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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________________to______________________
Commission File Number 033-19992-LA
National Equities Holding, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 76-0539342
- ------------------------------- ----------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13700 Veterans Memorial Drive
Suite 410
Houston, Texas 77014
- ----------------------------- ----------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (281) 583-1280
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 No X
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As of March 31, 1998, the latest practicable date, 37,874,980 shares of the
registrant's common stock, $.01 par value per share, were issued and outstanding
based upon the Company's records. See, however, Part II - Other Information,
Item 1. Legal Proceedings in connection with claims concerning the issuance of
certain of those securities and the consideration therefor.
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<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
INDEX
PART I. Financial Information Page
- ------- --------------------- ----
Glossary of Selected Oil and Natural Gas Terms..............3
Item 1. Financial Statements........................................6
Balance Sheet as of March 31, 1998
(unaudited).................................................6
Statements of Operations for the Three Months
Ended March 31, 1998 and 1997
(unaudited).................................................8
Statements of Cash Flows for
the Three Months Ended March 31, 1998 and 1997
(unaudited).................................................9
Reconciliation of Net Loss to
Net Cash Used in Operating Activities
for the Three Months Ended March 31, 1998 and 1997
(unaudited)................................................10
Notes to Financial Statements..............................11
Item 2. Management's Discussion and Analysis or
Plan of Operations.........................................20
PART II. Other Information
- -------- -----------------
Item 1. Legal Proceedings..........................................25
Item 2. Changes in Securities......................................26
Item 3. Defaults upon Senior Securities............................26
Item 4. Submission of Matters to a Vote of Security Holders........26
Item 5. Other Information..........................................26
Item 6. Exhibits and Reports on Form 8-K...........................27
Signatures................................................................29
2
<PAGE>
GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference
to oil or other liquid hydrocarbons.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Developed Well. A well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Hole. A well found to be incapable of producing either oil or natural gas in
sufficient quantities to justify completion as a developed oil or natural gas
well.
Estimated Future Net Revenues. Revenues from production of oil and natural gas
in an unproved area, net of all production-related taxes, lease operating
expenses and capital costs.
Exploratory Well. A well drilled to find and produce oil or natural gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir.
Farm-in. An agreement whereby the lease owner agrees to allow another to drill a
well or wells and thereby earn the right to an assignment of a portion or all of
the lease, with the original lease owner typically retaining an overriding
royalty interest and other rights to participate in the lease.
Field. One or more reserves related to the same individual geological structural
feature.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Lease Expirations. Oil and natural gas leases are for a fixed period. Under
certain circumstances, if no well is drilled or production ceases a situation
may be created in which the number of acres holding oil for production would be
in excess of production holding regulations. In Texas, for example, the
production holding regulation for an oil well is 40 acres. If there is no
production for six months, the lease expires naturally and reverts back to the
mineral rights holder.
Mcf. One thousand cubic feet of natural gas.
Net Acres or Net Wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Net Oil and Natural Gas Sales. Oil and natural gas sales less oil and natural
gas production expenses.
Net Production. Production that is owned by the Company after royalties and oil
and natural gas production due others.
Overriding Royalty Interest. An interest in an oil and natural gas property
entitling the owner to a share of oil and natural gas production free of costs
of exploration and production.
3
<PAGE>
Payout. That point in time when a party has recovered monies out of the
production from a well equal to the cost of drilling and completing the well and
the cost of operating the well through that date.
Productive Well. A well that is producing oil or natural gas or that is capable
of production in paying quantities.
Properties. Any ownership in, or an interest representing the right to, or the
participation in, the extraction of oil and/or natural gas. The term also
includes a nonoperating interest, such as royalty interests or production
interests payable in oil and/or natural gas.
Proved Developed Non-Producing Reserves. Reserves that consist of (i) Proved
Reserves from wells which have been completed and tested but are not producing
due to lack of market or minor completion problems which are expected to be
corrected and (ii) Proved Reserves currently behind the pipe in existing wells
and which are expected to be productive due to both the well log characteristics
and analogous production in the immediate vicinity of the wells.
Proved Developed Producing Reserves. Reserves that can be expected to be
recovered from currently producing zones under the continuation of present
operating methods.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of oil, and natural gas 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 Undeveloped Reserves. Proved reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in a
different formation or producing horizon from that in which the well was
previously completed.
Reservoir. A separate confined underground formation containing a natural
accumulation of producible oil and/or natural gas.
Royalty Interest. An interest in an oil and natural gas property entitling the
owner to a share of oil and natural gas production free of costs of production.
SEC PV-10. The present value of proved reserves is an estimate of the discounted
future net cash flows from each of the properties at March 31, 1998, or as
otherwise indicated. Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of the
Securities and Exchange Commission (the "Commission"), the future net cash flows
have been discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream and should not be construed as being the fair market value
of the properties. In accordance with Commission rules, estimates have been made
using constant oil and natural gas prices and operating costs, at March 31, 1998
or as otherwise indicated.
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<PAGE>
Shut-In. To close down a producing well or field temporarily for repair,
cleaning out, building up reservoir pressure, lack of a market or similar
conditions.
Sidetrack. A drilling operation involving the use of a portion of an existing
well to drill a second hole, in which a milling tool is used to grind out a
"window" through the side of a drill casing at some selected depth. The drilling
bit is then directed out of the window at a desired angle into previously
undrilled strata. From this directional start, a new hole is drilled to the
desired formation depth and casing is set in the new hole and tied back into the
older casing, generally at a lower cost than the cost to drill a new well
because of the utilization of a portion of the original casing.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
Unproved Properties. Lease acreage on which wells have not been drilled, but are
believed to be candidates for probable or possible oil and natural gas reserves.
Working Interest. The operating interest that gives the owner of the property or
mineral rights the right to (i) drill, produce and conduct operating activities
on the property; and (ii) a share of the production, subject to all royalties,
overriding royalties and other burdens as well as all costs of exploration,
development and operations and all risks in connection therewith.
Workover. Work performed on a well, subsequent to the initial drilling and
completion phase of a well. Typically, a workover involves procedures to repair
a well or to improve a well's production.
5
<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,1998
-------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
CASH $ 63,476
ACCOUNTS RECEIVABLE 8,069
PREPAID EXPENSES 720
----------
TOTAL CURRENT ASSETS 72,265
----------
OIL AND NATURAL GAS PROPERTIES, AS DETERMINED OIL AND NATURAL GAS PROPERTIES, PROVED 263,586
BY THE SUCCESSFUL EFFORTS OIL AND NATURAL GAS PROPERTIES,
METHOD OF ACCOUNTING UNPROVED AND UNDEVELOPED 1,816,670
WELL AND RELATED EQUIPMENT 211,855
LESS: ACCUMULATED DEPLETION,
DEPRECIATION AND AMORTIZATION (57,576)
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TOTAL OIL AND NATURAL GAS PROPERTIES 2,234,535
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OTHER ASSETS
INVESTMENT IN LIMITED PARTNERSHIP
INTERESTS OF RST/HORSE (NOTE 4) 2,562,000
PROPERTY, PLANT AND EQUIPMENT-
OFFICE EQUIPMENT 3,385
DEPOSITS 6,039
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TOTAL OTHER ASSETS 2,571,424
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TOTAL ASSETS $4,878,224
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C> <C>
LIABILITIES AND CAPITAL:
- ------------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 67,163
ACCRUED EXPENSES 60,000
ACCRUED INTEREST 2,650
NOTE PAYABLE (NOTE 8) 276,099
NEHI DEBENTURES (NOTE 6) 120,000
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TOTAL LIABILITIES 525,912
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
PREFERRED STOCK
1,000,000 SHARES AUTHORIZED
AT $0.001 PAR VALUE; NONE
ISSUED AND OUTSTANDING
COMMON STOCK
49,000,000 SHARES AUTHORIZED AT
$0.001 PAR VALUE:
37,874,980 SHARES ISSUED AND
OUTSTANDING 37,875
PAID IN CAPITAL 9,196,159
ACCUMULATED (DEFICIT) (4,881,722)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,352,312
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,878,224
===========
</TABLE>
7
<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
REVENUE:
SALES $ 9,670 $ 43,166
OTHER INCOME 9,000 16,008
LESS:
LEASE OPERATING EXPENSES (14,568) (53,173)
----------- -----------
GROSS PROFIT 4,102 6,001
GENERAL AND ADMINISTRATIVE EXPENSES (192,625) (154,806)
INTEREST EXPENSE (2,650) (69,616)
----------- -----------
NET (LOSS) $ (191,173) $ (218,421)
=========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING 36,754,380 14,873,630
BASIC (LOSS) PER SHARE $ (0.005) $ (0.0146)
FULLY DILUTED (LOSS) PER SHARE $ (0.005) $ (0.0146)
</TABLE>
8
<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Cash received from operations $ 18,670 $ 59,174
Lease operating expenses paid (14,568) (53,173)
Interest paid on Erin Oil Debentures -- (135,213)
General and administrative expenses paid (121,244) (154,806)
--------- ---------
Net Cash Used in Operating Activities (117,142) (284,018)
--------- ---------
CASH FLOW FROM
INVESTING ACTIVITIES
(Increase) in Capital Expenditures (3,385) (25,809)
--------- ---------
Net Cash Used in Investing Activities (3,385) (25,809)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to Shareholder (2,361) --
Stock Issued for Services (650) --
Advance (to) from Affiliate -- (302,341)
Sale of 1998 NEHI Debentures 125,000 --
--------- ---------
Net Cash Provided by Financing Activities 121,989 302,341
--------- ---------
Net Increase (Decrease) in Cash 1,462 (7,486)
Cash Balance, Beginning 62,014 3,480
--------- ---------
Cash Balance, Ending $ 63,476 $ (4,006)
========= =========
</TABLE>
9
<PAGE>
NATIONAL EQUITIES HOLDINGS, INC.
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
<S> <C> <C>
1998 1997
Net (Loss) $(191,173) $(218,421)
Decrease in assets 10,005 --
Increase (Decrease) in Accrued Expenses 64,026 (65,597)
--------- ---------
Net Cash Used in Operating Activities $(117,142) $(284,018)
========= =========
</TABLE>
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1: Summary of Significant Accounting Policies:
Basis of Presentation
The accompanying unaudited Financial Statements were prepared in accordance with
the instructions for Form 10-QSB and, therefore, do not include all disclosures
necessary for a complete presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. All adjustments which are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the interim
financial statements, have been included. The results of operations for the
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.
Due to the untimely filing of this Form 10-QSB for the quarterly period ended
March 31, 1998, the Notes to the Financial Statements contain information of
events which have occurred subsequently to the date of the financial statement
presentation in order to conform to the financial statement disclosure contained
in the Form 10-QSB for the quarterly period ended June 30, 1998, filed
concurrently herewith.
This summary of significant accounting policies of NATIONAL EQUITIES HOLDINGS,
INC. ("NEHI" or the "Company") is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity.
a. Organization and Business Activities:
The Company was formed on November 24, 1987 and is an independent oil and
natural gas exploration and production company with operations focused on
properties in western Texas and West Virginia. See Item 2 - Management's
Discussion and Analysis or Plan of Operations - Plan of Oil and Natural Gas
Operations. The Company operates in an environment with many financial and
operating risks, including, but not limited to, the ability to acquire
additional economically recoverable oil and natural gas reserves, the inherent
risks of the search for, development of and production of oil and natural gas,
the ability to sell oil and natural gas at prices which will provide attractive
rates of return, the highly competitive nature of the industry and local and
worldwide economic conditions. The Company's ability to expand its reserve base
and diversify its operations is also dependent upon obtaining the necessary
capital through operating cash flow, borrowings or the issuance of additional
equity.
b. Cash and Cash Equivalents:
The Company considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and highly liquid debt instruments purchased with a
maturity of three months or less, to be cash equivalents.
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<PAGE>
c. Revenue Recognition:
The Company recognizes revenue from oil produced at the point of sale, which is
deemed when the oil is run from the field production storage tanks to
purchasers. Natural gas is not stored on the leased property; thus, revenue is
recognized at the point of production and sale because they are the same.
d. Basis of Accounting:
The Company prepares its financial statements and federal income taxes on the
accrual basis of accounting. The Company's oil and natural gas properties are
accounted for using the "Successful Efforts" basis of accounting.
Costs to acquire mineral interests in oil and natural 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.
Unproved oil and natural gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized, based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and
natural gas properties, after considering estimated dismantlement and
abandonment costs and estimated salvage values, are depreciated and depleted by
the unit-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, 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.
e. Oil and natural gas leases held for resale:
The Company has acquired and may continue to acquire certain oil and natural gas
leases from time to time in the future for the purpose of contributing the
leases to affiliated oil and natural gas partnerships or selling the leases to
industry partners for cash consideration. Such leases held for resale are
periodically reviewed to determine if they have been impaired. If impairment
exists, a loss is recognized by providing an impairment allowance. Abandonments
of oil and natural gas leases held for resale are charged to expense. With
respect to leases transferred to affiliated oil and natural gas partnerships,
the determination of recovery of total costs is made on a
partnership-by-partnership basis.
12
<PAGE>
f. Capitalized interest:
The Company capitalizes interest on expenditures for significant exploration and
development projects during the period in which such activities are in progress.
g. Management Fees:
In connection with the planned sponsorship of oil and natural gas partnerships,
the Company will seek to receive a management fee from such partnerships, which
will be credited to income as earned.
h. Income Taxes:
The Company records income taxes in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax assets and liabilities
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 differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates. The
Company does not have any deferred tax liabilities as of the date of these
financial statements.
i. Asset Impairment
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," applies to (1) long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and (2) long-lived assets
and certain identifiable intangibles to be disposed of. Management is
responsible for considering whether an asset is impaired. SFAS 121 requires
impairment testing of assets to be held and used only when events or
circumstances indicate carrying amounts may not be recoverable. Management
performs a review of its long-lived assets annually.
Proved Reserves are reviewed annually by independent petroleum engineers who
issue a report which estimates discounted future cash flows. Management will
review these reports for indicated impairment and take appropriate steps. If
such impairment is determined to exist, a loss is recognized by providing for an
impairment allowance.
j. Property, Plant and Equipment:
Property and equipment are carried at cost. Oil and natural gas pipelines and
equipment are depreciated on the straight-line method over their estimated
lives, typically fifteen years. Other property is also depreciated on the
straight-line method over their estimated lives, ranging from three to ten
years.
k. Per Share Amounts:
The Company has adopted SFAS No. 128, "Earnings per Share." In accordance with
SFAS No. 128, the Company's basic earnings (loss) per share amounts have been
computed based on the average number of common shares outstanding.
13
<PAGE>
l. Reclassification:
Certain financial statement items have been reclassified to conform to the
current year's presentation. In addition, the financial statements and the Notes
thereto contain information concerning subsequent events, due to the untimely
filing of this Form 10-QSB. See "Basis of Presentation."
m. Use of Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities in the financial statements,
including the use of estimates for oil and natural gas reserve information and
the valuation allowance for deferred income taxes. Actual results could differ
from those estimates. Estimates related to oil and natural gas reserve
information and the standardized measure are based on estimates provided by
independent engineering firms. Changes in prices could significantly affect
these estimates from year to year.
NOTE 2: Going Concern:
The three months ended March 31, 1998 continued a period of losses in NEHI's oil
and natural gas operations. This cycle of increasing operating losses has raised
concerns regarding the Company's ability to continue as a going concern.
Management has taken steps to overcome these negative trends by acquiring
interests in two limited partnerships, one of which has a patent pending for a
down-hole drilling tool known as a "rotary steerable device" (the "Device").
Management has also entered into farm-in agreements in West Virginia. As of
March 31, 1998, the Company was awaiting the receipt of an independent report
with respect to the oil and natural gas reserve evaluations of such property. In
April, 1998, the Company received the independent evaluation, which states that
the oil and natural gas reserves contained on such property are estimated to be
substantial.
NOTE 3: Volatility of Oil and Natural Gas Prices:
The Company's revenues, profitability and the carrying value of its oil and
natural gas properties are substantially dependent upon prevailing prices of,
and demand for, oil and natural gas and the costs of acquiring, finding,
developing and producing reserves. The Company's ability to borrow, to repay
outstanding indebtedness, and to obtain additional capital on attractive terms
is also substantially dependent upon oil and natural gas prices. Historically,
the markets for oil and natural gas have been volatile and are likely to
continue to be volatile in the future. Prices for oil and natural gas are
subject to wide fluctuations in response to: (i) relatively minor changes in the
supply of, and demand for, oil and natural gas; (ii) market uncertainty; and
(iii) a variety of additional factors, all of which are beyond the Company's
control. These factors include domestic and foreign political conditions, the
price and availability of domestic and imported oil and natural gas, the level
of consumer and industrial demand, weather, domestic and foreign government
relations, the price and availability of alternative fuels and overall economic
conditions.
NOTE 4: Asset Acquisition:
On August 9, 1996, the Company acquired from Mr. Bill Knollenberg, a director
and former senior executive officer of the Company, the oil and natural gas
reserves of Erin Oil Exploration, Inc., a Texas corporation,
14
<PAGE>
("Erin Oil") for 13,122,045 shares of NEHI Common Stock having a fair market
value of $6,854,486 as of the date of the acquisition. Of these 13,122,045
shares of Common Stock, all of such shares are held by Gulf Minerals
Exploration, a general partnership ("Gulf Minerals") of which Mr. Bill
Knollenberg and his wife, Mrs. Doris C. Knollenberg are each 20% partners and
Mr. A. Bradley Knollenberg, their son, holds a 60% partnership interest. As a
part of this transaction, the Company assumed the liability for convertible
debentures issued by Erin Oil in the amount of $2,770,000. This transaction is
the subject of litigation between the Company and the Knollenbergs as well as
Erin Oil and Gulf Minerals. See Note 6 to the Notes to the Financial Statements,
Part II - Other Information, Item 1 - Legal Proceedings and Exhibit 10.2 hereto.
On November 1, 1997 the Company acquired a 25% limited partnership interest in
HORSE ENERGY LP, a Texas limited partnership ("HORSE"). NEHI issued a total of
7,871,023 shares of common stock having, as of such date, a fair market value of
$1,338,074 (or $0.17 per share) to HORSE. HORSE is an exploration and
development entity formed for the purpose of engaging in advanced technology and
innovation for the production of oil and natural gas reserves. NEHI agreed to
invest, as a non-operating partner, $5,000,000 in drilling ventures to be
assembled and operated by HORSE. This transaction is the subject of litigation
between the Company and the Knollenbergs as well as Erin Oil and Gulf Minerals.
See Part II - Other Information, Item 1 - Legal Proceedings.
The general partner of HORSE is Horse Energy, LLC ("HE LLC"). The other limited
partners of HORSE are Messrs. George Sutherland, Feroze Variava and Jack Chance,
who serve as directors of and maintain senior management positions with the
Company. Messrs. Sutherland, Variava and Chance have significant experience in
the oil and natural gas exploration industry having been involved, in the
aggregate, in the drilling of in excess of 500 horizontal, 50 re-entry and 20
multilateral horizontal wells. See Exhibit 10.4 hereto.
On November 5, 1997, the Company acquired a 25% limited partnership interest in
Rotary Steerable Tools (USA) LP, a Texas limited partnership ("RST"). NEHI
issued 6,551,022 shares of Common Stock having, as of such date, a fair market
value of $1,113,674 (or $0.17 per share), as well as $250,000 in cash in return
for such interest in RST. Former management of NEHI simultaneously sold five
percent of NEHI's interest in RST to an unaffiliated third party for $250,000 in
cash, whereby the Company's interest in RST was reduced to 20%. NEHI has an
obligation to fund certain expenses up to $1,000,000 to be incurred in relation
to the development of the Device in return for its interest in RST. See Exhibit
10.5 hereto.
The transaction between NEHI and RST has been accounted for at cost. SFAS No.
123, "Accounting for Stock-Based Compensation" states "...the fair value of the
equity instruments issued shall be used to measure the transaction if that value
is more reliably measurable than the fair value of the consideration received."
The general partner of RST is Rotary Steerable Tools LLC, a Texas limited
liability company ("RST LLC"). The other limited partners of RST are Messrs.
Jack Chance, Chairman and Chief Executive Officer of the Company, and Steve
McLoughlin, the Company's Treasurer and Executive Vice President of Oilfield
Services. Messrs. Chance and McLoughlin are the inventors and owners of the
intellectual property related to the Device. See Part II - Other Information,
Item 1 - Legal Proceedings and Exhibit 10.5 hereto.
The Device is patent pending and is presently in the patent application process.
A patent application was filed in the United Kingdom in 1995. Subsequently, an
international patent application, under the Patent Cooperation Treaty, was filed
in 1996. The international patent application was published
15
<PAGE>
on October 10, 1996 under serial number WO-96-31679. The priority date on the
international patent application is April 5, 1995. A patent was applied for in
the United States on October 5, 1997. Applications for patents in other
countries have also been submitted. The Device, used in connection with
steerable oil and natural gas drilling, is generally described as a down-hole
adjustable device for trajectory control in the drilling of deviated wells. The
Device can be used for horizontal and multilateral drilling. The Device has not
yet been offered commercially. RST is the licensee in the United States for the
Device.
The Device is designed to enable drillers to control the inclination and
direction of the well bore while maintaining complete rotation of the
drillstring at all times during the drilling process. The Device uses the static
method of rotary steering and the Device is self-aligning within the borehole.
Forces are applied continuously to the borehole by means of an eccentric cam
which can be rotated and then locked into place during drilling. During
drilling, there are no moving parts. The Device has three major components. The
mandrel carries all axial and torque loadings from the drillstring to the drill
bit. The inner sleeve is the eccentric cam component which transmits forces to
the borehole wall by means of blades which are set on the outer housing. The
outer housing contains the pregnant, self-aligning portion of the Device. It has
two parallel short stabilizer blades set at a distance of approximately two to
three feet from the face of the drill bit. The blades apply radial forces to the
borehole. The blades can be removed in the field and shimmed to different
heights which results in a change in the dog-leg characteristics which the
Device can provide. The outer housing contains the mechanical means of
controlling the position of the inner sleeve, as well as the power source and
instrumentation for the Device. The Device is only eight feet long, which allows
survey instrumentation to be placed closer to the drill bit, and the quality of
formation evaluation information can be better because the drilling mud will
have had less time to contaminate the rock formation.
The competitive market for steerable drilling tools includes such companies as:
Baker Hughes Inteq, Camco, Cambridge, Halliburton, Schlumberger and Sperry-Sun,
which manufacture and market similar drilling equipment which would compete with
the Device. Two prototype Devices are in the advanced stages of development by
RST and field testing is anticipated to begin in the first quarter of 1999.
Messrs. Chance, McLoughlin, Sutherland and Variava each have extensive oil and
natural gas industry experience, particularly in horizontal and multi-lateral
oil and natural gas drilling. With the RST/Horse transactions, the Company and
its current management is in the process of developing plans to refocus the
Company as an exploitation and oilfield service company and to use the Device on
its own drill sites and for the drill sites of others.
NOTE 5: Change in Control:
The RST/HORSE transactions resulted in a change of control of the Company. Bill
Knollenberg was the only serving officer and director of the Company in November
1997, and, as a part of such transactions, appointed the four individuals, who
have controlling interests in RST and/or HORSE, as directors and officers of the
Company.
In February 1998, an agreement (the "February 1998 Agreement") was entered into
pursuant to which certain principal shareholders of NEHI agreed that the
Company's Board of Directors would consist of three Directors selected
collectively by Bill M. Knollenberg, Bradley Knollenberg and Doris Knollenberg;
three Directors selected collectively by Jack Chance, George Sutherland, Feroze
Variava and Steve McLoughlin; and one ex-
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officio advisor, to be selected by the parties to the agreement, who would have
authority to vote if the Board of Directors was deadlocked. See Exhibit 10.7. As
part of the February 1998 Agreement, Daniel R. Kirshbaum, Esq., former counsel
to the Company, was designated to serve as the initial ex-officio advisor until
such time as he resigned or was replaced by the Board of Directors and Mr.
McLoughlin agreed to resign. Mr. McLoughlin's resignation was effective in April
1998. NEHI was not a party to the February 1998 Agreement and, current
Management does not believe the Company is bound by such agreement. Based upon
this conclusion, it is the Company's position that the present directors of the
Company are: Messrs. Jack Chance, George Sutherland, Feroze Variava, Bill M.
Knollenberg and A. Bradley Knollenberg. Mr. Bill Knollenberg tendered his
resignation as Chairman of the Board of Directors (but, not as a director) and
Chief Executive Officer of the Company on December 8, 1997. Current corporate
officers and management are Messrs. Jack Chance, Chairman and Chief Executive
Officer, George Sutherland, President and Chief Operating Officer, Feroze
Variava, Executive Vice President of Operations and Secretary and Steve
McLoughlin, Executive Vice President of Oilfield Services and Treasurer. See
Part II - Other Information, Item 1 - Legal Proceedings.
NOTE 6 - Convertible Debentures:
1996 Transactions: As a part of the acquisition of the oil and natural gas
reserves from Erin Oil in 1996, the Company assumed liability for convertible
debentures previously issued by Erin Oil and outstanding as of September 30,
1996 ("Erin Oil Debentures"). The Erin Oil Debentures were issued at various
times during 1996 at interest rates of 8 to12% due January 5, 1998. As of
January 5, 1997, the first anniversary date of the Erin Oil Debentures, such
debentures were available for conversion into common stock of the Company. The
conversion ratio varied from $0.75 to $2.00 per share of Common Stock, depending
upon the amount of such debenture. A principal amount of $5,000,000 was
authorized by the Erin Oil Board of Directors, of which $2,770,000 were sold and
outstanding at September 30, 1996. An additional $698,000 of Erin Oil Debentures
were sold by Erin Gas Producers, Inc. ("Erin Gas"), another company affiliated
with Mr. Bill Knollenberg, from October 1 through December 31, 1996, and
subsequently assigned to the Company, bringing the total amount of outstanding
Erin Oil Debentures to $3,468,800. If fully converted on January 5, 1997, the
outstanding Erin Oil Debentures would have represented 3,048,638 additional
shares of the Company's Common Stock.
1997 Transactions: On May 27, 1997, the NEHI Board, through its sole director,
Mr. Bill Knollenberg, approved the conversion of $745,000 of Erin Oil Debentures
into 597,903 shares of NEHI common stock. On December 18, 1997, the Company
entered into an agreement with Erin Oil and Mr. Bill Knollenberg (the "December
18, 1997 Agreement"). The December 18, 1997 Agreement, which was not an
arms-length transaction, transferred the liability for the balance, which
amounted to $2,746,080, as of December 16, 1997, of the outstanding Erin Oil
Debentures and accrued interest to Mr. Bill Knollenberg and Erin Oil. See
Exhibit 10.6 hereto. At the time the Erin Oil Debentures were sold to the
public, it was represented that such debentures would be convertible into common
stock of a public company represented as NEHI. Because of these representations,
the Company agreed to hold, 2,913,200 shares of the Company's Common Stock to be
used by Erin Oil for the express purpose of converting the outstanding Erin Oil
Debenture debt. Based on the December 18, 1997 Agreement, Erin Oil, Gulf
Minerals and Mr. Bill Knollenberg have assumed any additional liability for
payment or conversion of the Erin Oil Debentures. As Erin Oil retires these
debentures, a corresponding amount of Common Stock will be released from the
escrow. As of March 31, 1998, 1,944,746 shares of Common Stock had been
exchanged for Erin Oil Debentures and the balance of the stock was held in
escrow. In addition, the transaction had the effect of removing
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approximately $2,621,800 of debt from the Company's balance sheet. Current
Management believes the 2,913,200 shares of Common Stock held by the Company
satisfy NEHI's liability for these debentures.
In August, 1998, it was discovered that from August through September, 1997,
$120,000 of NEHI Series A Convertible Debentures were sold by former management
of NEHI at an interest rate of 8% due August 25, 1999 ("1997 NEHI Debentures").
According to the 1997 NEHI Debenture documents, these debentures are part of a
series of NEHI convertible debentures of up to an aggregate principal of
$1,000,000. Other than the $120,000 of debentures, current Management has been
unable to determine whether any additional debentures of these series have been
sold and are outstanding, but intensive efforts to ascertain the likelihood of
additional outstanding debentures are on-going. The Company does not intend to
meet the interest obligation, which was due on these debentures on August 25,
1998, and based on discussions with the present debenture holders, the Company
and such holders have agreed to convert such debentures to Common Stock. Upon
conversion, the outstanding debentures will represent 282,258 additional shares
of the Company's Common Stock. See Exhibit 4.2 hereto.
NOTE 7 - Stock Options:
On August 9, 1996, an option was granted to Diversified Service Brokers, Inc.,
an unrelated party, to purchase 200,000 shares of the common stock of the
Company, at $0.44 per share. This option expires on August 8, 1999 and was based
on a previous purchase of stock for cash at $0.44 per share. The Company has
elected to account for its stock options under the fair value method of
accounting for stock-based compensation plans. This stock option, which was
granted as a result of the Erin Oil transaction, is the only currently
outstanding stock option. The Company has not issued any compensation based
stock options to employees.
NOTE 8: Related Party Transactions:
During 1997, Mr. Bill Knollenberg as Chief Executive Officer of NEHI and
representing the then majority common stock interests, represented to the Board
of Directors that personal advances by him had been made to the Company totaling
$278,460, which covered operating cash shortfalls and investments made by the
Company. These advances were made as needed to the Company and were unsecured.
Subsequent to December 31, 1997, the Company executed a note in the amount of
$200,000 to Mr. Knollenberg with payment due December 31, 1998. To cover the
difference and interest, the Company issued 400,000 shares of restricted common
stock to Mr. Knollenberg. These accounts are being reviewed by NEHI and are a
part of ongoing litigation. Accordingly, the note payable reflected on the
balance sheet is an obligation outstanding to Mr. Bill Knollenberg. See also
Notes 4 and 6 to the Notes to the Financial Statements and Part II - Other
Information, Item 1 - Legal Proceedings.
The following shares were issued to the Knollenbergs in 1997, all in connection
with services rendered:
Related Party No. of Shares Date Issued Fair Value
A. Bradley Knollenberg 1,000,000 July 3, 1997 Unknown
Doris C. Knollenberg 1,000,000 December 9, 1997 Unknown
Bill Knollenberg 885,052 December 8, 1997 Unknown
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These transactions have not been accounted for at a known value, due to lack of
marketability of the common stock at the time of approval and the unknown fair
value of the services rendered. Restrictions on the sale of this Common Stock
under SEC Rule 144 create additional valuation problems. Accordingly, a zero
value has been assigned to this transaction in these financial statements.
The issuance of the aforementioned shares is also the subject of ongoing
litigation. See also Part II - Other Information, Item 1 - Legal Proceedings.
NOTE 9: Year 2000 Issues:
The Year 2000 issue ("Y2K") is the result of computer programs being written
using two digits rather than four to define the applicable year. Any programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculation. NEHI currently uses an oil and natural gas accounting program
running on a Windows 95 operating system. Management is currently checking with
the software vendor to see if this accounting program is Y2K compliant.
Management is also reviewing the Company's individual desktop units to insure
that these units are Y2K compliant. Assuming all systems are non-compliant, the
cost of Y2K compliance would be less than $30,000.
NOTE 10: Commitments and Contingencies:
Based on agreements between NEHI and RST and HORSE, the Company has commitments
to pay $1,000,000 and $5,000,000 to RST and HORSE, respectively. The principals
of RST and HORSE have indicated that neither RST or HORSE intend to enforce
these commitments at this time and therefore such commitments are not reflected
on the balance sheet. See Exhibits 10.4 and 10.5 hereto.
In addition, see Note 6 to the Notes to the Financial Statements with respect to
shares of Common Stock (i) held in escrow by the Company to retire the Erin Oil
Debentures and (ii) to be issued in connection with the conversion of the
$120,000 of outstanding 1997 NEHI Debentures. In the event any additional
debentures of the series of up to $1,000,000 1997 NEHI Debentures are discovered
outstanding, the Company will need to meet its obligations to the holders of
such debentures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward Looking Information
This Form 10-QSB contains certain forward looking statements. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," anticipates,"
"estimates," or "continue" or comparable terminology or the negative thereof are
intended to identify certain forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, both known and
unknown, and actual results may differ materially from any future results
expressed or implied by such forward-looking statements. Such statements speak
only as of the quarter ended March 31, 1998 and the Company undertakes no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events or otherwise. See Exhibit 99.4
hereto.
Company Control
Until November, 1997, the Company was under the management and control of Mr.
Bill Knollenberg, who acquired the controlling interest in NEHI in September of
1996 through a transaction involving a transfer of certain leasehold interests
located in Fisher and Scurry County, Texas from Erin Oil Exploration, Inc.("Erin
Oil"), a company owned by Mr. Knollenberg, in exchange for 14,022,045 shares of
NEHI common stock. In addition, NEHI assumed $2,770,000 of Erin Oil Debentures
as part of the transaction in which Mr. Knollenberg gained controlling interest
in the Company as well as $698,000 in convertible debentures of Erin Gas
Producers, Inc. ("Erin Gas"),another affiliated company of Mr. Knollenberg. In
1997, Mr. Knollenberg issued to himself and/or his family or affiliated
businesses, 7,000,000 additional shares of NEHI common stock of which 4,114,947
shares have been returned to the Company and 2,885,082 remain in control of Mr.
Knollenberg or his affiliates. The issuance of these shares is the subject of
ongoing litigation. See also Part II - Other Information, Item 1 - Legal
Proceedings.
Also in December 1997, Mr. Bill Knollenberg resigned as Chairman and Chief
Executive Officer of the Company and appointed Messrs. George Sutherland, Jack
Chance, Feroze Variava and Steve McLoughlin, as directors and officers of the
Company ("Current Management"). These individuals have extensive management and
technical skills in oilfield services and hold various positions with RST and
HORSE. See Note 4 to the Notes to the Financial Statements.
On December 18, 1997, the Company agreed to hold 2,913,200 shares of NEHI Common
Stock to be used to convert the Erin Oil Debentures in exchange for an agreement
from Mr. Knollenberg that he and his companies would assume and retire certain
existing long-term debt of Erin Oil previously assigned by Mr. Knollenberg to
NEHI, when Mr. Knollenberg acquired controlling interest of NEHI in 1996. See
Note 6 to the Notes to the Financial Statements.
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Results of Operations
Three Months Ended March 31, 1998 and 1997
The Company's operations resulted in a net loss of $191,000 for the three months
ended March 31, 1998 representing a $27,000 decrease from the net loss of
$218,000 for the same period in 1997. This decrease was primarily due to the
elimination of the interest expense on the Erin Oil Debentures. See Note 6 to
the Notes to the Financial Statements.
The Company's revenues totaled $19,000 for the three months ended March 31, 1998
compared to $59,000 for the same period in 1997, as decreased of $40,000. Of
such $19,000, $10,000 represented oil sales primarily from the Fisher County,
Texas properties and $9,000 represented well administrative fees.
The cost of revenue decreased from $53,000 for the three months ended March 31,
1997 to $15,000 for the three months ended March 31, 1998 due to a decrease in
lease operating expenses.
General and Administrative expenses increased $38,000 from $155,000 for the
three month period ended March 31, 1997 to $193,000 for the same period in 1998.
This increase was primarily related to accrued management compensation over the
three-month period ended March 31, 1998.
With Erin Oil re-assuming the liability in December 1997 for $3,468,800 of its
8% convertible debentures, which had been transferred to NEHI as part of the
1996 acquisition transaction, there was no longer a need to accrue interest
thereon after the 1997 year end. During the three months ended March 31, 1997,
$70,000 of interest was accrued on such debentures. See Note 6 to the Notes to
the Financial Statements.
Liquidity and Capital Resources
During the three months ended March 31, 1998, the Company initiated efforts to
secure capital resources for lease acquisition and drilling projects. This was
pursued primarily through the private placement offering of a new issuance of up
to $20,000,000 of NEHI Series A 9% Convertible Debentures, which commenced in
January 1998, ("1998 NEHI Debentures"). The $125,000 obtained as proceeds from
this offering through March 31, 1998 have been used to fund lease acquisitions,
well workover projects and to pay general and administrative costs.
Capital expenditures of $3,385 for the first quarter of 1998 which were funded
by cash flows, consisted primarily of purchases of office equipment.
The Company is currently pursuing inexpensive workovers on West Texas
properties, low cost drilling opportunities and joint ventures with industry
partners to improve cash flow for 1998.
The Company's liquidity requirements for the remainder of 1998 are anticipated
to be $450,000. The Company presently exhibits serious cash flow problems and
therefore its ability to meet such liquidity requirements is in question.
Continuing efforts to raise working capital through the private placement of the
1998 NEHI Debentures is one source to meet such requirements, however, these
efforts are in abeyance pending compliance with fulfilling the reporting
requirements with the Commission. See Part II -- Other Information, Item 5.
Other Information. It is anticipated that such efforts will be renewed in the
fourth quarter of the 1998 fiscal year; however, there is no assurance that such
placements will be successful or sufficient to meet the Company's needs.
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Plan of Oil and Natural Gas Operations
The identification and development of proven oil and natural gas prospects to
achieve reserve growth, increase cash flow, and enhance share value are the
central focus of the Company's business. Prospects are generated primarily
internally, by joint venture participation with industry partners, and by
consulting explorationists with which the Company has working relationships.
The Company's strategy is to exploit proven prolific oil and natural gas
reserves quickly and efficiently through the use of advanced technology and
innovation. The Company will target oil and natural gas leases where the
application of re-entry, horizontal and multilateral technology can be
successfully applied.
In its efforts to acquire leases or other exploration rights in new prospect
areas, the Company faces competition from major oil companies, independent oil
firms, and oil and natural gas speculators. The ability to acquire leases or
exploration rights is generally determined by the amount of cash required to
obtain the property interest, the royalty or other interest reserved by the
transferor, and the nature of any commitment to drill or complete other
exploration.
Acquisition and divestitures of oil and natural gas properties are being pursued
as part of the Company's strategy of securing properties that can best be
exploited by the recently acquired interest in its affiliate company, HORSE.
Re-entry, horizontal and multilateral development opportunities are being
evaluated by HORSE and the Company plans to secure mineral lease positions when
investment funds are available.
Properties
As is customary in the oil and natural gas industry, the Company makes only a
cursory review of title to undeveloped oil and natural gas leases at the time
they are acquired by the Company. However, before drilling commences, the
Company causes a thorough title search to be conducted, and any material defects
in title are remedied prior to the time actual drilling of a well on the lease
begins. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller or lessor of the undeveloped
property, is typically obligated to cure any such title defects at its expense.
If the Company were unable to remedy or cure any title defect of a nature such
that it would not be prudent to commence drilling operations on the property,
the Company could suffer a loss of its entire investment in drilling operations
on the property. The Company believes that it has good title to its oil and
natural gas properties, some of which are subject to immaterial encumbrances,
easements and restrictions.
The oil and natural gas properties owned by the Company are also typically
subject to royalty and other similar non-current cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties.
Coleman County, Texas
This property was acquired from Erin Oil. The Company has disposed of and
written down its proved producing reserves for the Coleman County properties.
Specifically, the Carroll Hinds Leases and the Rufus
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Allen Leases were terminated due to poor production and low potential for
applying alternative drilling technologies to boost production.
Fisher County, Texas
This property was acquired from Erin Oil. The Fisher County properties
contributed the most to NEHI production and proved producing reserves during the
first three months of 1998. However, production declined significantly on these
properties over the last twelve months from water breakthrough and mechanical
well problems. Several workovers were performed in April and May and the
properties are being evaluated for possible infill drilling potential. Long term
plans are to divest of operating rights to these properties and retain a
non-operated interest. It was determined in April 1998 that the leasehold
interests to the Fisher County properties had never been transferred from Erin
Oil to NEHI. As a result of the Company initiating the cause of action against
Mr. Knollenberg, et al, in June 1998 (See Part II - Other Information, Item 1 -
Legal Proceedings), Erin Oil executed and delivered the documents necessary to
transfer the interests to NEHI late in July, 1998. The documents as delivered
were dated April 1998.
Scurry County, Texas
This property was acquired from Erin Oil. Management believes that substantial
lease impairment may exist with respect to the Scurry/McMullen property and will
be evaluating the property for a determination as to whether the reserves will
be written off during the next quarter.
Walker County, Texas
This property was acquired from Erin Oil. This block consists of 179.57 acres
and is located in close proximity to successful horizontal Austin Chalk wells
drilled by offsetting operators. The Austin Chalk is at 13,000 feet deep in this
area, and can be a very prolific, high volume natural gas producer. The Company
is pursuing the sale of this project or industry partners for joint venture.
Drilling costs for this development have been estimated at $1,500,000 by the
Company.
Wirt County, West Virginia
In 1997, the Company extended its rights to a 10,122 acre "Roberts" oil and
natural gas estate in Wirt County, West Virginia through a drilling farm-in
commitment which was made on behalf of NEHI by company affiliate HORSE. The
property is in close proximity to the Burning Springs Anticline where
hydrocarbons have been produced since the early twentieth century. The Company
has a two well drilling commitment on the property for the fourth quarter of
1998 and plans to target the Greenbriar and Pocano Injun Formations as well as
the Fractured Devonian Shales using high angle multilateral well technology. It
is anticipated that the Company's affiliate company, HORSE, will be engaged in
the drilling aspects of the project, if and as funds become available.
The Company has received an oil and natural gas farm-in assignment of the first
200 acre "Roberts" tracts, and acquired a lease on a 102 acre contiguous tract,
all of which the Company subsequently assigned to HORSE. The Company retained a
lease payment and overriding royalty on this property.
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The Company feels that this property has the potential, with independent oil
reserve calculations placing the proven reserves worth more than $17,000,000 as
of April, 1998, discounted at 10% over two thirds of well life. Additionally,
the nature of the Devonian Shale Reservoir, makes this an ideal location to
utilize high angle and horizontal well technology. The Company plans to joint
venture with HORSE to drill and test high angle multilateral potential in these
formations.
The transactions between NEHI and HORSE were not at arms-length; however,
current Management believes that such transactions were necessary to pursue the
Company's strategy to refocus its efforts towards oil and natural gas
exploration and exploitation.
Ritchie and Pleasants County, West Virginia
The Company did not include production or reserve numbers for its properties in
Richie and Pleasants County, West Virginia. The Company was transferred its
mineral rights leasehold interest in these wells during 1996 from Erin Gas, but
has been unable to accurately determine chain of title to these properties. Erin
Gas and RFBK Partners, which includes Mr. Bill Knollenberg as one of its
partners, from whom NEHI would have obtained its assignment of these leases, are
involved in a lawsuit with the previous owners of the properties. NEHI is
investigating the situation and will claim production and reserve rights at such
time that rightful title can be established, if at all.
Other
The Company intends to continue to focus on oil and natural gas investments for
1998 and the foreseeable future. New management, strategic lease acquisition,
strategic equity investments by the Company or into the Company and joint
venture drilling opportunities are all being pursued to improve NEHI's financial
condition. NEHI is focusing on affiliation with companies in the oil field
service sector of the industry. The affiliation with RST is in line with this
philosophy. NEHI is also focusing on acquisition of oil and natural gas reserves
that can be exploited through affiliation with HORSE, the horizontal technology
company affiliate. NEHI plans to increase reserve holdings over the coming
years, acquiring undeveloped reserves to increase company value. The Company
will pursue development of these reserves through affiliation and joint venture
relationships with other companies. This assumes that the Company can overcome
its lack of liquidity and need for capital while proceeding with the current
litigation.
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NATIONAL EQUITIES HOLDING, INC,
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1998, the Company filed a lawsuit in the 295th Judicial District for
the District Civil Court of Harris County, Texas, Case No. 98-28403, against
Bill Knollenberg, Doris Knollenberg, Bradley Knollenberg, Erin Oil Oil
Exploration Inc., and Gulf Minerals Exploration (collectively referred to as
"Defendants"). Bill 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 and is also a
director. The Company's complaint alleges, among other things, mismanagement of
the business and financial affairs, of and breach of fiduciary duty to, the
Company by Bill and Doris Knollenberg, self-dealing and wrongful conversion by
the Knollenbergs in the issuance of securities of the Company to themselves,
Erin Oil and Gulf Minerals for inadequate consideration. As a remedy for such
alleged acts, the Company has demanded in its petition that Bill Knollenberg be
removed from his position as a director of the Company, that an injunction be
issued against the Defendants preventing 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 determined to
be improperly issued to said Defendants. See Exhibit 99.1 hereto.
On July 10, 1998, the Defendants responded with a counterclaim in which, among
other things, (a) it is being demanded that the Company be compelled to permit
inspection of its books and records by the Knollenbergs, and (b) injunctive
relief is being sought to (i) prevent the Company from hiring legal and
accounting professionals; (ii) prevent the Company from having a board of
directors meeting without all members of the board being given proper notice and
an opportunity to participate; and (iii) declare a February 26, 1998 agreement
among Bill, Bradley and Doris Knollenberg, Jack Chance, Steve McLoughlin, George
Sutherland and Feroze Variava, individually, as valid and binding on the
Company. See Exhibits 10.7 and 99.2 hereto.
The Defendants have also filed a third-party petition in the right of NEHI as
shareholders and on behalf of all other shareholders alleging, among other
things, Jack Chance, Steve McLoughlin, George Sutherland, Feroze Variava, RST
and HORSE negligently failed to disclose materials facts and/or knowingly
provided NEHI with material misinformation which led to the acquisition of the
interests in both RST and HORSE by NEHI in issuing its securities to RST and
HORSE for inadequate or no consideration thereby. See Exhibit 99.2 hereto.
On July 23, 1998, the parties to this litigation entered into an Interlocutory
Agreement in which the issues relative to the inspection of books and records,
the holding of a board of directors meeting and its procedure, and the holding
of a shareholders meeting among other matters, were resolved. See Exhibit 99.3
hereto.
The Company cannot, as of this date, predict the outcome of this litigation.
On May 12, 1997, the Company, along with Bill M. Knollenberg, Erin Oil and Erin
Oil Gas, 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. 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
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was given the right to convert the Erin Oil debentures she owned into 400,000
shares of NEHI common stock. These 400,000 shares were to be issued out of the
2,913,200 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. See Note 6 to the Notes to the Financial
Statements and Part I - Financial Information - Item 2 Management's Discussion
and Analysis or Plan of Operations.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
The Company has not filed its Form 10-KSB, the Annual Report for the year ended
December 31, 1997 (the "Form 10-KSB"). The Company also has not filed the Form
10-QSB for the quarter ended March 31, 1998 nor has it filed its Form 10-QSB for
the quarter ended June 30, 1998 in a timely manner. It has been unable to file
the Form 10-KSB due to the necessity to resolve certain financial and legal
disclosure items, some of which are the subject of litigation. See Part II, -
Other Information, Item 1 - Legal Proceedings. The Company is currently working
with its independent accountants and with special counsel to file such reports
as soon as possible.
On August 4, 1998, the Board of Directors of the Company held a meeting in which
it was resolved that a Special Meeting of the Company would be held after the
filing of NEHI's Form 10-KSB in compliance with the Interlocutory Agreement and
the Company's Amended and Restated Certificate of Incorporation and Bylaws. It
is anticipated that the Form 10-KSB will be filed upon resolving these financial
and legal disclosure items. The primary purposes of the Special Meeting will be
the election of directors and the ratification of the Independent Certified
Accountants retained to audit NEHI's financial statements for the year ended
December 31, 1998.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation SB
Exhibit 3
(i) Articles of Incorporation, **
(ii) By-Laws, **
Exhibit 4.1 Specimen Stock Certificate*
Exhibit 4.2 Convertible Bond/Debenture**
Exhibit 10.1 NEHI Incentive Stock Option Plan*
Exhibit 10.2 Agreement between NEHI and Erin Oil, dated
July 30, 1996**
Exhibit 10.3 Option Agreement with Diversified Service Brokers
Inc., dated August 9, 1996 *
Exhibit 10.4 Agreement between NEHI and HORSE, dated November 1,
1998**
Exhibit 10.5 Agreement between NEHI and RST, dated November 5,
1998**
Exhibit 10.6 Agreement between Erin Oil and NEHI, dated December
18, 1997**
Exhibit 10.7 Agreement by and among Bill Knollenberg, Doris
Knollenberg, Bradley Knollenberg, Jack Chance,
George Sutherland, Feroze Variava, and Steve
McLoughlin dated February 26, 1998**
- ---------------------------
* Previously filed as an Exhibit to the Company's Form 10-KSB, as amended, for
the Year Ended December 31, 1966 and incorporated herein by reference.
** Filed herewith.
27
<PAGE>
Exhibit 27 Financial Data Schedule**
Exhibit 99.1 Petition of the Company Against Billy Knollenberg,
et al., 295th Judicial District for the District
Civil Court of Harris County, Texas, Case No.
98-28403 ("Case No. 98-28403")**
Exhibit 99.2 Answer and Original Counterclaim in Case No.
98-28403**
Exhibit 99.3 Interlocutory Agreement in Case No. 98-28403**
Exhibit 99.4 Forward Looking Statements**
(b) Reports on Form 8-K.
None.
28
<PAGE>
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: October 19, 1998 By: /s/ George Sutherland
----------------- ----------------------------
George Sutherland, President
and Chief Operating Officer
29
Exhibit 3.(I)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMADEUS HOLDERS, INC.
Pursuant to Section 242 and Section 245 of the General Corporation Law
of the State of Delaware, Amadeus Holdings, Inc. has adopted this Amended and
Restated Certificate of Incorporation, restating, integrating and further
amending its Certificate of Incorporation originally filed November 24, 1987 as
Asquith Venture Associates, Inc.
1. NAME: The name of the corporation is National Equities Holdings,
Inc.
2. Registered Office: The address of the registered office of the
corporation in the State of Delaware is 1013 Centre Road, the City of
Wilmington, County of New Castle and its registered agent is Corporate Agents,
Inc.
3. Purpose: The Purpose of the corporation is to engage in any lawful
act or activity for which a corporation may now or hereafter be organized under
the General Corporation Law of the State of Delaware as set forth in Title 8 of
the Delaware Code (the "GCL").
4. Corporate Stock:
a. The total number of shares of stock which the corporation shall
have authority to issue is Fifty Million (50,000,000) shares, consisting of
Forty-nine Million (49,000,000) shares of Common Stock, having a par value of
$.001 per share, and One Million (1,000,000) shares of Preferred Stock, having a
par
<PAGE>
value of $.01 per share.
b. Shares of the Preferred Stock of the corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by the
Board of Directors of the corporation (the "Board of Directors") prior to the
issuance of any shares thereof. Each such class or series of Preferred Stock
shall have such voting powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated in
such resolution or resolutions providing for the issue of such class or series
of Preferred Stock as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in it, all in accordance with the laws of the State of
Delaware. The number of authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock, without a
vote of the holders of the Preferred Stock, or of any class or series thereof,
unless a vote of any such holders is required pursuant to the certificate or
certificates establishing the class or series of Preferred Stock.
c. The shares of Common Stock and Preferred Stock shall be issued
only as fully paid and non-assessable shares.
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<PAGE>
d. Holders of shares of Common Stock shall be entitled to one (1)
vote for each share held of record. Shares of the Common Stock shall have no
preference over any other shares of capital stock of the corporation with
respect to distribution of assets on dissolution or liquidation or with respect
to payment of dividends.
5. Directors:
a. The business and affairs of the corporation shall be managed by
or under the direction of the Board of Directors consisting of not less than
four (4) directors nor more than seven (7) directors, the exact number of
directors to be determined from time to time by resolution adopted by the Board
of Directors. The directors shall be divided into three classes, designated
Class I, Class II and Class III. The term of the initial Class I directors shall
terminate on the date of the 1993 annual meeting of stockholders; the term of
the initial Class II directors shall terminate on the date of the 1994 annual
meeting of stockholders and the term of the initial Class III directors shall
terminate on the date of the 1995 annual meeting of stockholders. At each annual
meeting of stockholders beginning in 1993, successors to the class of Directors
whose term expires at the annual meeting shall be elected for a three-year term.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as reasonably possible, and any additional directors
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<PAGE>
of any class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent directors. A director shall hold office until the annual
meeting for the year in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Any vacancy on the Board of
Directors, howsoever resulting, shall be filled only by a majority of the
directors then in office, even if less than a quorum, or by a sole remaining
director and not by the stockholders. Any director elected to fill a vacancy
shall hold office for a term that shall coincide with the terms of the class to
which such director shall have been elected.
b. Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the corporation
may be removed from office at any time, for cause only, by the affirmative vote
of the holders of seventy-five percent (75%) of the outstanding shares of the
corporation then entitled to vote generally in the election of directors,
considered for purposes of this Paragraph 5(b) as one class.
c. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by
-4-
<PAGE>
the corporation shall have the right, voting separately by class or series, to
elect directors at an annual or special meeting of stockholders, the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by the terms of this Certificate of Incorporation or the
resolution or resolutions adopted by the Board of Directors pursuant to
Paragraph 4(b) applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Paragraph 5 unless expressly provided by
such terms.
6. Stockholders:
a. Special Meetings: Special meetings of the stockholders for any
purpose or purposes may be called at any time only by the Board of Directors,
the Chairman of the Board, or by the Chief Executive Officer or President of the
corporation.
b. Meeting Location: Meetings of stockholders may be held within or
without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the GCL) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the corporation.
c. Power of Stockholders: Bylaws may be adopted, amended, or
repealed by the affirmative vote of the holders of
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<PAGE>
seventy-five percent (75%) of the outstanding shares of the corporation except
as otherwise provided by law or by this Certificate of Incorporation.
d. Power of Directors: Subject to the rights of stockholders as
provided in Paragraph 6(c) to adopt, amend or repeal Bylaws and except as
otherwise provided in Paragraph 6(c), Bylaws may be adopted, amended or repealed
by the Board of Directors at any regular or special meeting thereof.
e. Election of Directors by Ballot: Elections of directors need not
be by ballot unless a stockholder demands election by ballot at the meeting and
before the voting begins.
f. Vote of Stockholders: Any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken only upon
the vote of the stockholders at an annual or special meeting duly noticed and
called, as provided in the Bylaws of the corporation, and may not be taken by a
written consent of the stockholders pursuant to the GCL unless such action by
written consent shall be authorized by resolution of the Board of Directors.
7. Limitation on Liability of Directors: No director of the corporation
shall be personally liable to the corporation or its
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<PAGE>
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for
any transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Paragraph 7 shall apply to or have any effect on
the liability or alleged liability of the director of the corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
8. Indemnity:
a. Right to Indemnification: Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she is or was a director or
officer of this corporation or, while a director or officer of this corporation,
is or was serving at the request of this corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including
-7-
<PAGE>
service with respect to employee benefit plans ("indemnitee"), whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by this
corporation to the fullest extent authorized by the GCL against all expense,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
under the Employee Retirement Income Security Act of 1974 or penalties, and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
indemnitee in connection therewith and such indemnification shall continue as to
any indemnitee who has ceased to be director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors or administrators;
provided, however, that except as provided in Paragraph 8(d) with respect to
proceedings to enforce rights of indemnification this corporation shall
indemnify any indemnitee seeking indemnification in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of this corporation. The right
to indemnification conferred in these Paragraphs 8(a) through (e) shall be a
contract right and shall include the right to be paid by this corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the GCL requires, the payment of such
expenses incurred by indemnitee in his or her capacity as a director or officer
(and not in any other capacity in
-8-
<PAGE>
which service was or is rendered by an indemnitee while a director or officer,
including, without limitation, service with respect to an employee benefit plan)
in advance of the final disposition of such proceeding, shall be made only upon
delivery to this corporation of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial determination from which there is no right of
appeal that such indemnitee is not entitled to be indemnified under these
Paragraphs 8(a)-(e) or otherwise. This corporation may, by action of its Board
of Directors, provide indemnification to employees and agents of this
corporation and any subsidiary of this corporation with the same scope and
effect as the foregoing indemnification of directors and officers.
b. Non-Exclusivity of Rights: The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in these Paragraphs 8(a)-(e) shall not be exclusive of any
right which any person may have or hereafter acquire under any statute,
provision of this Certificate of Incorporation, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
c. Insurance: The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any
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<PAGE>
such expense, liability or loss, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under the
GCL.
d. Right of Indemnitee to Bring Suit: If a claim under Paragraph (a)
of this Paragraph 8 is not paid in full by the corporation within sixty days
after a written claim has been received by the corporation, except in the case
of a claim for advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit or in a suit brought by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that the
indemnitee has not met the applicable standard of conduct set forth in the GCL,
and, in any suit by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the corporation shall be entitled to
recover such expenses upon a final adjudication that the indemnitee has not met
the applicable standard of conduct set forth in the CGL. Neither the failure of
the corporation (including its Board of Directors, independent legal counsel, or
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<PAGE>
its stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the GCL, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee, has not met the applicable standard of conduct or, in the case
of such a suit brought by the indemnitee, by a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this Paragraph 8(d) or otherwise shall be on
the corporation.
e. In any suit or proceeding with respect to the corporation's
refusal to grant indemnification, (i) the corporation shall conclusively be
deemed to have acted in good faith and to have fully complied with any implied
covenant of good faith and fair dealing unless the indemnitee affirmatively
proves by clear and convincing evidence that the corporation acted or omitted to
act without any reasonable basis; and (ii) no indemnitee shall be entitled
hereunder or otherwise to consequential damages, including without limitation,
damages for inconvenience, emotional distress, lost profits, injury to privacy,
publicity, or reputation, or
-11-
<PAGE>
punitive damages, all of which are expressly waived.
9. Certain Extraordinary Transactions:
a. Except as set forth in Paragraph 9(b) the affirmative vote of the
holders of seventy-five percent (75%) of the outstanding shares of the
corporation entitled to vote on the applicable Record Date shall be required
for:
(i) any merger or consolidation to which the corporation, or any
of its subsidiaries, and an Interested Person (as hereinafter
defined) are parties;
(ii) any sale, lease, exchange or other disposition by the
corporation, or any of its subsidiaries, of all of substantially all
of the corporation's or its subsidiaries' assets to an Interested
Person.
(iii) any purchase or other acquisition by the corporation, or
any of its subsidiaries, of assets or stock of an Interested Person,
the aggregate purchase price of which exceeds $20,000,000.00; and
(iv) any other transaction with an Interested Person which
requires the approval of the stockholders of the corporation under
the Delaware General Corporation Law, as in effect from time to
time.
b. The provisions of Paragraph 9(a) shall not be applicable to any
transaction described therein if such transaction is
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<PAGE>
approved by resolution of the Board, provided that a majority of the members of
the Board voting for the approval of such transaction were duly elected and
acting members of the Board prior to the time that the person, firm or
corporation, or any group thereof, with whom such transaction is proposed,
became an Interested Person.
c. As used in this Paragraph 9, the term "Interested Person" shall
mean any person, firm or corporation, or any group thereof, acting or intending
to act in concert, including any person directly or indirectly controlling or
controlled by or under direct or indirect common control with such person, firm,
or corporation or group, which owns of record or beneficially, directly or
indirectly, five percent (5%) or more of the shares of any class of voting
securities of the corporation.
10. Reserved Power to Amend. The corporation reserves the right to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, provided
that, no such amendment, alteration, change or repeal shall be made without
the affirmative vote of the holders of not less than seventy-five percent (75%)
of the outstanding shares of stock of the corporation entitled to vote in order
to alter, amend or repeal this Paragraph 10 or Paragraphs 5(b), 6, 7, 8 and 9,
and all rights conferred herein are granted subject to this reservation.
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<PAGE>
The undersigned officers hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed and that the facts stated
therein are true.
By: /s/ Joel Christe
------------------------------
Joel Christe, President
By: /s/ Anthony J. Spallone
------------------------------
Anthony J. Spallone, Secretary
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<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
CHANGE OF REGISTERED AGENT OF "NATIONAL EQUITIES HOLDINGS, INC.", FILED IN THIS
OFFICE ON THE FIFTH DAY OF DECEMBER, A.D. 1994, AT 9 O'CLOCK A.M.
[SEAL] /s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9028133
DATE: 04-15-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/05/1994
944235196 - 2144417
CERTIFICATE OF CHANGE OF LOCATION
OF REGISTERED OFFICE AND REGISTERED AGENT
OF
NATIONAL EQUITIES HOLDINGS, INC.
The Board of Directors of NATIONAL EQUITIES HOLDINGS, INC., a
Corporation of Delaware, on this 1st day of November, A.D. 1994, do hereby
resolve and order that the location of the Registered Office of this Corporation
within this State be, and the same hereby is 25 Greystone Manor, DE 19801 County
of Sussex.
The name of the Registered Agent therein and in charge thereof upon
whom process against this Corporation may be served, is Harvard Business
Services, Inc. The address of the Registered Agent is 25 Greystone Manor, Lewes,
DE 19958 County of Sussex.
NATIONAL EQUITIES HOLDINGS, INC., a Corporation of Delaware, does
hereby certify that the foregoing is a true copy of a resolution adopted by the
Board of Directors at a meeting held as herein stated.
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by its Authorized Officer, this 1st day of November, A.D., 1994.
By: /s/ P. A. Hartley, CEO
----------------------------
Authorized Officer (title)
NATIONAL EQUITIES HOLDINGS, INC.
[SEAL]
ATTEST:
--------------------------
Secretary
NATIONAL EQUITIES HOLDINGS, INC.
3430 E. FLAMINGO ROAD - SUITE 206
LAS VEGAS, NV 89121
Exhibit 3.(II)
BYLAWS
OF
NATIONAL EQUITIES HOLDINGS, INC.
A Delaware Corporation
ARTICLE I
CORPORATE OFFICES
Section 1. Registered Office. The registered office of the Corporation
in the State of Delaware shall be located at Corporate Trust Center, 1209 Orange
Street, Wilmington, County of New Castle.
Section 2. Principal Office. The principal office of the Corporation
shall be located at 3430 E. Flamingo Rd, Ste. 206 Las Vegas, Nevada 89121.
The Board of Directors (herein referred to as the "Board") is hereby granted the
full power and authority, by a resolution of a major of the directors, to change
the principal office from one location to another. Any such change shall be
noted in these Bylaws opposite this section, and this section may be amended to
state the new location.
Section 3. Other Offices. The Corporation may establish any additional
offices, at any place or places, as the Board may designate, or as the business
of the Corporation shall require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 1. Place of Meeting. Meetings of the Stockholders of the
Corporation shall be held at the principal office or at such place, within or
without the State of Delaware, as may from time to time be designated for that
purpose by the Board.
Section 2. Annual Meetings. The annual meeting of the Stockholders
shall be held on such date and at such time designated, from time to time, by
resolution of the Board.
Section 3. Special Meetings. Special Meetings of the Stockholders for
the purpose of taking any action which the Stockholders are permitted to take
under the General Corporation Law of the State of Delaware (herein, as the same
may from time to time be amended, referred to as the "General Corporation Law")
may be called at any time by the Chief Executive Officer, the President, the
Chairman of the Board or the Board.
Section 4. Notice of Meetings. Except as otherwise provided by statute,
written or printed notice of each meeting of the Stockholders of the
Corporation, whether annual or special, shall be given not less than ten or more
than sixty days prior to
1
<PAGE>
the date upon which the meeting is to be held to each stockholder entitled to
vote at such meeting by leaving such notice with him personally at, or by
transmitting such notice with confirmed recorded communication, provided that
delivery (including telex, telegraph, cable or other form of recorded
communication, provided that delivery of such notice in written form is
confirmed in a writing) to, his residence or usual place of business. If mailed,
such notice shall be deemed delivered when deposited in the United States mail
in a sealed envelope addressed to the stockholder at his address as it appears
on the stock records of the Corporation, with postage thereon prepaid. Such
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. If a
meeting is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken and, at the adjourned meeting, such business may
be transacted as might properly have been transacted at the original meeting. If
the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at such
meeting.
Notice of a Stockholders' meeting or adjournment thereof is waived upon
the occurrence of the following:
(a) A Stockholders' meeting is adjourned and a time and place for
readjournment is announced at the meeting at which the adjournment is taken, and
such date of readjournment is no more than 30 days from the date of adjournment;
(b) Receipt by the Corporation of a written notice of waiver, signed by
the person entitled to notice before or after the time stated therein;
(c) Attendance by the person entitled to notice and failure of such
person to object to the transaction of any business because the meeting is not
lawfully called or convened.
Wherever notice is required to be given under any statute or the
Certificate of Incorporation or these Bylaws to any Stockholder to whom (a)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings or (b) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
returned because undeliverable, the giving of notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the
2
<PAGE>
Corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the Corporation is such as to require the filing
of a certificate under any of the other sections of the General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this Section 4.
Section 5. Quorum. On all questions, the presence of the holders of a
majority of the shares entitled to vote, in person or by proxy, shall constitute
a quorum for the transaction of business at any meeting of the Stockholders. On
all questions, the Stockholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough Stockholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by a least a
majority of the shares required to constitute a quorum.
Section 6. Adjourned Meeting. Any Stockholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned by vote of a
majority of the shares present, either in person or by proxy, but in the absence
of a quorum no other business may be transacted at such meeting, except as
expressly provided in Section 5 of this Article.
Section 7. Voting.
(a) The Stockholders entitled to notice of any meeting or to vote at
such meeting shall only be persons whose names stand on the stock records of the
Corporation on the record date determined in accordance with the provisions of
Section 12 of this Article, provided, however, that if no such record date shall
be fixed by the Board, only persons in whose names shares stand on the stock
records of the corporation at the close of business on the business day next
preceding the day on which notice of the meeting is given or if such notice is
waived, at the close of business or the business day next preceding the day on
which the meeting of Stockholders is held, shall be entitled to vote at such
meeting, and such day shall be the record date for such meeting.
(b) Voting shall in all cases be subject to the provisions of Sections
217 and 128 of the General Corporation Law (relating to voting of shares held by
fiduciaries or pledgors, held in joint ownership, and voting of shares by voting
trusts or in accordance with other voting agreements).
(c) At each meeting of the Stockholders of the Corporation, holders of
a majority of the voting power of the Corporation entitled to vote thereat,
present either in person or by proxy, shall constitute a quorum for the
transaction of business. In the absence of quorum, the Stockholders of the
Corporation present in
3
<PAGE>
person or by proxy and entitled to vote at the meeting may, by majority vote,
or, in the absence of all Stockholders, any officer entitled to preside or act
as Secretary at such meeting, shall have the power to adjourn the meeting from
time to time until Stockholders holding the requisite amount of stock shall be
present in person or by proxy. At any such adjourned meeting at which a quorum
may be present, any business may be transacted which might have been transacted
at the meeting as originally called.
(d) On all questions, each Stockholder of the Corporation entitled to
vote on such questions shall be entitled to vote in person or by proxy one vote
for each share of Common Stock of the Corporation held by such Stockholder.
Unless otherwise provided in the Certificate of Incorporation or by statute, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present shall be the act of the Stockholders.
Unless demanded by a Stockholder present in person or by proxy at any meeting
and entitled to vote thereat, the vote on any question need not be by ballot.
Upon demand for a vote by ballot upon any question by any Stockholder present in
person or by proxy at any meeting and entitled to vote thereat, such vote shall
be taken by ballot. On any vote taken by ballot, each ballot shall be signed by
the Stockholder voting, or by his lawful proxy, and shall state the number and
kind of shares voted.
Section 8. Proxies. Each Stockholder entitled to vote at a meeting of
Stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. Any such proxy shall be delivered
to the secretary of such meeting, at or prior to the time designated in the
order of business for so delivering such proxies. A duly elected proxy shall be
irrevocable if it states that it is irrevocable and if, and only so long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
proxy may be made irrevocable regardless of whether the interest with which it
is coupled is an interest in the stock itself or an interest in the Corporation
generally.
Section 9. Stockholder List. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of Stockholders, a complete list of Stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, for any purposes
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be
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inspected by any Stockholder who is present.
Section 10. Inspectors of Election. In advance of any meeting of the
Stockholders, the Board shall appoint at least one person, other than nominees
for office, as inspector of election to act at such meeting or any adjournment
thereof. The number of such inspectors of election shall be one or three. In
case any person appointed as inspector fails to appear or refuses to act, the
vacancy shall be filled by appointment by the Board in advance of the meeting,
or at the meeting by the chairman of the meeting. If there are three inspectors
of election, the decision, act or certificate of a majority is effective in all
respects as the decision, act or certificate of all.
The duties of each such inspector of election shall include:
(a) determining the number of shares outstanding and the voting power
of each;
(b) determining the shares represented at the meeting;
(c) determining the existence of a quorum;
(d) determining the authenticity, validity and effect of proxies;
(e) receiving votes, ballots or consents;
(f) hearing and determining all challenges and questions in any way
arising in connection with the right to vote;
(g) retaining for a reasonable period the disposition of any challenges
made to the inspector's determinations;
(h) counting and tabulating all votes;
(i) determining when the polls shall close;
(j) determining the result of any election;
(k) certifying the determination of the number of shares represented at
the meeting, and the count of all votes and ballots;
(l) certifying any information considered in determining the validity
and counting of proxies and ballots if that information is used for the purpose
of reconciling proxies and ballots submitted by or on behalf of banks, brokers,
their nominees or similar persons which represent more votes than the
Stockholder holds of record; and
(m) performing such acts as may be proper to conduct the election or
vote with fairness to all Stockholders.
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Section 11. Record Date. In order that the Corporation may determine
the Stockholders entitled to notice of or to vote at any meeting of Stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action.
If no record date is fixed:
(a) The record date for determining Stockholders entitled to notice of
or to vote at a meeting of Stockholders shall be at the close of business on the
day next preceding the day on which notice is given, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held;
(b) The record date for determining Stockholders for any other purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to
vote at a meeting of Stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
Section 12. Procedures for Meetings. All meetings of Stockholders shall
be conducted according to such rules and procedures as the Board of Directors
may establish by resolution or, absent such a resolution, which the person
presiding over the meeting shall determine from time to time as being in the
best interests of the Stockholders and as may be deemed appropriate for insuring
that such meetings are conducted in a fair and orderly manner and in accordance
with the Certificate of Incorporation and these Bylaws.
Section 13. Opening and Closing of Polls. An announcement shall be made
at each meeting of the Stockholders by the Chairman of the meeting of the date
and time of the opening and closing of polls for each matter upon which the
Stockholders will vote at the meeting. No ballots, proxies or votes, nor any
revocations thereof or changes thereto, shall be accepted by the inspectors of
election after the closing of the polls unless the Delaware Court of Chancery
upon application by a Stockholder shall determine otherwise.
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ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the Corporation shall be
managed by, or under the direction of the Board, except as may be otherwise
provided by the General Corporation Law or in the Certificate of Incorporation
or these Bylaws. Without prejudice to such powers, but subject to the same
limitation, it is hereby expressly declared that the directors shall have the
following powers in addition to other powers enumerated in these Bylaws:
(a) To select and remove all officers, agents and employees of the
Corporation; prescribe any powers and duties for them that are consistent with
law, with the Certificate of Incorporation, and with these Bylaws; fix their
compensation; and require from them security for faithful service;
(b) To conduct, manage and control the affairs and business of the
Corporation, and to make rules and regulations therefor consistent with law,
with the Certificate of Incorporation and with these Bylaws;
(c) To change the offices of the Corporation from one location to
another; to fix and locate from time to time one or more other offices of the
Corporation within or without the State of Delaware; to cause the Corporation to
be qualified to do business and to conduct business in any other state,
territory, dependency or country; and to designate any place within or without
the State of Delaware for the holding of any Stockholders' meeting or meetings,
including annual meetings;
(d) To adopt, make and use a corporate seal; to prescribe the forms and
certificates of stock; and to alter the form of the seal and certificates;
(e) To authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such consideration as may be lawful;
(f) To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities therefor.
Section 2. Number and Qualifications. The number of directors of the
Corporation shall be as specified in the Certificate of Incorporation. Directors
need not be Stockholders of the Corporation unless required by the Certificate
of Incorporation.
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Section 3. Election and Term of Office. Members of the Board of
Directors shall hold office for the terms specified in the Certificate of
Incorporation and until their successors have been elected as provided in the
Certificate of Incorporation.
Section 4. Vacancies.
(a) Any vacancy on the Board of Directors however resulting, shall be
filled only by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director, and not by the Stockholders. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected.
(b) If at any time, by reason of death, resignation or other cause, the
Corporation should have no directors in office, then any officer or any
Stockholder or an executor, administrator, trustee or guardian of a Stockholder,
or other fiduciary entrusted with like responsibility of the person or estate of
a Stockholder, may call a special meeting of Stockholders in accordance with the
provisions of the Certificate of Incorporation and the Bylaws or may apply to
the Delaware Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law.
(c) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any Stockholder or
Stockholders holding at least 10 percent of the total number of shares at the
time outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by Section 211 of the General Corporation Law.
(d) Any or all of the directors of the Corporation may be removed from
office at any time, for cause only, by the affirmative vote of the holders of
75% of the shares of the Corporation then entitled to vote generally in the
election of directors, considered for purposes of this Section 4(a) as one
class.
(e) Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later date for the effectiveness of such resignation.
Section 5. Place of Meeting. Unless otherwise provided in the
Certificate of Incorporation, or by unanimous written consent of all action
directors, meetings, both regular and special, of the Board shall be held at the
Corporation's principal executive offices or at such other place or places
within or without the
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State of Delaware, as the Board may from time to time determine.
Section 6. Regular Meetings. Immediately following each annual meeting
of the Stockholders of the Corporation the Board shall hold a regular meeting at
the same time at which such Stockholders' meeting is held, or any other place as
may be fixed from time to time by the Board of Directors. Notice of such meeting
need not be given.
Other regular meetings of the Board shall be held without call at such
time and place as the Board may from time to time by resolution determine. If
any day fixed for a regular meeting shall be a legal holiday at the place where
the meeting is to be held, then the meeting which would otherwise be held on
that day shall be held at the same hour on the next succeeding business day not
a legal holiday. Notice of a regular meeting need not be given.
Section 7. Special Meetings. Except as otherwise provided in the
Certificate of Incorporation, special meetings of the Board for any purpose or
purposes may be called at any time by the Chairman of the Board, the Chief
Executive Officer, the President, the Secretary or by any three directors.
Written notice of the time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone, telegraph, telex, facsimile transmission, courier service, cable or
mail or other form of recorded communication, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
Corporation or, if it is not so shown on such records or is not readily
ascertainable, at the director's residence or usual place of business. In case
such notice is mailed, it shall be deposited in the United States mail at least
seven days prior to the time of the holding of the meeting. In case such notice
is delivered personally or by other form of written communication, it shall be
delivered at least 48 hours before the time of the holding of the meeting. The
notice shall state the time of the meeting, but need not specify the place of
the meeting if the meeting is to be held at the principal executive office of
the Corporation. The notice need not state the purpose of the meeting unless
expressly provided otherwise by statute.
Section 8. Meetings by Communication Equipment. Members of the Board of
the Corporation, or any committee designated by the Board, may participate in a
meeting of the Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this section
shall constitute presence in person at such meeting.
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Section 9. Quorum and Manner of Acting. The presence of a majority of
the total number of directors shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at a meeting duly
held shall be the act of the Board. In the absence of a quorum, a majority of
the directors present may adjourn any meeting from time to time until a quorum
is present. Notice of a adjourned meeting need not be given.
Section 10. Validation of Defectively Called or Noticed Meetings. The
transactions of any meeting of the Board, however called and noticed and
wherever held, shall be as valid as though made or performed at a meeting duly
held after regular call and notice, if, either before or after the meeting, each
of the directors not present or who, though present, has prior to the meeting or
at its commencement protested the lack of proper notice to such director, signs
a written waiver of notice or a consent to holding such meeting or approval of
the minutes thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Section 11. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing and the writings are filed with the minutes of
proceedings of the Board or committee.
Section 12. Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses incurred by them, as may be fixed or determined by
resolution of the Board of Directors.
Section 13. Committees. The Board may, by resolution passed by a
majority of the directors, designate one or more committees, each committee to
consist of one or more directors of the Corporation, and the directors
constituting such committee. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Any such committee, to the extent
provided in the resolution of the Board, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it, but no such committee shall have power or
authority in reference to amending the consolidation, recommending to the
Stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a
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certificate of ownership and merger. Any director may be removed from a
committee with or without cause by the affirmative vote of a majority of the
entire Board of Directors.
ARTICLE IV
OFFICERS
Section 1. Officers. The Officers of the Corporation shall be a
Chairman, a President, a Chief Executive Officer, a Chief Operating Officer, a
Treasurer, and a Secretary. The Corporation may also have, at the discretion of
the Board, one or more Vice Presidents, one or more Assistant Secretaries, one
or more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 3 of this Article. Any number of
offices may be held by the same person.
Section 2. Election of Officers. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by the Board,
and each shall serve at the pleasure of the Board.
Section 3. Subordinate Officers. The Board may appoint, and may empower
the Chief Executive Officer to appoint, such other officers as the business of
the Corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in these Bylaws or
as the Board or Chief Executive Officer may from time to time determine.
Section 4. Removal and Resignation of Officers. Without prejudice to
the rights, if any, of an officer under any contract of employment, any officer
may be removed, either with or without cause, by the Board, at any regular or
special meeting of the Board, or by any officer upon whom such power of removal
may be conferred by the Board.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
Section 5. Vacancies in Offices. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular election or appointment to
such office.
Section 6. Chairman of the Board. The Chairman of the Board, or
Co-Chairman, if such an officer or officers be elected, shall, if present,
preside at all meetings of the Board and
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exercise and perform such other powers and duties as may be from time to time
assigned to him or them by the Board. If there shall be Co-Chairmen of the Board
they shall agree between themselves who shall preside at meetings of the Board
and, if there shall be no agreement, the Secretary shall preside.
Section 7. Chief Executive Officer. Subject to such supervisory powers,
if any, as may be given by the Board to the Chairman of the Board, the Chief
Executive Officer, if such an officer be elected, shall, subject to the control
of the Board, and the Chairman, have general supervision, direction and control
of the business and the officers of the Corporation. The Chief Executive
Officer, shall preside at all meetings of the Stockholders and, in the absence
of the Chairman of the Board, or both Co-Chairmen, or if there be none, at all
meetings of the Board. The Chief Executive Officer shall exercise and perform
such other powers and duties as may be from time to time assigned to him by the
Board.
Section 8. President. Subject to such supervisory powers, if any, as
may be given by the Board to the Chairman of the Board and the Chief Executive
Officer, if there be such officers, the President shall be the chief operating
officer of the Corporation and shall, subject to the control of the Board, have
general supervision, direction, and control of the business and the officers of
the Corporation (other than the Chairman and Chief Executive Officer). The
President shall preside at all meetings of the Stockholders in the absence of
the Chairman and the Chief Executive Officer, and, in the absence of the
Chairman and the Chief Executive Officer, at all meetings of the Board. The
President shall have the general powers and duties of management usually vested
in the office of president and general manager of a Corporation, and shall have
such other powers and duties as may be prescribed by the Board and the Chief
Executive Officer.
Section 9. Vice President. In the absence or disability of the
Chairman, the Chief Executive Officer and the President, the Vice Presidents, or
any, in order of their rank as fixed by the Board, or, if not ranked, the Vice
President designated by the Board shall perform all the duties of such officer,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, such offices. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board, the Chief Executive Officer or the President.
Section 10. Secretary. The Secretary shall keep, or cause to be kept,
at the principal executive office or such other place as the Board may direct, a
book of minutes of all meetings and actions of directors, committees of
directors, and Stockholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice given, the names of
those present at directors' meetings or committee meetings, the
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number of shares present or represented at Stockholders' meetings, and the
proceedings.
The Secretary shall give, or cause to be given, notice of all meetings
of the Stockholders and of the Board required by the Bylaws or by law to be
given, and he shall keep the seal of the Corporation, if one be adopted, in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
Section 11. Treasurer. The Treasurer shall be the Chief Financial and
Accounting Officer and shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares, and shall send or cause to be sent to the Stockholders of the
Corporation such financial statements and reports as are by law or these Bylaws
required to be sent to them. The books of account shall at all reasonable times
be open to inspection by any director.
The Treasurer shall deposit all monies and other valuables in the name
or to the credit of the Corporation with such depositories as may be designated
by the Board. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, shall render to the President and directors, whenever
they request it, an account of all transactions undertaken as Chief Financial
Officer and of the financial condition of the Corporation, and shall have such
other powers and perform such other duties as may be prescribed by the Board.
ARTICLE V
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 1. Agents, Proceedings and Expenses. For the purposes of this
Article, "agent" means any person who is or was a director, officer, employee or
other agent of the corporation, or is or was a director, officer, employee or
agent of corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or complete action or proceeding,
whether civil, criminal, administrative, or investigative; and "expenses"
includes, without limitation, attorneys' fees and any expenses of establishing a
right to indemnification under Section 2 or Section 3 of this Article.
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Section 2. Actions Other Than By The Corporation. The Corporation shall
have power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 3. Actions by the Corporation. The Corporation shall have power
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 4. Successful Defense by Agent. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 2 and 3, or in
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defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 5. Required Approval. Any indemnification under Sections 1 and
2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 2 and 3. Such
determination shall be made (a) by the Board by a majority vote of quorum
consisting of directors who were not parties to such actions, suit or
proceedings, or (b) if such disinterested directors so direct, by independent
legal counsel in a written opinion, or (c) by the affirmative vote of a majority
of Stockholders.
Section 6. Advance of Expenses. Expenses incurred in defending a civil
or criminal action, suit or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding as authorized by the
Board in the specific case upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board deems appropriate.
Section 7. Contractual Rights. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Section 8. Limitations. No indemnification or advance shall be made
under this Article, except as provided in Section 4, in any circumstances where
it appears:
(a) That it would be inconsistent with a provision of the Certificate
of Incorporation, a resolution of the Stockholders or an agreement in effect at
the time of accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
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Section 9. Insurance. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article.
Section 10. Constituent Corporations. For purposes of this Article,
references to "the Corporation" shall include, in addition to the Corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, employees or agents of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
Section 11. Definitions. For purposes of this Article, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and an person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to that best interest of the Corporation" as referred to in
this Article.
ARTICLE VI
MISCELLANEOUS
Section 1. Inspection of Books and Records by Stockholders. Any
Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours of business to inspect for any proper purpose the Corporation's
stock ledger, a list of Stockholders, and its other books and records, and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a Stockholder. In
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every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by the power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the Stockholder. The demand under oath shall be directed
to the Corporation at its registered office in the State of Delaware or at its
principal place of business.
Section 2. Inspection of Books and Records by Directors. Any director
shall have the right to examine the Corporation's stock ledger, a list of its
Stockholders and its other books and records for a purpose reasonably related to
his position as a director. Such right to examine the records and books of the
Corporation shall include the right to make copies and extracts therefrom.
Section 3. Checks, Drafts, Evidences of Indebtedness. All checks,
drafts, or other orders for payment of money, notes, or other evidences of
indebtedness, issued in the name of or payable to the Corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board.
Section 4. Corporate Contracts and Instruments; How Executed. The
Board, except as otherwise provided in these Bylaws, may authorize any officer
or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board or within the agency power of the officer, no officer,
agent, or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
Section 5. Certificate for Shares. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by the Chairman, a Co-Chairman or the Treasurer, or the
Secretary or an Assistant Secretary of the Corporation representing the number
of shares owned by him in the Corporation. Any or all the signatures on the
certificates may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 6. Transfer of Shares. Transfer of shares of the capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by his attorney thereunto authorized by a power of attorney
duly executed and filed with the Secretary of the Corporation or a transfer
agent of the
17
<PAGE>
Corporation, if any, and on surrender of the certificate or certificates for
such shares properly endorsed. A person in whose name shares of stock appear on
the books of the Corporation shall be deemed the owner thereof as regards the
Corporation, and upon any transfer of shares of stock the person or persons into
whose name or names such shares shall have been transferred, with respect to all
rights, privileges and obligations of holders of stock of the Corporation and as
against the Corporation or any other person or persons. The term "person" or
"persons" wherever used herein shall be deemed to include any partnership,
corporation, association or other entity. Whenever any transfer of shares shall
be made for collateral security, and not absolutely, such fact, if known to the
Secretary or to such transfer agent, shall be so expressed in the entry of
transfer.
Section 7. Lost, Stolen or Destroyed Certificates. The Corporation may
issue a new certificate of stock in the place of any certificate theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the
Corporation may require the owner of the lost, stolen or destroyed certificate,
or his legal representative, to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 8. Representation of Shares of Other Corporations. The Chairman
of the Board, the President, or any Vice-President or any person designated by
any such officers, is authorized, in the absence of authorization by the Board,
to vote on behalf of the Corporation any and all shares of any other corporation
or corporations, foreign or domestic, for which the Corporation has the right to
vote. The authority granted to these officers to vote or represent on behalf of
the Corporation any and all shares held by the Corporation in any other
corporation or corporations may be exercised by any of these officers in person
or by any person authorized to do so by proxy duly executed by these officers.
Section 9. Construction and Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law shall govern the construction of these Bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both the corporation or other entity and a natural person.
Section 10. Amendments. Unless otherwise provided in the Certificate of
Incorporation, the power to adopt, amend or repeal any Bylaws of the Corporation
shall be in the Stockholders of the Corporation holding at least 75% of these
shares entitled to vote considered as one class, and by the Board.
18
<PAGE>
Section 11. Seal. The Board of Directors shall adopt a corporate seal,
which shall be in the form of a circle and shall have inscribed thereon the name
of the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 12. Fiscal Year. The fiscal year of the Corporation shall begin
on the first day of January of each year.
Section 13. Dividends; Surplus. Subject to the provisions of the
Certificate of Incorporation and any restrictions imposed by statute, the Board
of Directors may declare dividends out of the net assets of the Corporation in
excess of its capital or, in case there shall be no such excess, out of the net
profits of the Corporation for the fiscal year then current and/or the preceding
fiscal year, or out of any funds at the time legally available for the
declaration of dividends (hereinafter referred to as "surplus or net profits")
whenever, and in such amounts as, in its sole discretion, the conditions and
affairs of the Corporation shall render advisable. The Board of Directors in its
sole discretion may, in accordance with law, from time to time set aside from
surplus or net profits such sum as it may think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for the purpose of maintaining or
increasing the property or business of the Corporation, or for any other
purposes as it may think conducive to the best interests of the Corporation.
19
Exhibit 4.2
DEBENTURE # ______________________________
CONVERTIBLE DEBENTURE
Due August 25, 1999
NATIONAL EQUITIES HOLDINGS, INC. (NEHI)
Obligation
NATIONAL EQUITIES HOLDINGS, INC. (NEHI), a corporation organized and
existing under the laws of the State of Delaware, for value received, promises
to pay the registered holder on the above due date, being a date two years or
less after the date of authentication below, the principal sum of
$__________________________________.
Holder _______________________________________________________________________.
Except as herein otherwise proved, National Equities Holdings, Inc. (NEHI) also
promises to pay interest on the principal sum from the date of authentication,
at a rate of eight percent (8%) per year until the principal sum has been paid.
The principal and interest on this Debenture is payable at the office of
National Equities Holdings, Inc. (NEHI) at 616 FM 1960 W., Suite #225, Houston,
Texas 77090.
Interest Payment
Interest on this Debenture will be paid on August 25 of each year.
After allocation of earnings has been made to cover all of National Equities
Holdings, Inc. (NEHI's) existing and continuing obligations, including any new,
customary, and extraordinary obligations incurred in the normal course of doing
business, and after the usual appropriates have been made for customary
reserves, funds, or accounts, the amount of earned surplus available for payment
of dividends or other purposes will be determined. All such surplus in each year
will first be used toward this issue, to pay the holders on a pro rata basis up
to the maximum percent of interest on this Debenture. Only when all holders
are paid the maximum percentage of interest on this Debenture will the surplus
be available for payment of dividends or other purposes as the Board of
Directors determines.
Series
This Debenture is one of a series of National Equities Holdings, Inc.
(NEHI) Debentures known as Convertible Debentures, with an aggregate principal
amount of $1,000,000, all of which are subject to the same terms and conditions
as this Debenture.
Page 1 of 3
<PAGE>
Redemption
This Debenture will be redeemable at the option of National Equities
Holdings, Inc. (NEHI) in whole or part, at any time after the proper notice. The
redemption price will be the principal amount of this Debenture plus interest
accrued to the date fixed for redemption. In the event that less than all the
Debentures of this issue are to be redeemed, redemption will be, to the extent
possible, pro rata. This Debenture will become due and payable and will cease to
bear interest on the date fixed for the redemption.
Notice of Redemption
Before redeeming, National Equities Holdings, Inc. (NEHI) will notify
any registered holder of this Debenture of its intention to redeem and of the
redemption date at least thirty (30) days prior to such date. Notice shall be
sent by registered mail to the last address of the registered holder as it
appears on the books of National Equities Holdings, Inc. (NEHI).
Straight Conversion
This Debenture will be convertible at the option of the holder at any
time from and after the date of issue, and up to but not after one year from the
date of issue. If this Debenture is called for redemption, it will be
convertible at any time prior to the close of business on the fifth day
preceding the date fixed for redemption. This Debenture will be convertible into
fully paid and non assessable shares of National Equities Holdings Inc. (NEHI)
Preferred Stock in accordance with "Addendum A" attached to this Debenture. For
the Purpose of Addendum A, the principal sum written in the "obligation"
paragraph above is the "Initial Investment." In order to exercise the conversion
privilege, the holder of this Debenture will surrender it to National Equities
Holdings, Inc. (NEHI) with the proper notice of conversion as described below.
If the stock into which this Debenture is convertible is to be used in a name or
names other than that of the registered owner of this Debenture, the Debenture
must be accompanied by proper assignment.
Notice of Conversion
A holder desiring to convert this Debenture must give written notice to
National Equities Holdings, Inc. (NEHI) and, simultaneously, surrender this
Debenture together with a duly executed instrument of assignment and transfer,
in the form attached hereto as "Exhibit I", at National Equities Holdings, Inc.
(NEHI's) principal office at 616 FM 1960 W., Suite #225, Houston, Texas 77090.
NEHI will promptly issue to the holder the share of stock into which this
Debenture is to be converted.
Assignment
This Debenture may not be assigned without the prior notice to and
consent of National Equities Holdings, Inc. (NEHI) to the assignment, which
consent will not be given unless NEHI and NEHI's counsel are satisfied that the
assignment shall not violate any state or federal securities laws.
Page 2 of 3
<PAGE>
IN WITNESS WHEREOF, National Equities Holdings, Inc. (NEHI) has caused
this Debenture to be signed by its President or other officer, and its seal to
be affixed hereto and attested by its Secretary this ________________________
day of ________________________, 19___.
NATIONAL EQUITIES HOLDINGS, INC. (NEHI)
By: -------------------------------
Name: Bill Knollenberg {Corporate Seal}
-------------------------------
Title: President
-------------------------------
Subscriber(s) Signature
-------------------------------
-------------------------------
Attest:
By: -------------------------------
Secretary
Page 3 of 3
<PAGE>
THE STATE OF Texas
COUNTY OF Harris
BEFORE ME, the undersigned authority, on this day personally appeared
Bill Knollenberg, known to me to be the person whose name is/are subscribed to
the foregoing instrument, and acknowledged to me that he executed the same for
the purposed and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this _____________ day of
______________________ of 19___.
-------------------------------------------
Notary Public in and for the State of Texas
My Commission Expires:
- ------------------------
--------------
Initial
--------------
Initial
<PAGE>
SIGNATURE PAGE
IF SUBSCRIBER(S) IS/ARE INDIVIDUAL(S), INCLUDING JOINT TENANTS OR
TENANTS IN COMMON, SIGN IN THE SPACE(S) PROVIDED BELOW:
IN WITNESS WHEREOF, the undersigned has executed this Subscription and
Investment Representation Agreement and Power of Attorney this __________ day of
________________ of 19___. If Purchasing as a community property in one or both
names, both spouses should sign.
EXECUTION:
WITNESS:
- --------------------------- ---------------------------------
Signature
---------------------------------
Print Name
EXECUTION:
WITNESS:
- --------------------------- ---------------------------------
Signature
---------------------------------
Print Name
ACCEPTED BY:
Issuer's Agent
Date:
-------------------------------
By:
-------------------------------
Signature
Bill Knollenberg
-------------------------------
Print Name
President
-------------------------------
Title
--------------
Initial
--------------
Initial
<PAGE>
Debenture No. _____________________
Addendum A
The Straight Conversion rate for this Convertible Debenture is $ per share of
NATIONAL EQUITIES HOLDINGS, INC. (NEHI) Debenture Total =
_________________________
- --------------------------------------
Bill M. Knollenberg
<PAGE>
CONVERTIBLE BOND # __________________________
CONVERTIBLE BOND
Due August 25, 1999
NATIONAL EQUITIES HOLDINGS, INC. (NEHI)
Obligation
NATIONAL EQUITIES HOLDINGS, INC. (NEHI), a corporation organized and
existing under the laws of the State of Delaware, for value received, promises
to pay the registered holder on the above due date, being a date two years or
less after the date of authentication below, the principal sum of
$______________________________________.
Holder ________________________________________________________________________.
Except as herein otherwise proved, National Equities Holdings, Inc. (NEHI) also
promises to pay interest on the principal sum from the date of authentication,
at a rate of eight percent (8%) per year until the principal sum has been paid.
The principal and interest on this Bond is payable at the office of National
Equities Holdings, Inc. (NEHI) at 616 FM 1960 W., Suite #225, Houston, Texas
7090.
Interest Payment
Interest on this Bond will be paid on August 25 of each year. After
allocation of earnings has ben made to cover all of National Equities Holdings,
Inc. (NEHI's) existing and continuing obligations, including any new, customary,
and extraordinary obligations incurred in the normal course of doing business,
and after the usual appropriates have been made for customary reserves, funds,
or accounts, the amount of earned surplus available for payment of dividends or
other purposes will be determined. All such surplus in each year will first be
used toward this issue, to pay the holders on a pro rata basis up to the maximum
percent of interest on this Bond. Only when all holders are paid the maximum
percentage of interest on this Bond will the surplus be available for payment of
dividends or other purposes as the Board of Directors determines.
Series
The Bond is one of a series of National Equities Holdings, Inc. (NEHI)
Bonds known as Convertible Bonds, with an aggregate principal amount of
$1,000,000, all of which are subject to the same terms and conditions as this
Bond.
Page 1 of 3
<PAGE>
Redemption
This Bond will be redeemable at the option of National Equities
Holdings, Inc. (NEHI) in whole or part, at any time after the proper notice. The
redemption price will be the principal amount of this Bond plus interest accrued
to the date fixed for redemption. In the event that less than all the Bonds of
this issue are to be redeemed, redemption will be, to the extent possible, pro
rata. This Bond will become due and payable and will cease to bear interest on
the date fixed for the redemption.
Notice of Redemption
Before redeeming, National Equities Holdings, Inc. (NEHI) will notify
any registered holder of this Bond of its intention to redeem and of the
redemption date at least thirty (30) days prior to such date. Notice shall be
sent by registered mail to the last address of the registered holder as it
appears on the books of National Equities Holdings, Inc. (NEHI).
Straight Conversion
This Bond will be convertible at the option of the holder at any time
from and after the date of issue, and up to but not after one year from the date
of issue. If this Bond is called for redemption, it will be convertible at any
time prior to the close of business on the fifth day preceding the date fixed
for redemption. This Bond will be convertible into fully paid and non assessable
shares of National Equities Holdings, Inc. (NEHI) Common Stock in accordance
with "Addendum A" attached to this Bond. For the Purpose of Addendum A, the
principal sum written in the "obligation" paragraph above is the "Initial
Investment." In order to exercise the conversion privilege, the holder of this
Bond will surrender it to National Equities Holdings, Inc. (NEHI) with the
proper notice of conversion as described below. If the stock into which this
Bond is convertible is to be used in a name or names other than that of the
registered owner of this Bond, the Bond must be accompanied by proper
assignment.
Notice of Conversion
A holder desiring to convert this Bond must give written notice to
National Equities Holdings, Inc. (NEHI) and, simultaneously, surrender this Bond
together with a duly executed instrument of assignment and transfer, in the form
attached hereto as "Exhibit I", at National Equities Holdings, Inc. (NEHI's)
principal office at 616 FM 1960 W., Suite #225, Houston, Texas 77090. NEHI will
promptly issue the holder the share of stock into which this Bond is to be
converted.
Assignment
This Bond may not be assigned without the prior notice to and consent
of National Equities Holdings, Inc. (NEHI) to the assignment, which consent will
not be given unless NEHI and NEHI's counsel are satisfied that the assignment
shall not violate any state or federal securities laws.
Page 2 of 3
<PAGE>
IN WITNESS WHEREOF, National Equities Holdings, Inc. (NEHI) has caused
this Bond to be signed by its President or other officer, and its seal to be
affixed hereto and attested by its Secretary this ________________ day of
_____________________, 19___.
NATIONAL EQUITIES HOLDINGS, INC. (NEHI)
By: -------------------------------
Name: Bill Knollenberg {Corporate Seal}
-------------------------------
Title: President
-------------------------------
Subscriber(s) Signature
-------------------------------
-------------------------------
Attest:
By: -------------------------------
Secretary
Page 3 of 3
<PAGE>
Bond No. _____________________
Addendum A
The Straight Conversion rate for this Convertible Bond is $ per share of
NATIONAL EQUITIES HOLDINGS, INC. (NEHI) Bond Total =
_________________________
- --------------------------------------
Bill M. Knollenberg
<PAGE>
SIGNATURE PAGE
IF SUBSCRIBER(S) IS/ARE INDIVIDUAL(S), INCLUDING
JOINT TENANTS OR TENANTS IN COMMON, SIGN IN THE
SPACE(S) PROVIDED BELOW:
IN WITNESS WHEREOF, the undersigned has executed this Subscription and
Investment Representation Agreement and Power of Attorney this __________ day of
________________ of 19___. If Purchasing as a community property in one or both
names, both spouses should sign.
EXECUTION:
WITNESS:
- --------------------------- ---------------------------------
Signature
---------------------------------
Print Name
EXECUTION:
WITNESS:
- --------------------------- ---------------------------------
Signature
---------------------------------
Print Name
ACCEPTED BY:
Issuer's Agent
Date:
-------------------------------
By:
-------------------------------
Signature
Bill Knollenberg
-------------------------------
Print Name
President
-------------------------------
Title
19
--------------
Initial
--------------
Initial
<PAGE>
THE STATE OF Texas
COUNTY OF Harris
BEFORE ME, the undersigned authority, on this day personally appeared
Bill Knollenberg, known to me to be the person whose name is/are subscribed to
the foregoing instrument, and acknowledged to me that he executed the same for
the purposed and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this _____________ day of
______________________ of 19___.
-------------------------------------------
Notary Public in and for the State of Texas
My Commission Expires:
- ------------------------
20
--------------
Initial
--------------
Initial
<PAGE>
DEBENTURE # ____________________________________
CONVERTIBLE DEBENTURE
Due January 5, 1998
ERIN GAS PRODUCERS, INC.
Obligation
ERIN GAS PRODUCERS, INC. (Erin Gas), a corporation organized and
existing under the laws of the State of Nevada, for value received, promises to
pay the registered holder on the above due date, being a date two years or less
after the date of authentication below, the principal sum of
$_____________________________________________.
Holder ________________________________________________________________________.
Except as herein otherwise proved, Erin Gas also promises to pay interest on the
principal sum from the date of authentication, at a rate of twelve percent (12%)
per year until the principal sum has been paid. The principal and interest on
this Debenture is payable at the office of Erin Gas at 2800 Post Oak-Transco
Tower, Suite #5260, Houston, Texas 77056.
Interest Payment
Interest on this Debenture will be paid on January 5 of each year.
After allocation of earnings has been made to cover all of Erin Gas's existing
and continuing obligations, including any new, customary, and extraordinary
obligations incurred in the normal course of doing business, and after the usual
appropriates have been made for customary reserves, funds, or accounts, the
amount of earned surplus available for payment of dividends or other purposes
will be determined. All such surplus in each year will first be used toward this
issue, to pay the holders on a pro rata basis up to the maximum percent of
interest on this Debenture. Only when all holders are paid the maximum
percentage of interest on this Debenture will the surplus be available for
payment of dividends or other purposes as the Board of Directors determines.
Series
This Debenture is one of a series of Erin Gas Debentures known as
Convertible Debentures, with an aggregate principal amount of $5,000,000, all of
which are subject to the same terms and conditions as this Debenture.
Page 1 of 3
<PAGE>
Redemption
This Debenture will be redeemable at the option of Erin Gas, in whole
or part, at any time after the proper notice. The redemption price will be the
principal amount of this Debenture plus interest accrued to the date fixed for
redemption. In the event that less than all the Debentures of this issue are to
be redeemed, redemption will be, to the extent possible, pro rata. This
Debenture will become due and payable and will cease to bear interest on the
date fixed for the redemption.
Notice of Redemption
Before redeeming, Erin Gas will notify any registered holder of this
Debenture of its intention to redeem and of the redemption date at least thirty
(30) days prior to such date. Notice shall be sent by registered mail to the
last address of the registered holder as it appears on the books of Erin Gas.
Straight Conversion
This Debenture will be convertible at the option of the holder at any
time from and after the date of issue, and up to but not after one year from the
date of issue. If this Debenture is called for redemption, it will be
convertible at any time prior to the close of business on the fifth day
preceding the date fixed for redemption. This Debenture will be convertible into
fully paid and non assessable shares of Erin Gas common stock in accordance with
"Addendum A" attached to this Debenture. For the Purpose of Addendum A, the
principal sum written in the "obligation" paragraph above is the "Initial
Investment." In order to exercise the conversion privilege, the holder of this
Debenture will surrender it to Erin Gas with the proper notice of conversion as
described below. If the stock into which this Debenture is convertible is to be
used in a name or names other than that of the registered owner of this
Debenture, the Debenture must be accompanied by proper assignment.
Notice of Conversion
A holder desiring to convert this Debenture must give written notice to
Erin Gas and, simultaneously, surrender this Debenture together with a duly
executed instrument of assignment and transfer, in the form attached hereto as
"Exhibit I", at Erin Gas's principal office at 2800 Post Oak-Transco Tower,
Suite #5260, Houston, Texas 77056. Erin Gas will promptly issue to the holder
the share of stock into which this Debenture is to be converted.
Assignment
This Debenture may not be assigned without the prior notice to and
consent of Erin Gas to the assignment, which consent will not be given unless
Erin Gas and Erin Gas's counsel are satisfied that the assignment shall not
violate any state or federal securities laws.
Page 2 of 3
<PAGE>
IN WITNESS WHEREOF, Erin Gas has caused this Debenture to be signed by
its President or other officer, and its seal to be affixed hereto and attested
by its Secretary this ________________ day of _____________________, 19___.
ERIN GAS PRODUCERS, INC.
By: -------------------------------
Name: Bill Knollenberg {Corporate Seal}
-------------------------------
Title: President
-------------------------------
Subscriber(s) Signature
-------------------------------
-------------------------------
Attest:
By: -------------------------------
Secretary
Page 3 of 3
<PAGE>
Debenture No. _____________________
Addendum A
The Straight Conversion rate for this Convertible Debenture is $ per share of
ERIN GAS PRODUCERS, INC. Debenture Total = _________________________
- --------------------------------------
Bill M. Knollenberg
<PAGE>
EXHIBIT I
ASSIGNMENT AND TRANSFER
The undersigned Assignee(s), holder of that certain Convertible
Debenture (the "Debenture") issued by ERIN GAS PRODUCERS, INC. ("Erin Gas") to
assignee, and dated as of _____________________________, 19__, hereby assigns
and transfers said Debentures to Erin Gas pursuant to the terms and conditions
of conversion set forth in said Debenture, and in exchange for the number of
shares of stock of Erin Gas listed on Addendum A to the Debenture that
correspond to the Initial Investment reflected in the first paragraph on the
bond entitled "Obligation".
IN WITNESS WHEREOF, I have signed my name this ________________ day of
____________________, 19___.
ASSIGNEE(S)
- --------------------------------------
Name:
-------------------------------
- --------------------------------------
Name:
-------------------------------
WITNESS:
- --------------------------------------
Name:
-------------------------------
Exhibit 10.4
THIS AGREEMENT is made the 1st day of November, 1997
BETWEEN:-
(1) HORSE ENERGY LP, a limited partnership registered in the State of
Texas, USA under number 102487-10 whose principal place of business is
at 5 Silver Elm Place, The Woodlands, Texas 77381 ("Horse"); and
(2) NATIONAL EQUITIES HOLDINGS INC., a company registered in the State of
Delaware, USA under number 2144417 whose principal place of business is
at 616 FM 1960 West, Suite 200, Houston, Texas 77090 ("NEHI")
WHEREAS:
(A) Horse is a company which specializes in horizontal oil recovery. Horse
identifies oil and gas reserves which have previously been considered
uneconomical to develop and re-enters the wells using specialist
techniques. Horse identifies wells as development candidates, secures
operational rights and develops the reserves. Horse has produced a
confidential business plan entitled "Horizontal Oil Recovery
Specialists" ("the Business Plan")
(B) NEHI is a company which is involved in oil and gas exploration and
production. NEHI is seeking funding in the sum of US $5,000,000 (five
million US dollars) and as part of its further commercial objectives
will be seeking additional funding in the form of a sale of shares by
offer or capital investment and/or is seeking to increase the value of
its stock and wants to disclose the contents of the Business Plan and
describe association with the Horse LP partners for purposes of raising
capital or to increase the value of its stock as aforesaid. Horse is
disclosing to NEHI a copy of the Business Plan in accordance with the
terms and conditions of this Agreement and NEHI shall be entitled to
make no more than 2 further copies. (For the avoidance of doubt NEHI
shall only be entitled to disclose 3 versions of the Business Plan
including the original copy).
IN CONSIDERATION of the disclosure by Horse of a copy of the confidential
Business Plan to NEHI THE PARTNERS HEREBY AGREE:-
1 NEHI shall:-
1.1 immediately upon disclosure by Horse to NEHI of a copy of the
Business Plan issue to Horse 7,871,023 (seven million eight
hundred seventy one thousand twenty three) shares of common
stock in NEHI together with a share certificate therefor and,
for the avoidance of doubt, Horse shall not be liable to make
any payment for 7,871,023 (seven million eight hundred seventy
one thousand twenty three) shares, and a certificate of
delivery of the Business Plan to NEHI by Horse in the form
annexed to this Agreement in Schedule 1 and signed by both
parties shall be conclusive evidence of disclosure.
1.2 give to Horse US $5,000,000 (five million US dollars) cash
free of any incumbrances the first installment being due 30
days after any investment vehicle is available to be sold to
the public but not later than January 1st 1998. The US
$5,000,000 (five million US dollars) is to
<PAGE>
be paid as needed but not less than US $300,000 per month, the
balance being due by June 30th, 1998.
1.3 pay 80% of all funds raised by a loan or offering or sale of
shares in NEHI or any other capital investments made as a
result of the disclosure by NEHI of the Business Plan, or
summary of the Business Plan or a described association with
Horse or any of the Horse partners, to a third party, into an
account opened by Horse, according to the schedule set out in
clause 1.2 until the balance of such account is at least US
$5,000,000 (five million US dollars) in credit unless a lesser
amount is allowed by Horse under clause 3 below ("the
Requisite Amount").
1.4 retain 20% of all funds raised by a loan or offering or sale
of shares in NEHI or any other capital investments made as a
result of the disclosure by NEHI of the Business Plan, or
summary of the Business Plan or a described association with
Horse or any of the Horse partners to cover NEHI overheads and
all costs related to the fund raising.
2 Horse shall:-
2.1 agree that NEHI shall be granted a 25% limited partner
interest (I.C. profit and losses only) in Horse.
2.2 Upon signature of this document, NEHI shall appoint George
Sutherland ("GS"), Jack Chance ("JC") and Feroze Variava
("FV") (together "the Participants") as executive directors on
the board of NEHI.
3 In any sale of common stock in NEHI by Horse, NEHI shall have right of
first refusal to purchase such stock at market value. In any sale of
common stock in Horse by NEHI, Horse shall have right of first refusal
to purchase such stock at market value.
4 NEHI shall be entitled to inform third parties of the fact that there
is a working relationship between Horse and NEHI and a 25% interest in
Horse and to disclose up to three copies or summaries of the Business
Plan to third parties, but shall provide Horse with details of the
identity of any such party and the contents of any such statement and
any such disclosure to a third party can only be for the purpose of
raising capital in accordance with this Agreement and shall be subject
to the confidentiality provisions below.
5 For the purpose of this Agreement it is necessary that Horse discloses
to NEHI confidential information (the "Information") relating to
proprietary, business and technical information in the possession of
Horse including without limitation future or proposed products and
services, intellectual property rights, business forecasts, information
on methods of working and application of know-how and for the avoidance
of doubt the Business Plan shall be confidential information and the
copyright in the Business Plan is proprietary to Horse. The Information
may be contained in writing, diagrams, computer programs and may be
delivered or communicated orally, in document form, by demonstration or
otherwise to NEHI through the personnel of NEHI or of any company
associated with NEHI.
6.1 NEHI shall maintain the Information confidential and NEHI shall not
disclose such Information to a third party or reproduce the Information
in whole or in part or alter, revise, copy or summarize the Business
Plan without Horse's prior written consent.
<PAGE>
6.2 NEHI shall not disclose to third parties any more than three copies of
the Business Plan without the prior written consent of Horse and Horse
shall decide the form and format of any further copies and shall be
entitled to stipulate whether or not the names of the Participants
shall be disclosed in any further copy of the Business Plan.
6.3 any third party to whom NEHI discloses a copy of the Business Plan must
sign a confidentiality agreement in the form annexed to this Agreement
in Schedule 2 prior to the disclosure of the Business Plan by NEHI to
such third party.
7 NEHI shall neither use the Information nor circulate it within its own
organization except and only to the extent necessary for:-
7.1 discussions and consultations with employees of NEHI solely
for the purpose set out in this Agreement and in any event
only on a need to know basis; or
7.2 any other purpose Horse may hereafter authorize in writing.
8 All Information and materials (whether in human-readable or
machine-readable form), including without limitation development plans,
product or service descriptions, electronic media, documents, manuals,
specifications, flowcharts, program listings and file printouts
furnished to NEHI shall be and remain the property of Horse and shall
be returned to Horse promptly at its request together with any copies
made. If Horse shall request the destruction of all material held by
NEHI comprised in the Information NEHI shall deliver to Horse within
one month of such request a sworn deposition authorized by a notary
public confirming that all such material has been destroyed or returned
securely to Horse.
9.1 Nothing contained in this Agreement shall be construed as granting or
conferring any rights by license or otherwise, expressly or impliedly,
for any intellectual property in which Horse or any of the directors
thereof may claim proprietary rights or for any use or exploitation of
any Information, invention, discovery or improvement made, conceived or
acquired prior to or after the date of this Agreement.
9.2 For the avoidance of doubt JC and SM own the intellectual property
rights in a device identified any generally described as "A Downhole
Adjustable Device for Trajectory Control in the Drilling of Deviated
Wells" and described as a "L-R Tool" in the Business Plan (the
"Device") and no rights in the Device are given to the parties to this
Agreement.
10.1 If Horse decides to make an initial public offering in relation to
Horse then NEHI shall have the option to purchase the first 25% of the
offered stock at market value.
10.2 In the event that NEHI acquires stock in Horse under clause 10.1 then
in any sale of stock in Horse by NEHI, Horse and/or the Participants
shall have the first right of refusal to purchase such stock at market
value.
10.3 In any sale or offering or proposed disposition of stock in NEHI by
NEHI or its directors, Horse and/or the Participants shall have the
first option to purchase such stock at market value.
<PAGE>
11 NEHI and NEHI's board of directors shall indemnify Horse and the
Participants against any and all liability, loss, damage, costs and
expenses which Horse may suffer whether direct or consequential as a
result of the use, disclosure or publication by NEHI and third parties
of the Business Plan in an altered, revised or summarized version or
format which has not been authorized by Horse. The indemnity shall also
apply to any action proceedings or claims taken by the Securities
Exchange Commission or other financial regulatory body taken as a
result of an altered, revised or summarized version or format which has
not been authorized by Horse.
12 NEHI and NEHI's board of directors shall indemnify Horse and the
Participants against any and all liability, loss, damage, costs and
expenses which Horse may suffer whether direct or consequential as a
result of any activities of NEHI prior to the signing of this
Agreement, and vice versa. The indemnity shall also apply to any action
proceedings or claims taken by the Securities Exchange Commission or
other financial regulatory body taken as a result of an altered,
revised or summarized version or format which has not been authorized
by Horse.
13 NEHI shall be responsible for ensuring compliance with all financial
regulations relating to the subject matter of this Agreement save for
any financial regulations relating to the Business Plan which shall be
the responsibility of Horse except insofar as any such financial
regulations relate to NEHI's use or disclosure of the Business Plan.
14 If NEHI does not comply with the provisions of clauses 1.1, 1.2 and 1.3
above as per the installments set out in clause 1.2, Horse reserves the
right to terminate this Agreement without prejudice and NEHI shall
immediately cease to be a partner in Horse and shall be entitled to no
payment or consideration for the termination.
15 This Agreement contains the entire agreement of the parties concerning
the subject matter hereof and supersedes any and all prior agreements
between the parties or any of them concerning the same, including the
Agreement dated August 20th, 1997 and the Extension of the same dated
October 18th, 1997. Each of the parties hereby declares and
acknowledges that he or it (as the case may be) is not entering into
this Agreement in reliance upon any representation or warranty or
understanding express or implied which is not contained expressly in
this Agreement itself and (for the avoidance of doubt) hereby
irrevocably and unconditionally waives any right to any remedy of
whatsoever nature (whether damages rescission or otherwise) for any
breach of any such representation or warranty which there may have been
or which may hereafter occur.
16 If any provision of this Agreement is held invalid void or
unenforceable for any reason whatsoever the validity legality and
enforceability of the remaining provisions hereof shall not in any way
be affected, impaired or restricted thereby.
17 The parties agree that all terms and conditions contained in this
Agreement are reasonable.
18 This Agreement is personal to the parties and may not be assigned to
any third party.
<PAGE>
19 This Agreement may not be modified or varied in whole or in part except
by a written instrument duly executed by each of the parties.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be signed by
their respective duly authorized representatives.
Signed for and on behalf of )
HORSE ENERGY LP )
by )
/s/ George Sutherland
................................
Name (signed and printed)
Date: .....11/5..... 1997
Signed for and on behalf of )
NATIONAL EQUITIES HOLDINGS INC. )
by )
/s/ Bill M. Knollenberg
................................
Name (signed and printed)
Date: .....11/05.... 1997
<PAGE>
SCHEDULE 1
----------
CERTIFICATE OF DELIVERY
-----------------------
I, George Sutherland, a director of Horse Energy L.P. hereby certify that at 9
a.m./p.m. on November 1st, 1997 I did hand over to Bill Knollenberg of National
Equities Holdings Inc. a copy of the Business Plan as defined in paragraph (A)
of the Recitals and referred to in clause 1 of the Agreement dated November 1st,
1997 between Horse Energy L.P. and National Equities Holdings Inc.
/s/ George Sutherland
- ---------------------------------
George Sutherland
for and on behalf of
Horse Energy L.P.
/s/ Bill Knollenberg
- ---------------------------------
Bill Knollenberg
received by and on behalf of
National Equities Holdings Inc.
Exhibit 10.5
THIS AGREEMENT is made the 5th day of November, 1997
BETWEEN:
(1) ROTARY STEERABLE TOOLS U.S.A. L.P., of 4708 Pecan Grove, San Antonio, Texas
78222
(2) NEHI of 616 FM, 1960 West #225, Houston, Texas 77090
RECITALS
(A) Jack Phillip Chance (JPC) and Stephen John McLoughlin (SJM) have conceived
and invented a device which is useful and which they believe to have
commercial potential and they have made an application for a Patent in the
United Kingdom and the United States of America and numerous other
jurisdictions. The device referred to is identified and generally described
as "A down hole adjustable device for trajectory control in the drilling of
deviated wells" (the "Device"). The Device is proprietary intellectual
property wholly and solely owned by SJM and JPC and they have disclosed the
details of the Device confidentially to Bill Knollenberg and A. Bradley
Knollenberg, who are Directors of NEHI and who have agreed to provide
financial support for the Development and possible exploitation of the
Device.
(B) JPC and SJM have licensed the device to a Limited Partnership registered in
the State of Texas, USA under number 00102516-10 which is called RST (USA)
L.P. ("the Partnership") and whose principal place of business is 4708,
Pecan Grove, San Antonio, Texas 78222.
(C) RST (USA) L.P. and NEHI wish to enter into this agreement in order that
they may develop the Device.
(D) NEHI is funding certain expenses incurred by RST (USA) L.P. in relation to
the Development of the Device, including payment of Patent Agents' fees,
expenses and disbursements relating inter alia to the Patent Application in
respect of the Device, patent attorney fees, filing fees, design
engineering fees, legal fees associated with contractual obligations,
specialist engineering fees, materials to build two prototypes of the
Device, machining and finishing costs, travel expenses including flight
tickets and hire cars, fuel, food, hotel accommodation, hire of apartments,
salaries for JPC and SJM, stationery, postal and telephone communication
expenses and other miscellaneous expenses incurred by JPC and SJM in the
course of bringing the said prototypes to a stage where they can be
considered to be ready for experimental testing, (at which time expenses
incurred shall be costs of material and personnel movements, air-freight
bills, re-machining of parts, associated vendor costs, ancillary legal
costs, advertising, and publicity for the Device (all of which shall be
known as the "Development" and shall continue to provide such funding until
such time as, in the
1
<PAGE>
opinion of the parties, the Device can be commercially exploited. In this
Agreement any such funding shall be called the "Initial Funding".
IN CONSIDERATION of JPC and SJM undertaking work and contributing their skill,
knowledge and experience of the drilling industry to RST (USA) L.P. and in
respect of the Device THE PARTIES HEREBY AGREE as follows:
1. The Initial Funding shall be non-returnable. As part of the Initial
Funding, NEHI will contribute 6,551,022 shares of Common Stock to RST
(USA) L.P.
2. The parties have incorporated a new company (the "Company"), which, for
the avoidance of doubt we will refer to as RST (USA), through which the
parties will undertake the Development of the device, build the
prototypes and market and exploit the Device under licence from JPC and
SJM who are the sole owners of the intellectual property rights relating
to the device. For the avoidance of doubt the costs and expenses
incurred in the incorporation of the Company will be provided by NEHI as
part of the Initial Funding.
3. The shares in the Company shall be held in the proportions listed below
by each party with voting rights in proportion to the percentage
shareholding:
General Partner: RST (USA) LLC 1.00%
RST (USA) LLC is wholly owned by JPC and SJM who hold 50% equity each.
Limited Partners: JPC 37.00%
SJM 37.00%
NEHI 25.00%
NEHI shall have the first right of refusal to purchase up to 55% of the
equity in RST (USA) L.P., belonging to JPC and SJM. In the event of JPC
and SJM electing to sell shares in RST (USA) L.P., NEHI shall have
thirty (30) days in which to decide whether they wish to exercise their
option to purchase and an additional sixty (60) days to raise the
finance with which to purchase. In the event that NEHI decides to sell
some of its stock, JPC and SJM have the right to purchase the stock, the
decision to purchase being made within 30 days and allowing 60 days to
raise the finance to purchase the shares.
No variation of these voting rights shall be made without the written
agreement of the parties and in the event that the actual percentage of
the respective shareholding of the parties alters the parties shall
still retain voting rights in the
2
<PAGE>
percentages set out herein and the articles of incorporation of the
Company shall be amended accordingly and as necessary to give effect to
this clause.
4. In any sale of shares in RST (USA) L.P. by NEHI, JPC and SJM shall have
the right of first refusal to purchase such stock at market value or, if
less than market value, at a price to be agreed between the parties.
5. Subject to Clause 4, above, NEHI shall not assign, transfer or otherwise
part with their shares in the Company to any third party without the
prior written consent of JPC and SJM.
6. JPC and SJM shall be appointed the initial directors of the Company,
with Bill Knollenberg representing NEHI's interest in the Company.
Further directors will be appointed as may be agreed between the
parties.
7. NEHI shall provide Initial Funding in the sun of US $500,000 (five
hundred thousand US dollars) for the purposes of the Development which
shall be provided in two equal sums of $250,000 (two hundred and fifty
thousand dollars) and paid into the Company's bank account for and to
the benefit of the Company. The first lump sum of $250,000 (two hundred
and fifty thousand dollars) shall be paid immediately by cleared funds
upon signing this agreement and the second lump sum of $250,000 (two
hundred and fifty thousand dollars) shall be provided by cleared funds
on or before 1st day of December, 1997.
8. If RST (USA) L.P. decides to make an Initial Public Offering (I.P.O.) of
the company then NEHI will advise and assist the Company in such an
initial public offering for a consideration to be agreed between the
parties. NEHI shall have the right to purchase the first 25% of the
I.P.O. at a fair market value, to be determined at the time of issuing
the I.P.O.
9. If the costs of Development of the Device increase beyond the initial
Funding of US $500,000 (five hundred thousand US dollars) due to
unforeseen engineering problems or re-engineering and associated costs,
NEHI shall provide a further sun of US $500,000 (five hundred thousand
US dollars), or more if there is an unusual cost overrun, to the
Company. The further $500,000 shall be paid in installments with the
stipulation that the total sum shall be paid in full by the date that
the tool is considered "Commercial". The date of "commerciality" shall
be taken as being the date when the first invoice for RST (USA) L.P.
tool rental is made out. This further sum shall be non-returnable and
shall have no effect on the proportion of shares in the Company listed
in Clause 3, above.
10. NEHI and NEHI's board of directors shall indemnify the Company against
any and all liability, loss, damage, costs and expenses which RST may
suffer whether direct or consequential as a result of any activities of
NEHI prior to the signing of this agreement. The indemnity shall also
apply to any action, proceedings or claims
3
<PAGE>
taken by the Security and Exchange Commission or other financial
regulatory body taken as a result of an altered, revised or summarized
version or format which has not been authorized by RST. A similar
indemnity shall exist between RST and NEHI, whereby RST will indemnify
NEHI against any and all liabilities arising from any activities of RST
(USA) L.P. or JPC and SJM prior to the signing of this agreement.
11. For the avoidance of doubt all Intellectual Property rights created or
arising during the Development of the Device shall be owned by JPC and
SJM.
12. This contract supersedes all previous contracts.
13. This Agreement shall be governed by the laws of Texas in the United
States of America.
SIGNED by JACK PHILIP CHANCE
SIGNED by STEPHEN JOHN McLOUGHLIN
SIGNED by BILL KNOLLENBERG on behalf of NEHI
Exhibit 10.6
DATED December 18th, 1997
- --------------------------------------------------------------------------------
ERIN OIL EXPLORATION INC (1)
NATIONAL EQUITIES HOLDINGS INC (2)
--------------------------------------------------------
AGREEMENT
--------------------------------------------------------
<PAGE>
THIS AGREEMENT is made the 18th day of December, 1997
BETWEEN:-
(1) ERIN OIL EXPLORATION INC., a company registered in the State of Texas,
USA under number 01128726-00 whose registered address is Two Energy
Square, 4849m Greenville Avenue, Suite 860, Dallas, Texas 75206,
("Erin"); and
(2) NATIONAL EQUITIES HOLDINGS INC., a company registered in the State of
Delaware, USA under number 2144417 whose principal place of business is
at 616 FM 1960 West, Suite 200, Houston, Texas 77090 ("NEHI")
WHEREAS:
(A) Erin is a company which is involved in oil and gas exploration and
production. Erin Oil originally raised funds through convertible
debentures, due January 5th, 1998, and passed these debts of $2,770,000
along with $8,650,000 in assets, namely the wells in the Royston Field,
Fisher County, Texas and leases in Scurry County, Texas to NEHI in
August 1996. Additionally, Erin Gas Producers sold debentures
convertible to NEHI stock in 1996 amounting to $698,800, also due
January 5th, 1998. Erin is agreeing to purchase these debentures and
shares of Common Stock in NEHI.
(B) NEHI is a company which is involved in oil and gas exploration and
production. NEHI is seeking to clear its debt status in order to
refocus and start afresh on a new venture with Horse Energy L.P. and
Rotary Steerable Tools USA L.P. This Agreement is to formalize the
offer made by Erin to purchase the debts which it originally created,
absolving NEHI completely and totally of any responsibility for these
debts.
IN CONSIDERATION of the offer by Erin to purchase complete responsibility for
the conversion or repayment of the original Erin Oil and Erin Gas debentures
from NEHI, THE PARTNERS HEREBY AGREE:-
1 NEHI shall
1.1 assign immediately all outstanding convertible debentures as
of December 16th, 1997 sold by and/or listed in the name of
Erin Oil Exploration and Erin Gas Producers to Erin.
1.2 provide 2,913,200 shares of NEHI common stock to Erin via an
escrow account.
2 Erin shall:
2.1 on the signature of this document, assume full and total
responsibility for the conversion and repayment of principal
and interest of Erin Oil Exploration and Erin Gas debentures
as described in Attachment 1.
2.2 indemnify NEHI from any and all responsibility toward the
convertible debentures raised by Erin Oil or Erin Gas. NEHI
has no obligation whatsoever to pay principal or interest
associated with the Erin debentures, nor has NEHI any
obligation whatsoever to convert the Erin debentures to NEHI
stock.
<PAGE>
3 NEHI shall refer to Erin all and any correspondence or telephone
inquiries related to the debentures in a prompt and timely manner.
4 This Agreement is effective as of December 18th, 1997, and applies to
the list of debenture holders in Attachment 1, whose conversion
instructions have not been received as of December 16th, 1997.
IN WITNESS WHEREOF the parties hereto have caused this Extension to Agreement to
be signed by their respective duly authorized representatives.
Signed for and on behalf of ) Signed for and on behalf of )
ERIN OIL EXPLORATION ) NATIONAL EQUITIES HOLDINGS INC. )
by ) by )
/s/ Bill Knollenberg /s/ George Sutherland
................................. .................................
Name (signed and printed) Name (signed and printed)
Date: .....18/Dec........1977 Date: ......12/18........1977
Signed for and on behalf of )
BILL KNOLLENBERG )
by )
/s/ Bill Knollenberg
.................................
Name (signed and printed)
Date: .....18/Dec........1977
<PAGE>
<TABLE>
<CAPTION>
Attachment 1
Outstanding Debenture Holders as of December 16th, 1997
Debenture Holder's Monies Conversion Shares @ Interest Interest Well Unit Total
Number Name Invested Rate Conv Rate Rate Due Shares Shares
--------- ---------------- --------- ---------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
215 Dermatology 30,000 1.50 20,000 8 2,400 20,000
228 Fresonke 30,000 2.00 15,000 8 2,400 15,000
179 Gunderson 30,000 2.00 15,000 8 2,400 12,832 27,823
281 Harders 50,000 1.00 50,000 8 4,000 8,000 58,000
178 Hoffman 50,000 1.50 33,333 8 4,000 31,292 64,625
128 Kent 30,000 1.50 20,000 8 2,400 20,000
393 G Kent 25,000 2.58 9,690 12 3,000 9,690
202 Laity 30,000 2.00 15,000 8 2,400 4,000 19,000
538 G Laity 50,000 0.80 62,500 12 6,000 62,500
136 Morgan 25,000 2.58 9,690 12 3,000 9,690
696 G Reeves J 25,000 0.80 31,250 12 3,000 31,250
537 G Reeves T 50,000 0.80 62,500 12 6,000 62,500
697 G Reeves T 25,000 0.80 31,250 12 3,000 31,250
613 G O'Dell D 26,000 2.08 12,500 12 3,120 12,500
612 G O'Dell E 15,000 2.08 7,212 12 1,800 7,212
724 G O'Dell D&E 8,000 2.08 3,846 12 960 3,846
492 G Sanz 50,000 0.80 62,500 12 6,000 62,500
170 Siragusa R 20,000 1.50 13,333 8 1,600 8,000 21,333
541 G Siragusa R 25,000 0.80 31,250 12 2,000 31,250
292 Threet 30,000 2.00 15,000 8 2,400 15,000
602 G Threet 50,000 0.80 62,500 12 6,000 62,500
177 Spencer 30,000 2.00 15,000 8 2,400 8,000 23,000
316 Spillane 50,000 1.50 33,333 8 4,000 33,333
176 Hickey 100,000 0.75 133,333 8 8,000 24,000 157,333
280 G Farrel 250,000 0.80 312,500 12 30,000 312,500
230 Keish 100,000 1.00 100,000 8 8,000 100,000
155 Belsky 25,000 2.58 9,690 12 3,000 9,690
201 Bonte A 100,000 1.00 100,000 8 8,000 100,000
121 Bonte A&M 30,000 1.00 30,000 8 2,400 12,000 42,000
126 Bonte A&M 20,000 1.00 20,000 8 1,600 4,000 24,000
180 Bonte A&M 50,000 1.00 50,000 8 4,000 50,000
318 Boysen 5,000 5.00 1,000 8 400 1,000
395 G Hanson 25,000 2.58 9,690 12 3,000 9,690
326 Heirs 30,000 2.00 15,000 8 2,400 15,000
132 Kelly 50,000 1.50 33,333 8 4,000 12,000 45,333
134 Lewandowsky 30,000 2.00 15,000 8 2,400 8,000 23,000
89 Mace 20,000 2.50 8,000 8 1,600 9,646 17,646
127 Mason 100,000 0.75 133,333 8 8,000 133,333
Murphy C 5,000 4.00 1,250 8 400 1,250
28 G Okan 25,000 2.58 9,690 12 3,000 9,690
122 Richey 30,000 1.50 20,000 8 2,400 20,000
117 G Schwenke 37,500 2.08 18,029 12 4,500 18,029
149 Stephensen 30,000 2.00 15,000 8 2,400 13,646 28,646
106 G Wilder 25,000 2.58 9,690 12 3,000 9,690
120 Wilkes 50,000 1.00 50,000 8 4,000 50,000
123 Wilkes 50,000 1.00 50,000 8 4,000 50,000
142 Smith 30,000 1.50 20,000 8 2,400 20,000
195 Smith 20,000 1.50 13,333 8 1,600 10,000 23,333
214 Stauffer 30,000 1.50 20,000 8 2,400 2,411 22,411
248 Victory Worship 100,000 1.00 100,000 8 8,000 100,000
593 G Ogundiji 25,000 2.00 12,500 12 3,000 12,500
593 G Oladele 30,000 2.00 15,000 12 3,600 15,000
530 G Lebo 50,000 0.80 62,500 12 6,000 62,500
274 Welling 30,000 2.00 15,000 8 2,400 15,000
208/229 Gross 115,000 1.00 115,000 8 9,200 18,000 133,000
193 Wiley 140,000 0.75 186,667 8 11,200 8,000 194,667
------- --------------- --------- ---- --------- -- ------- ------- ---------
TOTAL 2,511,500 2,336,226 234,580 193,818 2,530,044
======= =============== ========= ==== ========= == ======= ======= =========
- ---------------------------------------------------------------------------
TOTAL FUNDS NOT CONVERTED ($) 2,746,080
(Capital & Interest)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
TOTAL SHARES EXPOSED AT ORIGINAL 2,530,044
CONVERSION RATE
- ---------------------------------------------------------------------------
</TABLE>
Page 1
Exhibit 10.7
AGREEMENT
February 26, 1998
THIS AGREEMENT (the "Agreement") is made and entered into and is
effective as of the date first written above, by and among Bill Knollenberg,
Doris Knollenberg, Bradley Knollenberg (collectively, the "Knollenbergs"), and
Jack Chance, George Sutherland, Feroze Variava, Steve McLoughlin, (all of the
above, collectively, the "Parties").
WHEREAS, certain disputes have arisen among the Parties relating to:
(i) Certain debentures (the "Debentures") issued by Erin Oil
Exploration, Inc., Erin Gas Producers, Inc. and Terra Pulse, Inc.
(collectively "ERIN") and claims, if any, which the holders of
said Debentures or their heirs, successors or assigns may have
against National Equities Holdings, Inc. ("NEHI") with respect
thereto;
(ii) The sale by the Knollenbergs of restricted securities, as defined
in Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Act"), issued by NEHI to the Knollenbergs or to
affiliates, entities or third parties in which the Knollenbergs
have a beneficial or controlling interest;
(iii) A certain debt owed by NEHI to Bill Knollenberg (the "Debt");
(iv) A certain debt owed by NEHI to Brad Knollenberg; and
(v) The governance, operations and financial condition of NEHI.
(All of the above, collectively, the "Disputes").
WHEREAS, the Parties desire to provide for a settlement and resolution
of the Disputes; and
WHEREAS, the Parties have determined to enter into this Agreement which
sets forth in writing the terms and conditions of their settlement and
resolution in connection with the Disputes; and
WHEREAS, the Parties understand that matters set forth herein are
subject to compliance with the Act, Rule 144 under the Act, and the applicable
securities laws of various states, including Texas.
-1-
<PAGE>
NOW, THEREFORE, in consideration of the mutual convenants,
representations and warrantees, herein, the Parties hereto agree as follows:
1. Sale of Restricted Securities by the Knollenbergs. Upon the
execution of this Agreement and continuing until December 31, 1998, the
number of shares of restricted securities owned or controlled by the
Knollenbergs which might otherwise be available for lawful sale,
transfer, or other disposition for value (the "Sales") shall be limited
as follows:
(a) The Knollenbergs shall be limited in Sales of such restricted
securities to the same number of shares of restricted
securities through Rule 144 transactions which may be legally
available for Sale in the aggregate by Jack Chance, George
Sutherland, Feroze Variava and Steve McLoughlin, in the
aggregate, at any point in time.
(b) Not withstanding Section 1(a) above, the Knollenbergs may
effect Sales of restricted securities in excess of said
limitation as follows:
(i) The Knollenbergs may Sell of up to $20,000,000 in gross
Sales price of restricted securities per thirty day for
their personal purposes; and
(ii) The Knollenbergs may Sell restricted securities in any
amount for the express purpose of conveying the proceeds
thereof to NEHI for its continued operations; and
(iii) The Knollenbergs may Sell restricted securities in any
amount for the express purpose of effecting a buy-back
and cancellation of the ERIN Debentures, it being
acknowledged and reconfirmed by the Parties that
2,913,200 shares of NEHI common stock have been issued
to Bill Knollenberg for this purpose; and
(iv) The Knollenbergs may Sell up to an aggregate of
$30,100.00 in gross sales price of restricted securities
for the express purpose of reimbursing amounts owed to
Brad Knollenberg by NEHI. In such event, NEHI shall
issue additional shares of common stock to the
Knollenbergs to replace the shares so disposed of.
2. Composition of the Board of Directors. The Parties agree that the
NEHI Board of Directors (the "Board") shall consist of three Directors selected
by the Knollenbergs; three Directors selected by Jack Chance, George Sutherland,
Feroze Variava and Steve McLoughlin; and one ex officio advisor, to be selected
by the Parties, who shall have authority to vote if the Board of Director is at
an impasse (all of the above, collectively,
-2-
<PAGE>
the "Directors"). The Parties designate Daniel R. Kirshbaum to serve as the
initial ex officio advisor until such time as he resigns or is replaced by the
Board of Directors.
3. Board Meetings. The Board shall meet at least once every thirty days
at which time NEHI management shall make presentations to the Board about NEHI
activities. At such meetings, management shall provide regular reports in
reasonable detail regarding the management, operations, financial condition,
business prospects and activities of NEHI. Management shall also provide similar
reports reflecting the operational status, source and application of funds,
timetables and scheduling regarding the development of the rotary steerable
tool. Management shall respond promptly to any inquiries by any Board member
regarding these matters.
4. Viewing of the Rotary Steerable Tool. Bill Knollenberg is granted
the right to a physical viewing of the rotary steerable tool during normal
business hours at locations where the rotary steerable tool is undergoing
initial development or manufacturing. Such right shall be limited to one viewing
per month, arranged five working days in advance and it shall be accompanied by
an officer of Rotary Steerable Tool (U.S.A.) L.P. Due to the highly confidential
nature of the rotary steerable tool, this right to view may be exercised only by
Bill or Brad Knollenberg and does not include any other person.
5. Corporate Officers.
5.1 The corporate officers of NEHI in place as of the date hereof shall
continue as officers in the capacities in which they presently serve until such
time as they are replaced by the Board. Notwithstanding the above, Bill and Brad
Knollenberg hereby resign, effective immediately, as employees and officers of
NEHI in any capacity. Furthermore, Bill and Brad Knollenberg agree that they
shall have no further participation or involvement in the day-to-day operations
of NEHI from the date of execution of this Agreement other than in their
capacity as directors and shareholders of NEHI.
5.2 Upon the execution of this Agreement, Bill and Brad Knollenberg
shall convey or cause to be conveyed to NEHI the following:
(a) Any and all oil, gas or other mineral properties, wells or leases
and other assets owned by NEHI but held by, or in the name of,
others including, without limitation, ERIN; and
(b) Any and all financial accounting books and records, file
material, business records and other assets of NEHI in their
possession, custody or control.
-3-
<PAGE>
6. Relationship Between ERIN and NEHI. The Parties acknowledge as
follows:
(a) ERIN is a completely separate company from NEHI and no connection,
relationship or affiliation exists between ERIN and NEHI;
(b) NEHI is not responsible for paying the ERIN Debentures, which is
and shall continue to be solely the obligation of ERIN; and
(c) All oil and gas properties acquired by NEHI from ERIN, together
with all debt relating to such properties, shall remain assets of
NEHI.
7. Release. In connection with the acknowledgement set forth in
Paragraph 6 above, the Parties further agree as follows:
(a) The Knollenbergs for themselves, their respective agents,
attorneys, representatives, servants, employees, stockholders,
owners, heirs, executors, administrators, affiliates, successors
and assigns, and each of them, do hereby release, acquire, and
forever discharge NEHI and its officers, directors, agents,
attorneys, representatives, servants, employees, stockholders,
owners, heirs, executors, administrators, affiliates, successors
and assigns, and each of them, of and from any and all claims,
demands, and causes of action which the Knollenbergs ever had, now
have, or may have in the future, whether known or unknown, on
account of any matter relating to or arising out of, directly or
indirectly, the ERIN Debentures or any other ERIN debt; and
(b) As additional consideration for the above release, NEHI has issued
2,913,200 shares of NEHI stock to Bill Knollenberg.
8. Bill Knollenberg Advances. The Parties acknowledge that NEHI owes
the Knollenbergs approximately $400,000.00 for previous advances prior to
September 1, 1997, which NEHI agrees to repay upon the execution of this
Agreement, as follows:
(a) NEHI shall issue 400,000 shares of restricted common stock to the
Knollenbergs upon the execution of this Agreement; and
(b) NEHI shall deliver an unsecured promissory note in the amount of
$200,000.00, due in one lump sum on December 31, 1998 (the "Bill
Knollenberg Note").
9. Brad Knollenberg Advances. The Parties acknowledge that NEHI owes
Brad Knollenberg approximately $30,100.00 which NEHI agrees to repay upon
execution of this Agreement by delivering an unsecured promissory note of NEHI
in the amount of $30,100.00 due in one lump sum on September 1, 1998 be issued
to Brad promptly upon the execution
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<PAGE>
of this Agreement (the "Brad Knollenberg Note"). It is agreed that if the
Knollenbergs effect a Sale pursuant to Section 1(b)(iv) above and apply the
proceeds thereof to retire the Brad Knollenberg Note in whole or in part. Then
in such event, the balance due and owing on said note shall be reduced
accordingly. In such event, NEHI shall issue additional shares of common stock
to the Knollenbergs to replace the shares so disposed of.
10. Damages Claim. The Parties agree that $400,000 claim against Texas
Capital Securities, Inc., and any recovery therefrom, is an asset of Bill
Knollenberg.
11. Commencement of Drilling Activities. The Parties agree that they
shall cause NEHI to use its best efforts to commence such drilling activities on
its leasehold interests in Scurry County, Texas and Wirt County, West Virginia,
as are necessary to maintain the leases thereon and prevent the expiration of
same. Should NEHI be unable to commence drilling activities within the
specified time, the Knollenbergs shall have a right of first refusal to
personally provide funding for such activity and to acquire some or all of
NEHI's interest in said leases or to enter into a form of joint venture with
NEHI for the development of these leases, as the case may be. NEHI shall provide
the Knollenbergs with notice of any such inability within seven (7) days of the
applicable expiration date.
12. Return of Tangible Assets. Jack Chance, George Sutherland, Feroze
Variava, and Steve McLoughlin shall each promptly return to the Knollenbergs
certain tangible items as the Knollenbergs have provided to each of them,
specifically, certain motor vehicles and cellular phones, upon the execution of
this Agreement.
13. Office Space. ERIN and NEHI shall promptly, upon the execution of
this Agreement, move to opposite sides of the office they currently share, and
NEHI shall promptly seek a separate lease or sublease for non-shared office
space.
14. Further Assurances by Parties. The Parties shall deliver or cause
to be delivered upon the execution of this Agreement, and at such other times
and places as shall be reasonably agreed on, such additional instruments as may
reasonably be requested by any Party for the purpose of carrying out this
Agreement, including specifically the implementation of the terms set forth in
Section 6(c) attached hereto.
15. Effect on Existing Documents. The Parties agree that this
Agreement shall in no way effect, alter, supersede or modify the following
documents:
(a) NEHI and Rotary Steerable Tools (U.S.A.), L.P., dated November 5,
1997;
(b) NEHI and Horse Energy, L.P., dated November 1, 1997; and
(c) NEHI and Erin Oil Exploration, Inc., dated December 18, 1997.
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<PAGE>
16. Execution and Counterparts. This agreement may be executed in two
or more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same Agreement.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
18. Entire Agreement. This Agreement constitutes all of the promises,
agreements, conditions, understandings, warranties and representations between
the Parties hereto with respect to the transactions contemplated hereby and
supersedes all prior agreements, arrangements and understandings between the
Parties hereto, whether written or oral with respect to the transactions
contemplated hereby. No amendment, modification or alteration of the terms or
provisions of this Agreement shall be binding unless the same shall be in
writing and duly executed by the Parties hereto.
19. Severability. If any term or provisions of this Agreement is or
shall become illegal, invalid or unenforceable in any jurisdiction, all other
terms and provisions of this Agreement shall remain legal, valid and enforceable
in such jurisdiction and such illegal, invalid or enforceable provision shall be
legal, valid and enforceable in all other jurisdictions.
20. Successors and Assigns. The terms, conditions, and obligations of
this Agreement shall inure to the benefit of and be binding upon the Parties
hereto and their respective successors and permitted assigns thereof.
IN WITNESS WHEREOF, each of the Parties hereto has duly executed this
Agreement as of the date first above written.
------------------------------
Bill Knollenberg
------------------------------
Doris Knollenberg
------------------------------
Bradley Knollenberg
------------------------------
Jack Chance
------------------------------
George Sutherland
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<PAGE>
------------------------------
Feroze Variava
------------------------------
Steve McLoughlin
-7-
EXHIBIT 99.1
Petition of the Company
against Billy Knollenberg,
et al., Case No. 98-28403
<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.
EXHIBIT 99.2
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
misrepresentations 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
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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
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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
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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
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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
22
<PAGE>
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
23
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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
----------
EXHIBIT 99.3
INTERLOCUTORY AGREEMENT
1. The interlocutory agreement of certain disputed issues raised to date
in the litigation, and the conduct of the parties in making and
effectuating such agreement, shall not prejudice any party's rights in
the lawsuit on file, and all claims, causes of actions, defenses, and
arguments are expressly reserved.
2. A meeting of the directors and other interested persons will be called
by the President of the corporation for August 4 or 5, 1998. The
meeting will also serve as a simultaneous meeting of the corporation's
directors, and minutes shall be kept. The Chairman shall preside at the
meeting. Those attending will be George Sutherland, Jack Chance, Feroze
Variava, Steve McLoughlin, Bill Knollenberg, Doris Knollenberg, Brad
Knollenberg, Walter Cicack, as counsel for the Knollenberg Group,
Michael Lee, as counsel for NEHI, and Sheryl Jones Alu and/or Jeff
Koeppel, NEHI's regulatory compliance counsel. Bill Comiskey, of
Weinstein Spira, also will be permitted to attend, if his schedule
permits. Daniel Kirshbaum shall not be permitted to attend, nor shall
anyone else from his firm.
3. Although any matters related to the business of the corporation may be
raised for discussion, the only matter subject to decision at the
meeting shall be the calling of the annual meeting of the corporation's
shareholders, which meeting shall be scheduled and called by the
corporation for no sooner than forty-five (45) days nor later than
seventy-five (75) days following the meeting of the directors and other
interested persons. Bill Knollenberg, Doris Knollenberg, and Brad
Knollenberg shall not oppose or contest the scheduling and calling of
such meeting. Any person named herein may designate an item for
discussion (but not decision or vote, save for the calling of the
shareholders meeting) in writing, delivered to the corporation at its
offices with copies to Michael Lee and Walter Cicack, at least
forty-eight (48) hours before the meeting.
4. The meeting may be recorded and/or videotaped and costs shall be
divided equally and paid by NEHI and Bill Knollenberg.
5. No other meeting of the board of directors shall be held prior to the
shareholders meeting unless five (5) days prior written notice thereof
is provided to Michael Lee and Walter Cicack.
6. The Knollenberg Group will not oppose the engagement of Weinstein Spira
& Company and Bill Comiskey as the corporation's auditors. To the
extent he is reasonably able to do so, Bill Comiskey will issue a
written report and findings regarding each litigation party's stock
ownership in the corporation and provide a report on the same to the
corporation, with copies to Michael Lee and Walter Cicack, at least
fifteen (15) days prior to the shareholders meeting. Such report,
however, shall not involve deciding legal disputes regarding the
ownership of any party's stock.
<PAGE>
7. Until the shareholders meeting, NEHI agrees not to sell, transfer,
assign, or pledge any assets other than in the ordinary course of its
business.
8. Until the shareholders meeting, Bill Knollenberg, Doris Knollenberg,
Brad Knollenberg, Gulf Minerals Exploration, Erin Oil Exploration,
Inc., and Erin Oil (also a shareholder controlled by Bill Knollenberg)
agree not to sell, transfer, assign, or pledge, directly or indirectly,
any shares of NEHI stock and not to sell or offer for sal any
debenture, warrant, or other instrument which by its terms may bind
NEHI or which may be converted into NEHI stock or take any other action
which might create any liability on the part of NEHI.
9. Until the shareholders meeting, Horse Energy LP and Rotary Steerable
Tools USA, LP, Jack Chance, George Sutherland, Feroze Variava and Steve
McLoughlin, agree not to sell, transfer, assign, or pledge, directly or
indirectly, any shares they may own, if any, or NEHI stock.
10. The terms of this settlement agreement shall read into the court's
record and submitted for approval by the court. Michael Lee and Walter
Cicack agree to move for the Court's approval of such terms on behalf
of their respective clients.
11. The temporary injunction hearing scheduled for July 23, 1998, shall be
passed, without prejudice to any party's rights to seek other
injunctive relief, but all parties agree that no attempt will be made
to enjoin or prevent the meeting in number 2 hereinabove.
12. NEHI shall copy and deliver to Walter Cicack the items requested in
Walter Cicack's letter of June 19, 1998, subject to an objection as to
what may be inspected under Delaware law. Walter Cicack agrees to pay
the company's copying and delivery charges.
EXHIBIT 99.4
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
<PAGE>
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. The Company
desires to take advantage of the "safe harbor" provisions of the Act. The
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements.
History of Substantial Losses. The Company has experienced significant
losses during 1997 and continues to do so during 1998, primarily due to lack of
oil and natural gas production revenue and the write off of costs in connection
with its interests in the fields of agricultural water irrigation and computer
software. The Company is no longer involved in the latter two lines of business.
In addition, this continuing cycle of increased operating losses has raised
concerns regarding the Company's ability to continue as a going concern. In
order to attain profitability, the Company must drill successful oil and natural
gas wells and exploit its drilling technology. There can be no assurance that
the Company's business will generate sufficient cash flow in an amount
sufficient to enable the Company to make necessary expenditures.
Limited Operating History: No Assurance of Successful Implementation of
Business Strategy. The Company became active in the oil and natural gas industry
in 1996; thus, the Company has had limited experience exploring, developing and
producing oil and natural gas. The Company's future success depends upon its
ability to find or acquire additional oil and natural gas reserves that are
economically recoverable and exploit its present lease acreage. Except to the
extent the Company conducts successful exploration or development activities or
acquires properties containing Proved Reserves, the Proved Reserves of the
Company will generally decline as they are produced. The decline rate varies
depending upon reservoir characteristics and other factors. The Company's future
oil and natural gas reserves and production, and, therefore, cash flow and
income are highly dependent upon the company's level of success in exploiting
its current reserves and acquiring or finding additional reserves. There can be
no assurance that the Company's acquisition activities will result in
significant additional reserves or that the Company will have success drilling
productive wells at economic returns to replace its current and future
production. The Company believes that it now has adequate management depth,
however, the success of the Company is also dependent on its ability to finance
its activities. Presently, the Company has servere liquidity and cash flow
problems. There can be no assurance that the Company will be able to raise funds
to finance its activities, nor can there be any assurance that such financing
will be available on terms acceptable to the Company if at all.
<PAGE>
Should sufficient capital not be available, the Company may not be able to
continue to implement its strategy. In addition to the inherent risks in the oil
and gas business, the Company faces all the risks inherent in the growth of a
developing business. Therefore, the Company must be regarded as being at high
risk with all the unforeseen costs, expenses, problems and difficulties to which
a developing business is subject.
Risk of Oil and Gas Exploration, Development, Production and Marketing.
Oil and natural gas exploration, development, production and marketing have
inherent risks. There can be no assurance that the Company can find commercially
exploitable reserves of oil and gas, nor can there be any assurance that the
Company will be able to successfully develop commercial reserves, if discovered.
There can be no assurance that the Company will be able to maintain production,
nor successfully market production. The Company believes that its management
possesses the skills to address the inherent risks of the oil and gas industry.
Asset Acquisition Strategy and Technology Strategy. There can be no
assurance that the Company will be able to acquire lease acreage to drill on. A
failure therein could have a material adverse impact on the Company. The Company
believes that it can acquire adequate lease acreage.
Volatility of Oil and Natural Gas Prices. The Company's revenues,
profitability and the carrying value of its oil and natural gas properties are
substantially dependent upon prevailing prices of, and demand for, oil and
natural gas and the costs of acquiring, finding, developing and producing
reserves. The Company's ability to obtain additional capital on attractive terms
is also substantially dependent upon oil and natural gas prices. Historically,
the markets for oil and natural gas are subject to wide fluctuations in response
to: (i) relatively minor changes in the supply of, and demand for, oil and
natural gas; (ii) market uncertainty; and (iii) a variety of additional factors,
all of which are beyond the Company's control. These factors include domestic
and foreign political conditions, the price and availability of domestic and
imported oil and natural gas, the level of consumer and industrial demand,
weather, domestic and foreign government relations, the price and availability
of alternative fuels and overall economic conditions.
Uncertainty of Estimates of Reserves and Future Net Cash Flows. Reports
of the Company contain estimates of its oil and natural gas reserves, which have
been prepared by certain independent petroleum consultants. There are numerous
uncertainties inherent in estimating quantities of reserves of oil and natural
gas and in projecting future rates of production and the timing of development
expenditures, including many factors beyond the Company's control. The estimates
herein are based on various assumptions, including, for example, constant oil
and natural gas prices, operating expenses, capital expenditures and the
availability of funds, and, therefore, are inherently imprecise indications of
future net cash flows. Actual future production, cash flows, taxes operating
expenses, development expenditures and quantities of recoverable oil and natural
gas reserves may vary substantially from those assumed in the estimates. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth
2
<PAGE>
herein. Additionally, the Company's reserves may be subject to downward or
upward revision based upon actual production performance, results of future
development and exploration, prevailing oil and natural gas prices and other
factors, many of which are beyond the Company's control.
Product Development Risks of Rotary Steerable Tools (U.S.A.) L.P. and
Protection of Proprietary Technology. The Company owns a 20% interest in ROTARY
STEERABLE TOOLS (U.S.A.) L.P. ("RST"), a Texas limited partnership, which is the
licensee in the United States for certain rotary steerable drilling tool
technology. The Company cannot state that others will not independently develop
alternative proprietary methods for similar types of processes and apparatus or
that licenses may need to be obtained under the patent rights of others. RST has
not received notice that any of its apparatus or processes infringe any patent.
The patent pending for the Rotary Steerable Device (the "Device"), held by
Rotary Steerable Tools BVI, Inc. was filed originally pending under the Patent
Cooperation Treaty in the United Kingdom. Applications for individual patents
have been applied for in 23 countries, including the United States.
Costs of Compliance with Governmental Regulations. Governmental
regulations govern matters related to drilling. Governmental authorities have
the power, under various circumstances, to enforce compliance, and violators may
be subject to civil or criminal penalties. Private individuals may also have the
right to sue to enforce compliance with certain of the governmental
requirements. Operating permits are generally required by federal and state
agencies for drilling. The Company may from time to time become subject to
governmental enforcement proceedings and resulting fines or other sanctions and
may incur penalties. Such expenditures can be substantial and accordingly could
have a material adverse effect on the Company's financial condition.
Competition. The Company will compete with oil and natural gas
producers that have significantly larger financial resources than the Company.
No assurance can be given that the Company will be able to successfully compete
with such companies. The Company intends to use the Device on its own drill
sites.
Operating Risks and Possible Insufficiency of Insurance. The business
of the Company exposes it to various risks, including claims for damage to
property, injuries to persons, negligence and professional errors or omissions
in the planning or performing of its services and providing of its products,
which claims could be substantial. There can be no assurances that the Company
will be able to obtain adequate or required insurance coverage as its business
grows or, if obtainable, purchase it at reasonable rates. If the Company has
difficulty in obtaining or maintaining such coverage, it could be at a
competitive disadvantage with other companies, it may become exposed to
significant uninsured risks and losses, and/or may be unable to continue certain
of its operations. Accordingly, there can be no assurance that liabilities that
may be incurred by the Company will be covered by insurance or that the dollar
amount of such liabilities which may be covered by insurance will not exceed the
Company's policy limits. A partially or completely uninsured claim, if
successful, could have a material adverse effect on the Company's financial
condition and results of operations.
3
<PAGE>
Lack of Diversification: Risks of Investing in the Oil and Natural Gas
Industry. The Company operates primarily in the oil and natural gas industry.
The current plan of operation calls for expansion within, but does not
anticipate diversification beyond, this industry. The plan of operation,
therefore, subjects the Company to the economic fluctuations within this
industry and increases the risk associated with its operations. An investment in
any aspect of the oil and natural gas industry is speculative and historically
has involved a high degree of risk. The continued success of the Company will
depend on various factors over which the Company has little or no control.
Dependence on Management. Presently, the Company is dependent upon the
time, talent and experience of Messrs. Jack Chance, George Sutherland, Feroze
Variava and Steve McLoughlin. Although each has a significant equity ownership
in the Company, the Company does not presently have employment agreements. The
loss of the services of any of them, for any reason, could have a material
adverse effect on the Company. The Company does not currently maintain key-man
life insurance on any of its employees.
Future Need for Additional Personnel. As a result of a recent
restructuring of the management and operations of the Company, the Company has
obtained the services of new personnel to perform certain functions important to
the long-term development of the Company, including accounting, finance and
quality control functions. The Company may hire additional staff with the
special skills and education necessary for important Company functions.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000829324
<NAME> National Equities Holdings, Inc.
<MULTIPLIER> 1
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 63,476
<SECURITIES> 0
<RECEIVABLES> 8,069
<ALLOWANCES> 720
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<CURRENT-ASSETS> 72,265
<PP&E> 2,292,111
<DEPRECIATION> (57,576)
<TOTAL-ASSETS> 4,878,224
<CURRENT-LIABILITIES> 525,912
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0
0
<COMMON> 37,875
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<TOTAL-LIABILITY-AND-EQUITY> 4,878,224
<SALES> 9,670
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<CGS> 14,568
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<INCOME-PRETAX> (191,173)
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