXTRAORDINARY> (36,822)
<CHANGES> 0
<NET-INCOME> (13,909,133)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.48)
</TABLE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration statements of
Foreland Corporation on Forms S-3, SEC File Nos. 333-19063 and 333-3779 and 333-
49471 and the registration statement on Form S-8, SEC File No. 333-45025 of our
report dated March 10, 1999, on our audits of the consolidated financial
statements of Foreland Corporation as of December 31, 1998 and 1997, and for
each of the years in the three-year period ended December 31, 1998, which report
is included in this Annual Report on Form 10-K.
/s/ HEIN + ASSOCIATES LLP
Denver, Colorado
April 14, 1999
MALKEWICZ HUENI
ASSOCIATES
April 13, 1999
Kruse, Landa & Maycock, L.L.C.
50 West Broadway 8th Floor
Salt Lake City, Utah 84101-2034
We consent to the use of our report respecting Foreland Corporation's (the
"Company"), properties and the discussion of such report as contained in the
Company's annual report on Form 10-K for the year ended December 31, 1998 and to
the incorporation by reference of such report as it is referred to in the
Company's annual report to the Registration Statements on Form S-3, SEC File
Nos. 333-19063 and 333-03779 and 333-49471 and the Registration Statement on
Form S-8, SEC File Nos. 333-45025.
Sincerely,
Malkewicz Hueni Associates, Inc.
/s/
Gregory B. Hueni
Vice President
14142 Denver West Parkway, Suite 190
Golden, Colorado 80401 U.S.A.
(303) 277-0270
Fax: (303) 277-0267
