<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
June 17, 1998
- -------------------------------------------------------------------------
(Date of earliest event reported)
National Equities Holdings, Inc.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 033-19992-LA 33-0284600
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
13700 Veterans Memorial, Suite 410, Houston, Texas 77014
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(Address of principal executive offices) (Zip Code)
(281) 583-1280
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Page 1 of 5 Pages
Exhibit Index appears on Page 4
<PAGE>
Form 8-K
Page 2
ITEM 4. Changes in Registrant's Certifying Accountant.
On June 17, 1998, Alvin L. Dahl & Associates, Inc. (the "Former Auditors"),
informed the President of National Equities Holdings, Inc. (the "Company") and
the Securities and Exchange Commission ("SEC") that the Former Auditors
resigned as the Company's independent auditors as set forth in Exhibit 99.1
to this Report on Form 8-K. The decision to resign was made by the Former
Auditors and has not been formally approved or disapproved by the Company's
Board of Directors.
The report of the Former Auditors on the Company's financial statements for
the years ended December 31, 1997 and 1996 did not contain an adverse opinion or
a disclaimer of opinion. The report did question the ability of the Company to
continue as a going concern, because the Company has sustained significant
operating losses and abandonment of its oil and gas operations.
Management of the Company believed certain notes to the financial
statements did not adequately describe the condition of the Company and
decided not to release the financial statements until appropriate changes
were made thereto. In addition, the Company filed a lawsuit against a
director and stockholder of the Company and certain related parties. See
Item 5 below. Due to conflict between members of the Company's directors,
the Former Auditors resigned. The Company engaged Weinstein Spira & Company,
P.C., Houston, Texas, as its independent auditors ("Weinstein Spira") to
audit the financial statements of the Company for the year ended December 31,
1997. The Company had not previously consulted with the Weinstein Spira on
any matter prior to its engagement.
During discussions with the Former Auditors relative to the Company's
fiscal years ended December 31, 1996 and 1997 and through June 17, 1998, it was
determined that (i) there were no disagreements between the Company and the
Former Auditors on any matter of accounting principles or practice, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the Former Auditors would have caused them to
make reference thereto in their report and (ii) there were no reportable events
as defined in paragraph 304(a)(1)(v) of Regulation S-K. In light of this
determination, Management and the Former Auditors concluded, based upon the
subsequent event of the litigation, that minor changes to the notes to the
December 31, 1997 financial statements were necessary and that instead of using
the Weinstein Spira firm, the Former Auditor would revise his report to reflect
the litigation. These changes are now included in the audit report of the
Former Auditor.
On April 1, 1998, the Company filed a Form 12b-25 with respect to its
inability to file a Form 10-KSB for the year ended December 31, 1997 (the "Form
10-KSB"). Having received the Former Auditors' revised report of the Company's
December 31, 1997 and 1996 financial statements, the Company intends to file the
Form 10-KSB with the SEC within the next forty five days.
<PAGE>
Form 8-K
Page 3
The Company requested the Former Auditors to furnish it a letter addressed
to the SEC stating whether it agrees with the above statements. A copy of that
letter dated July 21, 1998, is filed as Exhibit 16.1 to this Current Report on
Form 8-K. The engagement of Weinstein Spira is being revised to provide solely
for the audit of the Company's financial statements for December 31, 1998 and no
review of the financial statements for the previous year.
ITEM 5. Other Events.
-------------
On June 16, 1998, the Company filed a complaint in the 295th Judicial
District for the District Civil Court of Harris County Texas against Billy
Knollenberg, Bradley Knollenberg, Doris Knollenberg, Erin Oil Exploration Inc.
("Erin") and Gulf Minerals Exploration Inc. (also known as the Knollenberg Gulf
Minerals Limited Partnership) ("Gulf Minerals") (collectively designated herein
as the "Defendants"), Case No. 98-28403. (See Exhbit 99.2.) Billy Knollenberg
was the former Chairman of the Board, and remains a director of the Company.
Doris Knollenberg is a former director of the Company and Bradley Knollenberg is
a former officer of the Company. The Company Complaint alleges, among other
things, mismanagement of the business and financial affairs, of and breach of
fiduciary duty to, the Company by Billy and Doris Knollenberg, self-dealing and
wrongful conversion by the Knollenbergs in the issuance of securities of the
Company to themselves, Erin and Gulf Minerals for inadequate or insufficient
consideration. As a remedy for such alleged acts, the Company has demanded in
its petition that any and all securities issued invalidly be canceled, that
Billy Knollenberg be removed from his position as a director of the Company,
that an injunction be issued against the Defendants in such action enjoining
them from directly or indirectly selling any securities of the Company held
by them and that the Court, upon a proper finding, cancel and rescind the
securities of the Company improperly issued to said Defendants.
On July 10, 1998 the Company was served with an Answer and Original
Counterclaims by the Defendants in response to its Complaint. (See Exhibit
99.3.) The Company is in the process of reviewing this pleading and intends to
prosecute this lawsuit.
On May 12, 1997, the Company, along with Bill M. Knollenberg, Erin Oil
Exploration, Inc.("Erin Oil") and Erin Gas Producers, was named as one of the
defendants in an action by Suzanne R. Wilkes in the 165th Judicial District for
the District Civil Court of Harris County, Texas, Case No. 97-25432, in which
she claimed damages in connection with her purchase of debentures of Erin Oil, a
Company affiliated with the Knollenbergs. On May 5, 1998, a Mediation
Settlement Agreement was executed between the parties in which a judgment
against Mr.Knollenberg and Erin Oil was agreed. In addition, Ms. Wilkes was
given the right to convert the Erin Oil debentures she owned into 400,000
shares of Company common stock. These 400,000 shares were to be issued out of
2,913,000 shares, which had previously been set aside pursuant to an
agreement between the Company and Erin Oil for the purpose of the conversion
of the outstanding Erin Oil debentures.
<PAGE>
Form 8-K
Page 4
ITEM 7. Financial Statements and Exhibits.
----------------------------------
Exhibits:
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Exhibit Number Description
-------------- -----------
16.1 Letter from Alvin L. Dahl & Associates, Inc.
99.1 Letter of resignation of Alvin L.Dahl &
Associates, Inc. as independent accountants
of the Company.
99.2 Petition of the Company against Billy
Knollenberg, et al., Case No. 98-28403
99.3 Answer and Original Counterclaim
<PAGE>
Form 8-K
Page 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL EQUITIES HOLDINGS, INC.
Date: July 21, 1998 By: /s/ Jack Chance
-----------------------
Jack Chance
Chief Executive Officer
<PAGE>
<PAGE>
EXHIBIT 16.1
Letter from Alvin L. Dahl & Associates, Inc.
<PAGE>
ALVIN L. DAHL Member:
& Associates, PC American Institute of Certified
Certified Public Accountants Public Accountants
Private Companies Practice Section
A Professional Corporation SEC Practice Section
Texas Society of Certified
Public Accountants
Dallas Chapter of Certified
Public Accountants
July 21, 1998
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, DC 20549
Gentlemen:
We have read Item 4 of Form 8-K dated July 21, 1998 of National Equities
Holdings, Inc. and are in agreement with the statements contained in
paragraphs one through four therein. We have no basis to agree or
disagree with other statements of the registrant contained in the Form 8-K.
Sincerely,
/s/ Alvin L. Dahl
ALVIN L. DAHL & Associates, PC
<PAGE>
<PAGE>
EXHIBIT 99.1
Letter of resignation of
Alvin L. Dahl & Associates, Inc.
as independent accountants of the Company
<PAGE>
ALVIN L. DAHL Member:
& Associates, PC American Institute of Certified
Certified Public Accountants Public Accountants
Private Companies Practice Session
A Professional Corporation SEC Practice Session
Texas Society of Certified Public
Accountants
Dallas Chapter of Certified Public
Accountants
June 17, 1998
Chief Accountant
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: National Equities Holdings, Inc.
Current Reporting File No.: 33-19992-LA
Dear Sir:
Please be advised that effective June 17, 1998, the undersigned Independent
Accounting Firm has resigned as Auditor for National Equities Holdings, Inc.
Please feel free to call me if you have any questions regarding this matter.
Sincerely,
ALVIN L. DAHL & Associates, PC
/s/ Alvin L. Dahl
By: Alvin L. Dahl, CPA
President
cc: Mr. George Sutherland
<PAGE>
ALVIN L. DAHL Member:
& Associates, PC American Institute of Certified
Certified Public Accountants Public Accountants
Private Companies Practice Session
A Professional Corporation SEC Practice Session
Texas Society of Certified
Public Accountants
Dallas Chapter of Certified
Public Accouuntants
June 17, 1998
Mr. George Sutherland, President
National Equities Holdings, Inc.
13700 Veterans Memorial
Suite 410
Houston, TX 77014
Dear George:
I have enclosed the revised financial statement notes for the December 31, 1997
audit report. These notes replace those in the report previously furnished to
you and match those in the information provided to Dan Kirshbaum's office. Per
our previous agreement, accounting information necessary to file the 10QSB was
delivered to that office several weeks ago.
Please be advised that this firm is resigning as your auditor effective June 17,
1998.
There are no outstanding accounting issues of which we are aware.
Should any further services be required of this firm, we will require that the
currently outstanding invoice is paid and we will require payment in advance for
any other services.
Sincerely,
/s/ Alvin L. Dahl
Alvin L. Dahl, CPA
<PAGE>
<PAGE>
EXHIBIT 99.2
Petition of the Company
against Billy Knollenberg,
et al., Case No. 98-28403<PAGE>
<PAGE>
NO. 98-028403
-------------------
NATIONAL EQUITIES HOLDINGS INC. : IN THE DISTRICT CIVIL COURT
:
VS. :
:
BRADLEY KNOLLENBERG, : OF HARRIS COUNTY, T E X A S
ERIN OIL EXPLORATION INC., :
GULF MINERALS EXPLORATION, :
BILLY KNOLLENBERG, AND :
DORIS KNOLLENBERG : 295th JUDICIAL DISTRICT
: -----
PLAINTIFF'S ORIGINAL PETITION
TO THE HONORABLE JUDGE OF SAID COURT:
National Equities Holdings Inc., Plaintiff herein, files this its
Plaintiff's Original Petition against and complaining of Erin Oil Exploration
Inc., Gulf Minerals Exploration, also known as Knollenberg Gulf Minerals Family
Limited Partnership, Billy Knollenberg, Bradley Knollenberg, and Doris
Knollenberg. Defendants, and for cause of action would show the Court as
follows:
I. PARTIES, JURISDICTION, AND VENUE.
1. National Equities Holdings Inc. (hereinafter referred to only as
"NEHI"), is a corporation, duly formed and existing under the laws of the State
of Delaware, having its principal place of business in Houston, Harris County,
Texas.
2. Erin Oil Exploration Inc. ("Erin"), is a Texas corporation, existing
under the laws of the State of Texas, having its principal place of business in
Spring, Harris County, Texas. Erin may be served with process herein by serving
Billy M. Knollenberg, its President, at 21818 North I-45, Spring, Texas 77373,
or at 616 FM 1960 West, Suite 222, Houston, Texas 77090, or wherever else he may
be found. Alternatively, Erin may be served by serving its Registered Agent, as
named in
<PAGE>
the public records filed with the Texas Secretary of State, H. Dawson
French, at Two Energy Square, Suite 800, Dallas, Texas 75206. Gulf Minerals
Exploration, also known as Knollenberg Gulf Minerals Family Limited Partnership,
("Gulf Minerals") is alleged upon information and belief to be a limited
partnership existing under the laws of Texas, having its principal place of
business in Spring, Harris County, Texas. Gulf Minerals may be served with
process herein by serving Billy M. Knollenberg, its Registered Agent, as named
in the public records filed with the Texas Secretary of State, at 21818 North I-
45, Spring, Texas 77373, or at 616 FM 1960 West, Suite 222, Houston, Texas
77090, or wherever else he may be found. Also upon information and belief,
Knollenberg LLC is alleged to be the General Partner of Gulf Minerals and,
according to the public records filed with the Texas Secretary of State,
Billy M. Knollenberg is alleged to be the General Partner of Knollenberg LLC,
and Gulf Minerals may also be served, if necessary, through Knollenberg LLC
by serving Billy M. Knollenberg as its General Partner. Billy Knollenberg
("Knollenberg"), Bradley Knollenberg, and Doris Knollenberg are individuals
residing in or around Spring, Harris County, Texas. All aforementioned
Defendants may be served with citation at 21818 North Freeway, Spring, Texas
77373, or at 616 FM 1960 West, Suite 222, Houston, Texas 77090, or at such
other place as they may be found. Any and all Defendants may be served by
any person and means authorized by Rules 103 and 106, Texas rules of Civil
Procedure. Alternatively, in the unlikely event that Erin or Gulf Minerals
cannot be served as provided hereinabove, then they may be served through the
Texas Secretary of State.
3. All parties to this cause are residents of or domiciled in Harris
County, Texas, and the transaction or transactions upon which this cause is
based were made and performed here. Accordingly, this Court has jurisdiction
over the parties and subject matter of this cause, and venue
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<PAGE>
is proper in this County.
4. This cause is brought under the statutes, laws, including common
law, and principles of equity of the State of Texas. Any claims which NEHI
might have against these Defendants under the statutes and laws of the United
States of America, and the rules and regulations promulgated by one or more
federal agencies, boards, or commissions, are expressly excluded from this
cause.
II. BACKGROUND FACTS.
5. National Equities Holdings Inc. originally was formed under another
name by filing original and/or amended articles of incorporation with the
Secretary of State of Delaware. NEHI is authorized by such articles to issue
49,000,000 shares of common stock at $.001 par value.
6. For a period of time during the existence of NEHI, Billy Knollenberg
has been active in the business and financial affairs of the corporation. He
has been, and still is, a significant shareholder, an officer, and a Director.
Until February 1998, Billy Knollenberg was in de facto control of the
corporation and used it for his, and his family's and other business ventures
in which he was involved, personal gain and benefit. During this time,
Knollenberg controlled the Board of Directors and ran this public corporation
as if it were a privately held company. In November 1997, new shareholders
by the name of Jack Chance, George Sutherland, Steve McLoughlin, and Feroze
Viavara were admitted to the Board of Directors and then became managing
officers of the corporation.
7. Beginning in November 1997, however, when Jack Chance, George
Sutherland, Steve McLoughlin, and Feroze Variava were admitted to the Board of
Directors and then became
- ------------
1
NEHI, however, reserves the right to bring a seperate action under federal law
in a court of competent jurisdiction within the federal judicial system.
-3-
<PAGE>
managing officers of the corporation, Billy Knollenberg's absolute control
over the Board of Directors began to decline, and the new Directors began to
learn just how and to what extent he had abused his office and breached his
fiduciary duties to the corporation and mismanaged the business and financial
affairs of the corporation. All the while, however, Knollenberg continued
to misrepresent important facts and mislead the new Directors to the
detriment of the corporation and all its shareholders. Although internal
discovery is ongoing and by no means completed, the new officers have
identified various abuses committed by Knollenberg and his family members,
including Doris Knollenberg, his wife, and their son, Brad Knollenberg
(sometimes hereinafter referred to jointly as "the Knollenberg Family").
8. Among other things, the Knollenberg Family issued or caused the
corporation to issue to themselves, and to Erin and Gulf Minerals, shares of
stock in NEHI without paying any or adequate consideration for such shares.
This is in violation of Delaware Law, the Law which governs the affairs of the
corporation and the conduct of its Directors and officers. Only a full audit or
accounting by a disinterested and qualified public accountant or auditor can
reveal the extent of these wrongs. The corporation, however, seeks to cancel
any and all invalidly issues shares.
9. Furthermore, while he was in control of the corporation's Board,
Knollenberg improperly caused the corporation to assume liability for over
$2,700,000 in debentures previously issued by his private corporation, Erin Oil
& Exploration. There was no or inadequate consideration for the transaction,
however, and it, too, should be set aside and cancelled; alternatively, it
should be rescinded because of Knollenberg's fraud against NEHI.
10. Further still, shares of stock in NEHI were issued to the Knollenberg
Family members for less than par value or for an unreasonably low and thus
insufficient consideration in violation of
-4-
<PAGE>
Sections 152 and 153 of the Delaware Corporation Statutes. More specifically,
Plaintiff will show that Defendants were issued stock in return for certain
oil and gas reserves valued at below par value or well below reasonable
consideration for the stock. Knollenberg and others, including his Family,
induced this transaction through certain misrepresentations and fraud as to
the value of the oil and gas reserves. As stated, such shares should be
cancelled.
11. Only after being in office a reasonable amount of time did present
officers of the Plaintiff discover or deduce information, including from the
books and records of the corporation, indicating that Knollenberg, the
Knollenberg Family, Erin, and Gulf Minerals own or possess shares of stock in
the corporation which were obtained at below par value or well below reasonable
consideration for the stock in violation of Sections 152 and 153 of the Delaware
Corporation Statutes. Again, as stated, such shares should be cancelled.
12. NEHI now has reason to believe that Knollenberg and his Family
Members and the businesses they control, Erin and Gulf Minerals, are selling
the stock to third persons who may or may not become holders in due course or
bonafide purchasers. Additionally, they are selling the stock for less than its
value, thus watering the stock to the detriment of all shareholders. Defendants
are selling stock wrongfully issued to them as described elsewhere herein.
Unless restrained and enjoined, they will continue to sell stock in violation of
their duties and in violation of the law, and Plaintiff will have no adequate
remedy at law to recover stock from bonafide purchasers. This has harmed
Plaintiff and its shareholders, and will continue to do so. Accordingly,
Plaintiff requests a temporary restraining order without notice, and a temporary
and permanent injunction.
13. Additionally, on February 26, 1998, current management of NEHI met
with Knollenberg for the purpose of attempting in good faith to resolve certain
outstanding issues or
-5-
<PAGE>
differences among them as to the business of the corporation. In doing so,
current management relied upon information provided to them by Knollenberg,
as well as relying upon the advice and counsel of Daniel Kirshbaum, the
corporation's legal counsel for regulatory issues. In particular, they
reasonably expected that Daniel Kirshbaum would render proper advice and
competent professional representation to them, as managing officers of the
corporation and to the corporation itself. As a result of that meeting, a
written agreement dated February 26, 1998, was signed. Among other things, the
written agreement purported to reassign liability for the Erin debentures to
Erin and to make Doris Knollenberg and Brad Knollenberg Directors of the
corporation. Daniel Kirshbaum was also named as some sort of advisory
director. The entire meeting, however, and any actions taken therein or as a
result thereof, is invalid. No notice was given to the shareholders of the
corporation and the shareholders have not approved the new directors.
Furthermore, the Erin debentures should never have been the liability of the
corporation in the first place, so anything the corporation "gave" or
"exchanged" in consideration for a release or reassignment of the debentures
was done without any consideration and should be cancelled or set aside. The
corporation has advised Knollenberg, Kirshbaum, and others that the bogus
agreement is void.
14. As a result of an ongoing dispute between current management and
the Knollenbergs, the corporation has been unable to make and file appropriate,
and accurate, financial disclosures to its shareholders and to the public.
Current management cannot sign financial disclosures for a period which
preexists their active involvement with the corporation unless they are
assured of the accuracy thereof. Current management now has reason to
question the independent judgment and loyalty of at least Daniel Kirshbaum,
if not others, and will not be able to make or file required disclosures and
reports until the accuracy thereof is assured.
-6-
<PAGE>
15. As stated hereinabove, NEHI is continuing to conduct a thorough
internal audit of the self-dealing business and other actions committed by
Knollenberg, as well as members of his Family, against the best interests of the
corporation and its shareholders. This includes replacing Daniel Kirshbaum and
possibly the corporation's present auditing firm, as well. A thorough audit,
however, must include discovery of the Defendants, and others, under the Texas
Rules of Civil Procedure. Once such is concluded, or as intervening
circumstances mandate, the corporation will amend this Petition to join and all
other persons or entities who should be named as Defendants and any and all
other causes of action under Texas law which may properly be brought before
this Texas District Court.
16. In addition to the cancellation of shares fraudulently issued to
Knollenberg and the other Defendants, or which were issued in violation of
Delaware Law, NEHI hereby sues all Defendants for wrongful conversion, breach of
fiduciary duty, and it seeks a full accounting from the Defendants for all
monies and assets of the corporation they wrongfully converted and/or usurped,
as well as a judgment for damages as may be proved. Additionally,
Knollenberg has shown himself to be unfit to hold the trusted and fiduciary
position as Director of a public corporation, and he should be removed.
III. INJUNCTIVE RELIEF AND EXPEDITED DISCOVERY.
17. Plaintiff will further show that it has no adequate remedy at law
to correct the unlawful issuance of the shares made the subject of this suit.
The relative positions of its shareholders have been reduced and altered by the
issuance of certain shares to Defendants, whose ownership interest in Plaintiff
corporation has been acquired without proper consideration. Further, the
financial standing of National Equities Holdings Inc. does not reflect a true
picture of the assets and capital
-7-
<PAGE>
accounts of Plaintiff as long as Defendants hold shares issued for less than
the consideration prescribed by law. National Equities Holdings Inc. was and
is at all times ready, willing, and able to return to Defendants the oil and
gas reserves, as well as to do equity in all respects.
WHEREFORE, PREMISES CONSIDERED, National Equities Holdings Inc. prays
that the Defendants be served with process and ordered to appear and answer
herein; that, thereafter, a temporary restraining order be issued without
notice to Defendants, restraining Defendants, or their agents, servants, and
employees, from directly or indirectly selling stock issued by National
Equities Holdings Inc. until further order by this Court; that a hearing be
set and, following a hearing, that a temporary injunction be issued, after
notice to Defendants and an evidentiary hearing, enjoining Defendants, their
agents, servants, and employees, directly or indirectly from selling stock
issued by National Equities Holdings Inc. during the pendency of this action;
that the temporary injunction be made final following the trial of this cause;
that, upon trial hereof, the Court render its decree canceling National
Equities Holdings Inc.'s shares found to have been improperly issued to
Defendants, thereby cancelling and rescinding the issuance of such shares and
declaring that Defendants have no rights or privileges, now or hereafter,
with regard to such shares; that NEHI be awarded all damages, including
prejudgment interest, and attorneys fees and costs herein; that, if necessary
to effectuate his removal, Billy Knollenberg be removed as a Director of the
corporation; and that it have such other and further relief, both general
and special, at law or in equity, to which it may show itself justly entitled.
-8-
<PAGE>
Respectfully submitted,
GREENBERG, PEDEN,
SIEGMYER & OSHMAN, P.C.
By:_________________________________
MICHAEL B. LEE
State Bar No. 12129500
ROGER B. GREENBERG
State Bar No. 08390000
12 Greenway Plaza 10th Floor
Houston, Texas 77046
(713) 627-2720
(713) 627-7057 FAX
ATTORNEYS FOR
NATIONAL EQUITIES HOLDINGS INC.
<PAGE>
<PAGE>
EXHIBIT 99.3
Answer and Original Counterclaim
<PAGE>
NO. 98-28403
NATIONAL EQUITIES HOLDINGS INC. : IN THE DISTRICT CIVIL COURT
:
VS. : OF HARRIS COUNTY, TEXAS
:
BRADLEY KNOLLENBERG, :
ERIN OIL EXPLORATION INC., :
GULF MINERALS EXPLORATION, :
BILLY KNOLLENBERG, AND :
DORIS KNOLLENBERG : 295TH JUDICIAL DISTRICT
DEFENDANTS' SPECIAL EXCEPTIONS, ORIGINAL ANSWER, ORIGINAL
COUNTERCLAIMS TO PLAINTIFF'S ORIGINAL PETITION, AND APPLICATION FOR
TEMPORARY RESTRAINING ORDER, FOR TEMPORARY AND PERMANENT
INJUNCTION, AND THIRD-PARTY PETITION, APPLICATION FOR
TEMPORARY INJUNCTION, AND DEMAND FOR JURY TRIAL
-----------------------------------------------
TO THE HONORABLE JUDGE OF THIS COURT:
Defendants, Bradley Knollenberg, Erin Oil Exploration Inc., Gulf
Minerals Exploration, Billy Knollenberg, and Doris Knollenberg (hereinafter
"Defendants") file their special exceptions, original answer and original
counterclaims to the original petition filed by National Equities Holdings
Inc. (hereinafter "Plaintiff" or "NEHI") and respectfully show the Court as
follows:
I. SPECIAL EXCEPTIONS
---------------------
1. Defendants specially except to Plaintiff's original petition in
its entirety in that it is vague. Additionally, it is ambiguous as to
Defendants, and does not allege unequivocal or direct facts which create
a cause of action against Defendants. Therefore, Defendants submit that
the original petition should be dismissed.
2. Defendants specially except to paragraph 8 of Plaintiff's original
petition wherein Plaintiff alleges that Defendants Billy Knollenberg, Doris
Knollenberg and Bradley Knollenberg (hereinafter the "Knollenberg
Defendants") "issued or caused the corporation to issue to themselves,
<PAGE>
and to [Defendants] Erin and Gulf Minerals, shares of stock in NEHI without
paying any or adequate consideration for such shares, . . . in violation of
Delaware Law. . . ." These allegations are vague, ambiguous and broad and do
not apprise Defendants with fair notice of the facts upon which Plaintiff
intends to rely regarding how Defendants allegedly issued or caused the
corporation to issue shares of stock without paying any or adequate
consideration, and how Defendants violated Delaware law.
3. Defendants further specially except to paragraph 9 of Plaintiff's
original petition wherein Plaintiff alleges that Defendant Billy Knollenberg
improperly caused the corporation to assume liability for over $2,700,000 in
debentures previously issued by Defendant Erin, and that there was no or
inadequate consideration for the transaction. These allegations are vague,
ambiguous and broad and do not apprise Defendants with fair notice of the
facts upon which Plaintiff intends to rely regarding how Defendant Billy
Knollenberg allegedly improperly caused the corporation to assume liability
for over $2,700,000 in debentures, or how there was no or inadequate
consideration, or how there was fraud.
4. Defendants further specially except to paragraph 10 of Plaintiff's
original petition wherein Plaintiff alleges that shares of stock in NEHI were
issued to the Knollenberg Defendants for less than par value or for an
unreasonably low and thus insufficient consideration in violation of Sections
152 and 153 of the Delaware Corporation Statutes, and that the Knollenberg
Defendants and others induced this transaction through certain misrepresent-
ations and fraud as to the value of the oil and gas reserves in return for
which the aforementioned stock was allegedly issued. These allegations are
vague, ambiguous and broad and do not apprise Defendants with fair notice of
the facts upon which Plaintiff intends to rely for these allegations.
5. Defendants specially except to paragraph 11 of Plaintiff's
original petition wherein
2
<PAGE>
Plaintiff alleges that Billy Knollenberg, the Knollenberg Defendants, and
Gulf Minerals own or possess shares of stock in NEHI which were obtained at
below par value or well below reasonable consideration for the stock in
violation of Sections 152 and 153 of the Delaware Corporation Statutes.
These allegations are vague, ambiguous and broad and do not apprise
Defendants with fair notice of the facts upon which Plaintiff intends to rely
for these allegations.
6. Defendants specially except to paragraph 12 of Plaintiff's
original petition wherein Plaintiff alleges that Billy Knollenberg, the
Knollenberg Defendants, Erin, and Gulf Minerals are selling stock to third
persons who may or may not become holders in due course or bonafide
purchasers, and that they are selling the stock for less than its value, thus
watering the stock. These allegations are vague, ambiguous and broad and do
not apprise Defendants with fair notice of the facts upon which Plaintiff
intends to rely for these allegations.
7. Defendants specially except to paragraph 16 and the prayer of
Plaintiff's original petition wherein Plaintiff alleges that it is entitled
to damages and attorneys' fees. Such allegations are vague and ambiguous, and
fail to apprise Defendants of the nature and amount of the damages and
attorneys' fees sought.
8. In connection with its special exceptions, Defendants request
that the Court enter an order sustaining them and that the Plaintiff be
ordered to replead its original petition within 10 working days from the
Court's ruling on the special exceptions and that the Plaintiff's pleadings
be struck if not amended within the time limit.
II. SPECIAL DENIALS
-------------------
3
<PAGE>
9. Defendants deny that the directors/shareholders who have brought
this suit in the guise of Plaintiff fairly and adequately represent the
interests of NEHI in bringing this suit against Defendants. In addition,
Defendants deny that Plaintiff has the requisite legal capacity and/or
authority to maintain this suit since it has not been properly authorized by
the directors of Plaintiff.
III. GENERAL DENIAL
-------------------
10. Defendants, in accordance with Rule 92 of the Texas Rules of Civil
Procedure, deny generally all of the allegations of the Plaintiff's original
petition and demand that Plaintiff be required to prove every material
allegation as required by law.
IV. AFFIRMATIVE DEFENSES
------------------------
11. For further answer, if further answer be necessary, Defendants
affirmatively plead, in the alternative, under Rule 94 of the Texas Rules of
Civil Procedure, the following:
12. The Defendants, and in particular the Knollenberg Defendants,
relied on statements, evaluations, information, opinions, reports, financial
statements, and financial data concerning Plaintiff that was prepared by/
presented by (1) officers and/or employees of Plaintiff; (2) legal counsel,
public accountants, investment bankers, or other persons as to matters
reasonably believed to be within their professional or expert competence; or
(3) book value of corporate assets. Defendants, and in particular the
Knollenberg Defendants, acted in good faith and with ordinary care in relying
on the above.
13. Defendants, and in particular the Knollenberg Defendants,
exercised their best business judgment on behalf of the Plaintiff. They
relied in good faith on the corporate records and books, corporate officers
charged with duties for finance and business development, and outside experts.
14. The transactions complained of by Plaintiff were entered into
for the benefit of
4
<PAGE>
Plaintiff. Specifically, Plaintiff received full value. Defendants fully
disclosed to Plaintiff all transactions complained of. Such transactions
complained of were fair to Plaintiff. The transactions in question were
found to be good ones for the corporation by its directors. Prior to
approving such transactions, the board was fully informed of all relevant
information then known to Defendants.
15. The transactions which Plaintiff complains of were not contrary to
public policy, statute or common law. The board of directors were informed
of such transactions. The Defendants, particularly the Knollenberg Defendants,
complied with their duty of loyalty by fully disclosing all known facts
concerning the transactions. Ratification of such transactions was done by
Plaintiff and its directors.
16. Plaintiff's claims are barred by laches.
17. Plaintiff's claims are barred by estoppel.
18. Plaintiff's claims are barred by waiver.
19. If Plaintiff was damaged by Defendants, which is expressly denied,
then such damages were caused in whole or in part by the fault, negligence,
strict liability, breach of warranty or breach of contract of Plaintiff's
agents, or by persons, entities, or parties for whom Defendants are not
legally responsible.
20. The Knollenberg Defendants, in performance of their duties as
directors, relied in good faith upon the records of NEHI and upon such
information, opinions, reports, or statements presented to NEHI by NEHI's
officers or employees, and committees of the board of directors, and/or by
other persons as to matters the Knollenberg Defendants reasonably believed
were within such other persons' professional or expert competence and who
were selected with reasonable care by or on behalf of NEHI.
5
<PAGE>
21. The directors of NEHI either expressly and/or impliedly authorized
and/or ratified the actions complained of. Thus, Plaintiff has ratified the
conduct of which it now complains.
22. The Knollenberg Defendants were duly elected/appointed as directors
of NEHI on the 26th day of February, 1998. Since that time, they have
continually carried out their duties precisely as required by the bylaws of the
corporation and the laws of the States of Delaware and Texas to the extent
the purported officers of NEHI would allow them. Billy Knollenberg has been a
director of NEHI since July, 1996.
23. Plaintiff's claims are barred by the doctrine of unclean hands.
24. Defendants are not liable because of failure of consideration.
25. Defendants are not liable because Plaintiff ratified Defendants'
conduct.
26. Defendants are not liable because of legal justification or excuse.
27. Defendants assert as affirmative defenses the limitations on
liability of Directors as set forth in paragraph 7 of NEHI's Amended and
Restated Certificate of Incorporation.
28. Plaintiff is not entitled to monetary damages for any alleged
breach of fiduciary duty by Defendants pursuant to paragraph 7 of NEHI's
Amended and Restated Certificate of Incorporation.
29. Defendants have not breached their fiduciary duties.
30. Defendants have not breached their duties and loyalty to Plaintiff.
31. Defendants have acted in good faith.
32. Defendants have not acted with intentional misconduct.
33. Defendants have not knowingly violated any laws.
34. Defendants have not received any improper personal benefit.
6
<PAGE>
ORIGINAL COUNTERCLAIMS
----------------------
Defendants/Counter-Plaintiffs Erin Oil Exploration Inc., Gulf Minerals
Exploration, Bradley Knollenberg, Billy Knollenberg and Doris Knollenberg
(hereinafter collectively "Counter-Plaintiffs"), file their original
counterclaims against Plaintiff/Counter-Defendant, NEHI, and would
respectfully show the Court as follows:
35. Counter-Plaintiffs Bradley Knollenberg, Billy Knollenberg and Doris
Knollenberg (hereinafter "Knollenbergs") are individuals and residents of
Harris County, Texas.
36. Counter-Defendant NEHI is a Delaware corporation having its principal
place of business in Harris County, Texas.
37. Venue is proper in Harris County because all the parties are
residents of Harris County, Texas and the claims made the basis of
Plaintiff's suit and Counter-Plaintiffs' counterclaims arose here.
Counterclaim I -- For Writ of Mandamus to Compel Inspection
-----------------------------------------------------------
38. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 37. This counterclaim is for a
writ of mandamus to compel NEHI to permit an inspection of its books and
records. The Counter-Plaintiffs are directors of NEHI and are also holders
of a substantial number of shares of NEHI, individually and through Gulf
Minerals Exploration, a family partnership, and have been holders of shares
of NEHI for at least six months immediately preceding the demand described
below and Counter-Plaintiffs are the holders of at least five percent of all
outstanding shares of NEHI.
39. On or about June 19 , 1998, Counter-Plaintiffs sent by facsimile and
certified mail to NEHI and Michael Lee, counsel hired to represent NEHI in
this lawsuit, two written demands for
7
<PAGE>
inspection of NEHI's books and records, bank statements, financial statements,
management reports, records of account, oil and gas leases, lease, payroll
records, contracts, SEC filings, corporate minutes, and other documents as
set forth in the demand letters. One demand was made by the Knollenbergs in
their capacity as directors of NEHI, and the other by Billy Knollenberg in
his capacity as a stockholder of NEHI. A true and correct copy of these
demands are attached hereto as Exhibits "A" and "B" respectively, and
incorporated herein by reference as if fully set forth at length. As
indicated in the demands, the Knollenbergs requested permission to examine
these records at a reasonable time during NEHI's business hours. As further
indicated in the demand made by Billy Knollenberg in his capacity as a
stockholder, he designated his attorney to conduct the examination. As
further indicated in the demands, the Knollenbergs' purpose in seeking the
examination was due to concerns about NEHI's financial condition, activities,
SEC filings, and other matters as set forth in the demand letters.
40. NEHI and its current purported officers refused to allow the
inspections requested by the Knollenbergs, and NEHI continues to refuse the
Knollenbergs the exercise of this right under the law and pursuant to the
bylaws of NEHI.
41. In order to enforce the right to inspect such books and records, the
Knollenbergs have incurred and will in the future incur costs and expenses in
the amount of at least $3,000, including fees to the attorney whose name is
subscribed to this pleading. In this connection, the Knollenbergs would show
that a reasonable fee for the services of an attorney necessary to enforce
their rights as set forth in this pleading is at least $3,000.
42. The Knollenbergs have no other adequate remedy to compel NEHI to
permit inspection of the corporate books and records.
8
<PAGE>
Counterclaim II -- Declaratory Judgment
---------------------------------------
43. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 42. This counterclaim is brought
pursuant to the Texas Declaratory Judgment Act. Defendants seek a
declaration that the February 26, 1998 Agreement (the "Directors' Agreement")
is valid and binding on the parties to this lawsuit. A true and correct copy
of the Directors' Agreement is attached hereto as Exhibit "C" and is
incorporated herein by reference as if fully set forth at length.
44. Counter-Plaintiffs also seek to recover reasonable costs and
attorney's fees incurred in prosecuting this declaratory judgment action as
are allowed by law.
Counterclaim III -- Injunctive Relief regarding Board of Directors' Meetings
----------------------------------------------------------------------------
45. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 44. This counterclaim is brought
against NEHI to enjoin it from having a board of directors' meeting without
all six directors, of which the Knollenbergs constitute three, begin given
proper notice thereof and opportunity to participate. Upon information and
belief, some of the directors of NEHI are managing the business affairs of
NEHI without allowing the other directors of NEHI to have input as required
by law.
46. On February 26, 1998, in accordance with NEHI's certificate of
incorporation, by-laws, and Delaware corporate law, the directors of NEHI
reconfigured the board of directors by increasing the number of directors to
six (6) and adding Bradley Knollenberg and Doris Knollenberg as directors.
The directors of NEHI have conducted the business of the company as if there
have been six (6) directors until recently, when certain members of the board
of directors have, in bad faith, taken the position that the Directors'
Agreement was not valid. They have done this in an attempt
9
<PAGE>
to prevent the Knollenbergs from being involved in the management of NEHI.
In addition, they are attempting to hide their self-dealing and the fact that
House Energy LP and Rotary Steerable Tools (U.S.A.) LP and their principals
committed fraud on NEHI. Chance, Sutherland, McLoughlin, and Variava have
attempted, unlawfully, without any justification whatsoever, to wrestle
control of the management of NEHI from the Knollenbergs.
Counterclaim IV -- Compel NEHI to hold Board of Directors Meetings
------------------------------------------------------------------
47. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 46. This counterclaim is brought to
compel NEHI to have a board of directors' meeting, pursuant to its bylaws and
the Directors' Agreement.
48. The Directors' Agreement entered into between the parties provides
that NEHI shall have board meetings at least once every thirty days at which
time NEHI management shall make presentations to the board about NEHI
activities. NEHI has not complied with this provision and has purposefully
prevented management from informing the Knollenbergs about management,
operations, financial condition, business prospects and activities of NEHI,
as well as information regarding the rotary steerable tool (which is
discussed below). Counter-Plaintiffs have requested a board of directors
meeting and have even called a meeting, however, NEHI and the other directors
refuse to comply.
Counterclaim V -- Injunctive Relief regarding Hiring
----------------------------------------------------
49. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 48. This counterclaim is brought
against NEHI to enjoin it from (1) hiring new outside legal counsel to
replace Daniel Kirshbaum; and (2) hiring a new outside auditing firm to
10
<PAGE>
replace Alvin L. Dahl & Associates, P.C. without first obtaining approval of
the board of directors, NEHI, and the individuals who purport to be in
control (i.e., Sutherland, Chance, Variava and McLoughlin). These
individuals who purport to be in control of NEHI are attempting the most
blatant form of opinion shopping in order to prevent the disclosure of their
wrongdoing (which is explained in detail below and incorporated herein by
reference).
Counterclaim VI -- Directors' Expenses
--------------------------------------
50. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 49. This counterclaim is brought to
recover expenses, including attorneys' fees, incurred by the Knollenbergs, as
directors, to defend themselves in this groundless lawsuit, and expenses,
including attorneys' fees, incurred in establishing their right to
indemnification.
51. NEHI's suit alleges and charges Counter-Plaintiffs with wrongdoing
arising out and involving their positions as directors of NEHI. Counter-
Plaintiffs are not liable on the charges alleged by NEHI. Accordingly,
Counter-Plaintiffs are entitled to indemnification for expenses incurred in
the defense of this action and in establishing a right to indemnification,
pursuant to Section 145 of the General Corporation Law of the State of
Delaware and as provided by the bylaws of NEHI, Art. V., Sections 1, 3 and 4;
a true and correct copy of the pertinent provisions of the bylaws are
attached hereto as Exhibit "D" and incorporated herein by reference as if
fully set forth at length.
52. Counter-Plaintiffs will further show that the following expenses,
including attorneys' fees, have been or will be incurred in the defense of
this suit, and in establishing a right to indemnification, in the amount of
at least $50,000, which are reasonable and customary charges for the same or
similar services in Harris County, Texas.
11
<PAGE>
APPLICATION FOR TEMPORARY RESTRAINING ORDER AND
APPLICATION FOR TEMPORARY AND PERMANENT INJUNCTION
--------------------------------------------------
53. Counter-Plaintiffs hereby incorporate by reference all of the
allegations made in paragraphs 1 through 52.
54. NEHI has prevented Counter-Plaintiffs from obtaining any
information or inspecting documents regarding NEHI's management, operations,
financial condition, business prospects and activities, as well as
information regarding the rotary steerable tool. NEHI's conduct is in
violation of Counter-Plaintiffs' rights as directors and shareholders.
55. In addition, NEHI is not including the Knollenbergs in board of
directors meetings as it is required to do. The Knollenbergs have no remedy
but to seek equitable relief to enable them to act in their capacity and
fulfill their duties as directors of NEHI. Further, NEHI has threatened to
terminate its outside corporate legal counsel and its outside auditing firm.
56. Counter-Plaintiffs are very concerned as NEHI is not adhering to its
procedures and bylaws, and its management is mismanaging the corporation.
NEHI is not acting in the best interests of the corporation; rather it is
acting to the detriment of the corporation and its shareholders.
57. If NEHI is not restrained and enjoined from holding board of directors
meetings without the Knollenbergs, and if it is not restrained and enjoined
from firing its outside legal counsel and auditing firm, it will engage and
continue to engage in this conduct. Its conduct to date indicates that this a
real and immediate threat to Counter-Plaintiffs. If NEHI's conduct continues,
it will cause irreparable harm and injury to Counter-Plaintiffs for which
there is no adequate remedy at law.
58. For the reasons stated, Counter-Plaintiffs request that, after
trial, this Court permanently enjoin NEHI from these actions.
59. It is also essential that the Court immediately and temporarily
restrain NEHI from continuing with the conduct described. It is essential
that the Court act immediately, prior to notice on NEHI and a hearing on the
matter, because its conduct has threatened Counter-Plaintiffs' rights
12
<PAGE>
and has caused Counter-Plaintiffs' irreparable injury for which there is no
adequate remedy at law.
60. Further, in order to preserve the status quo and the rights of Counter
- -Plaintiffs, NEHI should be cited to appear and show cause why it should not be
temporarily enjoined, during the pendency of this action, from the above
conduct directed at Counter-Plaintiffs.
THIRD-PARTY PETITION
--------------------
Defendants/Counter-Plaintiffs, Erin Oil Exploration Inc., Gulf Minerals
Exploration, Bradley Knollenberg, Billy Knollenberg and Doris Knollenberg, now
acting as Third-party Plaintiffs, bring this third-party suit in the right of
National Equities Holdings Inc. ("NEHI"), as shareholders and on behalf of all
other shareholders similarly situated, and file this third-party petition
complaining of Rotary Steerable Tools (U.S.A.) L.P., Jack P. Chance, Stephen
John McLoughlin, Horse Energy LP, George Sutherland, Feroze Variava, P.A.
Hartley, A.J. Gallo, and Aqua Turf Technologies, Inc. as Third-party
Defendants, joining NEHI, as a Third-party Defendant, and for cause of action
show:
I. Parties
-------
61. Third-party Plaintiff Erin Oil Exploration Inc. (hereinafter
"Erin") is a Texas corporation with its principal place of business in Harris
County, Texas. Erin is a shareholder of NEHI.
62. Third-party Plaintiff Gulf Minerals Exploration (hereinafter
"Gulf") is a Texas limited partnership having its principal place of business
in Harris County, Texas. Gulf is a shareholder of NEHI.
63.Third-party Plaintiffs Bradley Knollenberg, Billy Knollenberg and Doris
Knollenberg
13
<PAGE>
(hereinafter collectively "Knollenbergs") are individuals and residents of
Harris County, Texas. The Knollenbergs are shareholders of NEHI.
64. Third-party Plaintiffs will hereinafter referred to as "Third-party
Plaintiffs," unless referred to individually or collectively as noted above.
65. Third-party Defendant NEHI is a Delaware corporation having its
principal place of business in Harris County, Texas. NEHI is in the business
of oil and gas exploration and production.
66. Third-party Defendant Rotary Steerable Tools (U.S.A.) L.P.
(hereinafter"RST") is a limited partnership registered in the State of Texas,
with its principal place of business at 4708 Pecan Grove, San Antonio, Texas
78222. It may be served with process by serving its partner, Jack P. Chance
at his address listed below.
67. Third-party Defendant Jack P. Chance (hereinafter "Chance") is an
individual and resident of Houston, Texas. He may be served with process at
601 Cypress Station Drive #408, Houston, Texas 77090. At all times material
hereto, Chance was and is a director of NEHI. Chance also owns a substantial
interest in RST.
68. Third-party Defendant Stephen John McLoughlin (hereinafter
"McLoughlin") is an individual and resident of Houston, Texas. He may be
served with process at 18800 Egret Bay Blvd. #600, Houston, Texas 77058. At
all times material hereto, McLoughlin was and is an officer of NEHI.
McLoughlin also owns a substantial interest in RST.
69. Third-party Defendant Horse Energy LP (hereinafter "Horse") is a
limited partnership registered in the State of Texas, with its principal
place of business located at 5 Silver Elm Place, The Woodlands, Texas 77381.
It may be served with process by serving its partner, George Sutherland, at
the above address.
14
<PAGE>
70. Third-party Defendant George Sutherland (hereinafter "Sutherland")
is an individual and resident of The Woodlands, Texas. He may be served with
process at 5 Silver Elm Place, The Woodlands, Texas 77381. At all times
material hereto, Sutherland was and is a director of NEHI. Sutherland also
owns a substantial interest in Horse.
71. Third-party Defendant Feroze Variava (hereinafter "Variava) is an
individual and resident of Houston, Texas. He may be served with process at
601 Cypress Station Drive #408, Houston, Texas 77090. At all times material
hereto, Variava was and is a director of NEHI. Variava also owns a
substantial interest in Horse.
72. Third-party Defendant P.A. Hartley (hereinafter "Hartley) is an
individual and resident of Las Vegas, Nevada. She may be served with process
at 2679 Par Four, Las Vegas, Nevada 89122.
73. Third-party Defendant A.J. Gallo (hereinafter "Gallo") is an
individual and resident of Las Vegas, Nevada. He may be served with process
at 2679 Par Four, Las Vegas, Nevada 89122.
74. Third-party Defendant Aqua Turf Technologies, Inc. is a corporation
organized under the laws of the State of Nevada, with its principal place of
business at Las Vegas, Nevada. It may be served with process by serving its
President, A. J. Gallo, 3160 E. Desert Inn Rd., #3-168, Las Vegas, Nevada
89121, or at 3642 Boulder Highway, Las Vegas, Nevada 89121.
II. Jurisdiction and Venue
----------------------
75. This Court has jurisdiction over this matter because the damages
are within the jurisdictional limits of the Court.
76. Venue is proper in Harris County as it is the county in which all or a
substantial part of the events or omissions giving rise to the claims occurred.
15
<PAGE>
III. Background and Claims
---------------------
77. Third-party Plaintiffs, at the time of the acts or omissions
complained of, were and still are shareholders of record of NEHI.
78. Third-party Plaintiffs are able to fairly and adequately represent the
shareholders of NEHI and the interests of NEHI in enforcing NEHI's rights.
Chance, McLoughlin and RST Transaction
- --------------------------------------
79. At all times material hereto, Chance and McLoughlin were, and are,
two of the officers of NEHI (and Chance is a director also), and they
simultaneously owned and conducted RST, a limited partnership. Chance and
McLoughlin represented to NEHI that they had conceived and invented a tool
referred to as a "down hole adjustable device for trajectory control in the
drilling of deviated wells" (hereinafter "the tool"). The tool was, and is,
wholly and solely owned by Chance and McLoughlin. The tool was licensed to RST.
80. Chance, McLoughlin and RST represented that the tool would be ready
for testing by January 1, 1998, be ready for commercial exploitation shortly
thereafter, and that the development of the tool could be completed for
another $250,000 or thereabouts. They also represented that NEHI's interest
in the tool included worldwide rights.
81. In reliance on the representations by Chance, McLoughlin and RST, NEHI
entered into a written agreement with them on November 5, 1998. Under the
agreement, Chance and McLoughlin were to contribute their skill, knowledge,
and experience to RST for NEHI's benefit. NEHI received a twenty-five percent
(25%) interest in the tool and RST received 6,551,022 shares of NEHI's common
stock.
82. NEHI, in addition to issuing the 6,551,022 shares to RST, funded
expenses allegedly
16
<PAGE>
incurred by RST in relation to the development of the tool. The
funds expended by NEHI, to date, are over $325,000.
83. To date, nothing has developed with the tool as far as the
Knollenbergs have been informed. It is not in a form that can be tested,
much less exploited in the marketplace. NEHI has seen no return on the
monies allegedly incurred by RST in the development of the tool, and it is
apparent that Chance and McLoughlin have not contributed their skill,
knowledge and experience to the development of the tool, or alternatively,
they have no skill, knowledge or experience to contribute.
84. On information and belief, Chance, McLoughlin, and RST committed
fraud in inducing NEHI to enter into the agreement. Chance, McLoughlin and RST
knowingly failed to disclose material facts to NEHI, and/or knowingly provided
NEHI with material misinformation, regarding the development of the tool, the
capabilities of the tool, the date the tool would be ready for testing, the
date the tool would be ready for use in the marketplace, and the projected
revenues the tool would generate for NEHI, as well as their own skill,
knowledge, and experience.
85. Additionally, Chance, McLoughlin and RST negligently failed to
disclose material facts, and/or negligently represented to NEHI material
misinformation regarding the development of the tool, the date the tool would
be ready for testing, the date the tool would be ready for use of the tool in
the marketplace, the capabilities of the tool, and the revenues the tool would
generate for NEHI, as well as their own skill, knowledge, and experience.
86. Third-party Plaintiffs further allege that each and every one of the
representations set forth in the preceding paragraphs concerned material facts
for the reason that NEHI would not have entered into the agreement with
Chance, McLoughlin and RST had it known about the falsity of any
17
<PAGE>
of the representations. Each and every one of the representations was relied
upon by NEHI to NEHI's substantial injury and damage.
87. By reason of NEHI's reliance upon Chance, McLoughlin, and RST's
representations or fraudulent concealment of material facts described above,
NEHI has been damaged in an amount far in excess of the minimum jurisdictional
limits of the Court.
88. Furthermore, Chance, McLoughlin and RST have continuously
misrepresented to NEHI, intentionally and/or negligently, the status of the
development of the tool.
89. Further, by reason of the fact that Chance, McLoughlin, and RST
knew that the representations described above were false at the time they
were made, the representations were fraudulent, willful, and/or malicious and
constitute conduct for which the law allows the imposition of exemplary
damages. In this connection, Third-party Plaintiffs will show that they have
incurred significant expenses, including attorneys' fees, in the
investigation and prosecution of this action. Accordingly, Third-party
Plaintiffs request that exemplary damages in favor of NEHI be awarded against
Chance, McLoughlin and RST in a sum which exceeds the minimum jurisdictional
limits of the Court.
90. Further, Third-party Plaintiffs show that the transaction described
above was not a fair transaction, but was against the best interest of NEHI and
highly advantageous to Chance McLoughlin, and RST. Specifically, the
transaction was unfair to NEHI because NEHI ultimately received unfair value
from Chance, McLoughlin, and RST in relation to the 6,551,022 shares of common
stock in NEHI they received. Thus, there was inadequate and insufficient
consideration. As such, Third-party Plaintiffs seek the return of NEHI's
6,551,022 shares of common stock fraudulently and/or negligently obtained by
Chance, McLoughlin, and RST to the extent they have
18
<PAGE>
not given NEHI fair and sufficient consideration for same.
91. Upon information and belief, Chance and McLoughlin have engaged in
further self-dealing with respect to the tool, which has been for their
benefit and at the expense and detriment of NEHI. Chance and McLoughlin have
"earned" salaries for doing nothing as the tool is not even at the testing
stage. Further, in violation of the agreement and their fiduciary duties to
NEHI, they have offered the tool to third-parties to the detriment of NEHI. In
addition, Chance and McLoughlin have purposefully failed to recognize NEHI's
worldwide interest in the tool, and attempted to limit NEHI's interest in the
tool to domestic revenues from the use of the tool. As a proximate result,
NEHI was damaged, and thus Third-party Plaintiffs seek damages for the monies
NEHI paid to Chance and McLoughlin as salaries, lost revenues/profits
resulting from the tool being offered to others and their attempts to limit
NEHI's interest to domestic exploitation. These damages are in excess of the
jurisdictional minimum of this Court.
92. Third-party Plaintiffs again seek exemplary damages in favor of
NEHI for this malicious, willful and/or fraudulent conduct of Chance,
McLoughlin, and RST.
Sutherland, Variava and Horse Transaction
- -----------------------------------------
93. On November 1, 1997, NEHI entered into a written agreement with
Sutherland, Variava, and Horse. Sutherland and Variava are owners of Horse.
During the negotiations for the agreement, Sutherland, Variava and Horse
portrayed Horse as a company that specialized in horizontal oil recovery.
They represented that Horse could identify oil and gas reserves which had
previously been considered uneconomical to develop, and then re-enter the
wells using specialist techniques, and develop those reserves.
19
<PAGE>
94. Further, Horse had produced a confidential business plan entitled
"Horizontal Oil Recovery Specialist" (hereinafter "business plan"). The
business plan involved the use of the RST tool. During the negotiations,
Sutherland, Variava and Horse represented to NEHI that (I) the business plan
was worth millions of dollars; (ii) Horse had substantial assets; and (iii)
the tool's value could be realized only with their involvement. These
representations were false.
95. In reliance on the representations by Sutherland, Variava and
Horse, NEHI entered into the agreement. Sutherland and Variava were
subsequently made directors of NEHI.
96. Horse disclosed the business plan to NEHI in consideration for NEHI
issuing to Horse 7,871,023 shares of NEHI common stock. NEHI also received a
25% limited partner interest in Horse.
97. On information and belief, Sutherland, Variava and Horse committed
fraud in inducing NEHI to enter into the agreement. Sutherland, Variava and
Horse knowingly failed to disclose material facts to NEHI, and/or knowingly
provided NEHI with material misinformation, regarding Horse's assets,
business plan, and capabilities. Horse had no assets of value and Horse's
business plan was not as represented. It has no value whatsoever. It has
proven to be a worthless piece of junk. Further, the success of the tool is
not dependant upon Horse, Sutherland or Variava one iota.
98. Third-party Plaintiffs further allege that each and every one of the
representations set forth in the preceding paragraphs concerned material facts
for the reason that NEHI would not have entered into the agreement with
Sutherland, Variava and Horse had they known about the falsity of any of the
representations. Each and every one of the representations was relied upon by
NEHI to its substantial injury and damage.
99. By reason of NEHI's reliance upon Sutherland, Variava and Horse's
representations
20
<PAGE>
or fraudulent concealment of material facts described above, NEHI have been
damaged in an amount far in excess of the minimum jurisdictional limits of
the Court.
100. The transaction described above was not a fair transaction, and
was against the best interest of NEHI and highly advantageous to Sutherland,
Variava, and Horse. Specifically, the transaction was unfair to NEHI because
NEHI received nothing of value in exchange for Horse receiving 7,871,023
shares of NEHI's common stock. As such, there was no consideration for this
transaction, and NEHI seeks rescission of the entire agreement. Third-party
Plaintiffs seek return of NEHI's 7,871,023 shares of common stock and NEHI
will return to Horse NEHI's interest in Horse.
101. NEHI will suffer substantial harm if the agreement is not rescinded
and their consideration returned, as there was no consideration on the part of
Sutherland, Variava and Horse. Damages would not adequately compensate for
the loss of NEHI's bargain.
102. Third-party Plaintiffs will further show that the conduct of
Sutherland, Variava and Horse, as described above, was fraudulent, willful
and/or malicious. As a result, NEHI is entitled to recover exemplary damages.
In this connection, NEHI will show that as a result of Sutherland, Variava and
Horse's conduct, NEHI has suffered losses of time and other expenses,
including attorneys' fees incurred in the investigation and prosecution of
this action. Accordingly, Third-party Plaintiffs ask that exemplary damages
be awarded against Sutherland, Variava and Horse in favor of NEHI in a sum
that exceeds the minimum jurisdictional limits of this Court.
103. Upon information and belief, Sutherland and Variava have engaged in
further self-dealing with respect to the tool, for their benefit and at the
expense of NEHI. They have attempted to exercise dominion and control over
the tool to the detriment of NEHI and its shareholders.
104. Sutherland and Variava's breach of duty of loyalty to NEHI was
malicious, willful,
21
<PAGE>
and/or fraudulent. Thus, Third-party Plaintiffs seek exemplary damages in
favor NEHI against Sutherland, Variava, and Horse.
Hartley, Gallo and Aqua Turf Transaction
- ----------------------------------------
105. Additionally, on or about July 30, 1996, NEHI and Erin entered into a
written agreement, whereby Erin acquired common stock of NEHI. At the time of
the transaction, Hartley was Chairman and CEO of NEHI. Upon information and
belief, Gallo was either Hartley's husband or boyfriend at that time.
106. At the time of the negotiation for that transaction, Hartley and Gallo
represented to Erin that NEHI owned a patent in a "subsurface watering system"
(hereinafter "system"). In reliance on that representation, Erin entered into
the agreement with NEHI.
107. On information and belief, Hartley, Gallo, and Aqua Turf committed
fraud in inducing Erin to enter into the agreement. Hartley, Gallo and Aqua
Turf knowingly failed to disclose material facts to NEHI, and/or knowingly
provided NEHI with material misinformation. Such conduct by Hartley, Gallo
and Aqua Turf was fraudulent, as NEHI only had a license in the system; it
did not have a patent. In fact, the patent was owned by Gallo or by Aqua
Turf, which was owned by Gallo.
108. Third-party Plaintiffs further allege that each and every one of the
representations set forth in the preceding paragraphs concerned material facts
for the reason that Erin would not have entered into the agreement with
Hartley, Gallo and Aqua Turf had they known about the falsity of any of the
representations. Each and every one of the representations was relied upon by
Third-party Plaintiffs to Third-party Plaintiffs' substantial injury and damage.
109. By reason of Third-party Plaintiffs' reliance upon Hartley, Gallo
and Aqua Turf's
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representations or fraudulent concealment of material facts described
above, NEHI has been damaged in an amount far in excess of the minimum
jurisdictional limits of the Court.
110. As a proximate result of the fraudulent misrepresentation and/or
failure to disclose material facts, NEHI has been damaged, and seeks as
damages the profits from the patent since the date of the agreement, July 30,
1996, and an accounting of same.
111. The exact nature and extent of the lost profits are unknown to
Third-party Plaintiffs and cannot be determined without an accounting, and an
investigation is necessary because there is no adequate remedy at law and in
order to establish the value of the interests of the parties.
112. NEHI seeks its attorneys' fees for having to prosecute these claims
against Hartley, Gallo and Aqua Turf.
113. In addition, Third-party Plaintiffs seeks to obtain for NEHI the
patent from Aqua Turf or Gallo, whichever the case may be.
114. Third-party Plaintiffs have performed all of the obligations
imposed on them by the agreement.
115. Third-party Plaintiffs will further show that the conduct of Hartley,
Gallo and Aqua Turf was fraudulent, willful and/or malicious. As a result,
Third-party Plaintiffs are entitled to recover exemplary damages. In this
connection, Third-party Plaintiffs will show that as a result of Hartley,
Gallo and Aqua Turf's conduct, NEHI has suffered losses of time and other
expenses, including attorneys' fees incurred in the investigation and
prosecution of this action. Accordingly, Third-party Plaintiffs ask that
exemplary damages be awarded in favor of NEHI against Hartley, Gallo and Aqua
Turf in a sum that exceeds the minimum jurisdictional limits of this Court.
116. Third-party Plaintiffs have not made efforts to have this suit brought
before the
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corporation by its board of directors because any effort would be
futile in that the Third-party Defendants, Chance, Sutherland, and Variava,
control the board of directors, which consists of only six persons, the other
three being the Knollenbergs, and those Third-party Defendants have prevented,
and continue to prevent, the Knollenbergs from exercising their rights as
directors. Those Third-party Defendants would not have taken action against
themselves or their companies or admitted to their fraudulent
misrepresentations, negligent misrepresentations, knowing failures to disclose
material facts, self-dealing, breaches of fiduciary duty to NEHI, breaches of
the duty of loyalty to NEHI, and malicious, willful and fraudulent conduct.
APPLICATION FOR TEMPORARY INJUNCTION
------------------------------------
117. In view of the position taken by the Third-party Defendants, and
because they currently purport to hold the power to appropriate and
distribute the assets of NEHI, and make bad faith and self-dealing business
decisions to the detriment of NEHI, which Third-party Plaintiffs reasonably
fear that they will continue to do, NEHI will be further deprived of
revenues, thereby causing its shares, including those owned by Third-party
Plaintiffs, to be greatly depreciated in value or rendered totally valueless.
NEHI, therefore, seeks to prevent Third-party Defendants from transferring
stock and/or assets of NEHI. Unless such transfers are prevented by
injunctive decree, they will destroy the growth prospects of NEHI, causing
irreparable injury to Third-party Plaintiffs, NEHI, and all of its
shareholders, for which there is no adequate remedy at law because it is
impossible to calculate damages with specificity.
ATTORNEY' FEES
--------------
118. Third-party Plaintiffs' successful prosecution of this action will
result in a substantial benefit to NEHI, and therefore Third-party Plaintiffs
are entitled to reimbursement of expenses,
24
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including reasonable attorneys' fees. In this connection, Third-party
Plaintiffs will show that a reasonable fee to compensate the undersigned
attorneys for preparation and trial of this cause is at least $50,000, plus
expenses, for which further sums Third-party Plaintiffs seek recovery.
DEMAND FOR JURY TRIAL
---------------------
119. Defendants/Counter-Plaintiffs/Third-party Plaintiffs demand a jury
trial and tender the appropriate fee.
PRAYER
------
WHEREFORE, PREMISES CONSIDERED, Defendants/Counter-Plaintiffs, Bradley
Knollenberg, Erin Oil Exploration Inc., Gulf Minerals Exploration, Billy
Knollenberg, and Doris Knollenberg request the following as to Plaintiffs'
original petition and as to their counterclaims against Plaintiff:
1. that Defendants' special exceptions be sustained and that an order be
entered sustaining same and requiring Plaintiff to specifically plead its
allegations against Defendants as stated in the special exceptions;
2. that on final trial, that Plaintiff take nothing against Defendants;
3. that a writ of mandamus issue commanding Plaintiff and the officers,
employees, agents and servants of Plaintiff to permit Defendants and Defendants'
designated agent to inspect the books and records of Plaintiff, and to make
extracts and copies therefrom, and that Plaintiff be ordered to pay Defendants'
costs and expenses, including attorneys' fees, for having to compel inspection,
as stated in paragraphs 38-42 above, in the amount of at least $3,000;
25
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4. that the Court declare that the February 26, 1998 Agreement (i.e. the
"Directors' Agreement") is valid and binding;
5. that the Court compel Plaintiff to hold board of directors meetings
pursuant to its bylaws and the Directors' Agreement;
6. that a temporary restraining order be issued without notice to
Plaintiffs, restraining them from (1) holding board of directors
meetings without all six directors being properly notified and given
an opportunity to participate; (2) hiring new outside legal counsel;
and (3) hiring a new outside auditing firm;
7. that a temporary injunction be issued, after notice to Plaintiffs and an
evidentiary hearing, enjoining Plaintiffs from (1) holding board of
directors meetings without all six directors being properly notified
and given an opportunity to participate; (2) hiring new outside legal
counsel; and (3) hiring a new outside auditing firm;
8. that a permanent injunction be issued, on final trial of this cause,
enjoining Plaintiffs from (1) holding board of directors meetings
without all six directors being properly notified and given an
opportunity to participate; (2) hiring new outside legal counsel; and
(3) hiring a new outside auditing firm;
9. that the Court find that this suit was brought against Defendants
without reasonable cause, and award judgment to Defendants against
Plaintiff for expenses, including attorneys' fees, in a reasonable
amount; or that Defendants recover expenses incurred in the defense
from NEHI;
10. that Defendants receive such reasonable attorney's fees and costs
incurred in prosecuting the declaratory judgment suit as are allowed
by law; and
26
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11. for such other and further relief, special or general, to which
Underwriters may be justly entitled.
WHEREFORE, PREMISES CONSIDERED, Third-party Plaintiffs request as to their
Third-party petition that:
1. Third-party Defendants be cited to appear herein and answer;
2. Third-party Defendants be notified of a hearing on Third-party
Plaintiffs application for a temporary injunction, and following such
hearing, Third-party Defendants be enjoined pending final decree from
transferring stock and/or assets of NEHI;
3. On final trial, Third-party Plaintiffs have and recover for the
benefit of NEHI and against Third-party Defendants, jointly and severally,
damages in a sum in excess of the minimum jurisdictional limit of the Court;
4. On final trial, Third-party Plaintiffs have and recover for the
benefit of NEHI and against Third-party Defendants an award of exemplary
damages from each Third-party Defendant.
5. On final trial, Third-party Plaintiffs recover from RST for the
benefit of NEHI, NEHI's 6,551,022 shares of common stock;
6. On final trial, judgment ordering rescission of the agreement of
November 1, 1997 entered into between NEHI and Horse, declaring it fully void
and excusing the parties from all obligations under the agreement, and that
Third-party Plaintiffs recover from Horse NEHI's 7,871,023 shares of common
stock, and NEHI return to Horse NEHI's 25% in Horse;
7. On final trial, judgment against Hartley, Gallo and Aqua Turf ordering
them to deliver to NEHI the patent for the subsurface watering system
described in paragraphs 106 and 107 of the
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Third-party petition;
8. In addition to the remedy of specific performance, judgment against
Hartley, Gallo and Aqua Turf for damages in favor of NEHI in an amount within
the jurisdictional limits of the Court;
9. In the alternative, if the remedy of specific performance is denied,
judgment against Hartley, Gallo and Aqua Turf in favor of NEHI for loss of
bargain damages in an amount within the jurisdictional limits of the Court;
10. An order that Hartley, Gallo and Aqua Turf render an accounting of the
amounts owed NEHI on account of the patent for the subsurface watering system;
11. Judgment against Harley, Gallo and Aqua Turf for a sum to be
determined in the accounting, which amount is within the jurisdictional
limits of this Court;
12. On final trial, Third-party Plaintiffs have and recover from Third-
party Defendants, Third-party Plaintiffs' expenses incurred, including
reasonable attorneys' fees, in the sum of at least $50,000;
13. Pre-and post-judgment interest as allowed by law;
14. Costs of suit; and
15. Third-party Defendants have such other and further relief to which
they may be justly entitled.
Respectfully submitted,
MEYER ORLANDO & EVANS P.C.
By:
---------------------
Walter J. Cicack
State Bar No. 04250535
Hilary C. Borow
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State Bar No. 00787106
2300 America Tower
2929 Allen Parkway
Houston, Texas 77019
Telephone:713-523-1101
Facsimile:713-523-2002
Attorneys for Defendants, Bradley Knollenberg, Erin
Oil Exploration Inc., Gulf Minerals Exploration,
Billy Knollenberg, and Doris Knollenberg
CERTIFICATE OF SERVICE
----------------------
The undersigned hereby certifies that a true and correct copy of the
foregoing Defendants' Special Exceptions, Original Answer and Original
Counterclaims to Plaintiff's Original Petition, and Application for Temporary
Restraining Order, Temporary and Permanent Injunction, and Third-Party Petition,
Application for Temporary Injunction, and Demand for Jury Trial was forwarded
to all counsel of record as listed below by either hand delivery, facsimile
transmission, and/or regular or certified mail, return receipt requested, on
this _____ day of July, 1998.
Mr. Michael B. Lee
Greenberg, Peden, Siegmyer & Oshman, P.C.
Tenth Floor, 12 Greenway Plaza
Houston, Texas 77046
Attorney for Plaintiff
National Equities Holdings Inc.
___________________________________
WALTER J. CICACK
29
<PAGE>
NO. 98-28403
NATIONAL EQUITIES HOLDINGS INC.: IN THE DISTRICT CIVIL COURT
:
VS. : OF HARRIS COUNTY, TEXAS
:
BRADLEY KNOLLENBERG, :
ERIN OIL EXPLORATION INC., :
GULF MINERALS EXPLORATION, :
BILLY KNOLLENBERG, AND :
DORIS KNOLLENBERG : 295TH JUDICIAL DISTRICT
VERIFICATION
------------
STATE OF TEXAS :
:
COUNTY OF HARRIS :
BEFORE ME, the undersigned authority, on this day personally appeared Walter
J. Cicack, who being duly sworn stated under oath the following:
1. "My name is Walter J. Cicack. I am over the age of 18, of sound mind,
and competent to make this affidavit. I am a shareholder with the law firm of
MEYER ORLANDO & EVANS P.C. in Houston, Texas, and am the lead attorney for
Defendants Bradley Knollenberg, Erin Oil Exploration Inc., Gulf Minerals
Exploration, Billy Knollenberg, and Doris Knollenberg. I am authorized to
make this verification on their behalf.
2. I have read the above counterclaim for writ of mandamus to compel
inspection, and every statement contained in the counterclaim for writ of
mandamus to compel inspection is within my personal knowledge and is true
and correct.
<PAGE>
Further, Affiant sayeth not."
------------------
Walter J. Cicack
Subscribed and sworn to before me the undersigned Notary Public on this the
____ day of ______________, 1998.
------------------------
Notary Public in and for
Said County and State
My Commission Expires
----------
<PAGE>
