UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] 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 1-10376
EDISTO RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-0883077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10375 Richmond Avenue, Suite 300
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713/782-0095
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _X_ No
At July 31, 1996, there were 13,843,816 shares of Common Stock
outstanding.
1
<PAGE>
EDISTO RESOURCES CORPORATION
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1996
INDEX
I. FINANCIAL INFORMATION
Item 1. Financial Statements of Edisto Resources Corporation:
Consolidated Balance Sheets...............................3-4
Consolidated Statements of Operations.......................5
Consolidated Statement of Stockholders' Equity..............6
Consolidated Statements of Cash Flows.......................7
Notes to the Consolidated Financial Statements..............8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................16
II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................25
Item 4. Submission of Matters to a Vote of Security Holders........25
Item 6. Exhibits and Reports on Form 8-K...........................25
Signatures .........................................................26
2
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
ASSETS
June 30, December 31,
1996 1995
Current assets:
Cash and cash equivalents .................. $ 43,319 $ 33,364
Restricted cash ............................ 333 333
Assets from risk management
activities .............................. 18,473 19,076
Accounts receivable:
Oil and gas production ................... 4,390 3,229
Gas marketing ............................ 91,563 71,041
Affiliates ............................... 55 --
Other .................................... 556 450
Storage inventory .......................... 3,068 5,437
Other current assets ...................... 3,136 3,114
--------- ---------
Total current assets .................... 164,893 136,044
Property and equipment:
Oil and gas properties using the
successful efforts method
of accounting ............................ 111,730 115,250
Other ...................................... 4,267 2,985
--------- ---------
115,997 118,235
Less - accumulated depreciation
and depletion ............................. (57,841) (51,418)
--------- ---------
58,156 66,817
Investments .................................. 248 242
Other assets ................................. 3,311 2,890
--------- ---------
$ 226,608 $ 205,993
========= =========
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1996 1995
Current liabilities:
Current maturities of long-term debt .......... $ 90 $ 1,796
Accounts payable:
Oil and gas production ...................... 8,883 9,609
Gas marketing ............................... 91,118 69,067
Accrued liabilities and other ................. 10,651 10,568
Liabilities from risk management activities ... 1,861 4,686
Deferred revenue .............................. 2,128 2,590
--------- ---------
Total current liabilities .................. 114,731 98,316
Long-term liabilities:
Long-term debt, net of current maturities ..... 11,325 17,635
Deferred revenue .............................. 743 691
Minority interest ............................. 9,039 9,092
Other noncurrent liabilities .................. 11,520 12,731
--------- ---------
32,627 40,149
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,896,030 issued
at June 30, 1996 and 12,977,960 at
December 31, 1995 ............................. 139 130
Additional paid-in capital .................... 70,460 61,528
Retained earnings ............................. 9,097 6,154
Foreign currency translation .................. (84) (95)
Treasury stock, at cost, 52,214 shares
at June 30, 1996 and 23,714 shares
at December 31, 1995 .......................... (362) (189)
--------- ---------
Total stockholders' equity .............. 79,250 67,528
--------- ---------
$ 226,608 $ 205,993
========= =========
See the accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production $ 22,033 $ 26,468 $ 10,513 $ 13,221
Gas marketing 349,591 176,041 166,214 96,226
Energy trading - (215) - 1,432
------------- ---------- ------------ ---------
371,624 202,294 176,727 110,879
------- ------- ------- -------
Costs and expenses:
Lease operating and production taxes 8,486 10,133 4,093 5,281
Gas purchases 344,085 175,121 164,992 95,699
Abandonment and exploration costs 921 1,115 879 134
Depreciation, depletion and amortization 8,337 11,371 3,972 5,898
Impairment of oil and gas properties 1,120 - 1,120 -
General and administrative 7,405 7,525 3,524 4,092
-------- --------- --------- ---------
370,354 205,265 178,580 111,104
------- ------- ------- -------
Operating income (loss) 1,270 (2,971) (1,853) (225)
---------- --------- -------- ---------
Other income (expense):
Interest income 1,250 1,956 555 1,029
Interest expense (716) (1,206) (328) (611)
Equity in earnings of affiliates 264 189 151 58
Gain (loss) on asset sales 1,167 (292) 352 (292)
Minority interest (379) (346) 203 3
Other, net 357 290 69 277
---------- ---------- ---------- ---------
1,943 591 1,002 464
--------- ---------- -------- ---------
Income (loss) before income taxes 3,213 (2,380) (851) 239
Preacquisition loss of subsidiary - 1,478 - 680
Income tax (provision) benefit (270) (522) (309) (214)
--------- --------- ------- ---------
Income (loss) from continuing operations 2,943 (1,424) (1,160) 705
--------- -------- ------- ---------
Discontinued operations:
Gain on sale of transmission operations - 2,557 - -
Gain on sale of manufacturing operations - 3,824 - -
------------ -------- ----------- ------------
Net income (loss) $ 2,943 $ 4,957 $ (1,160) $ 705
======== ======== ======== =========
Net income (loss) per common share:
Continuing operations $ .23 $ (.11) $ (.09) $ .05
Discontinued operations - .49 - -
----------- --------- ----------- ------------
Net income (loss) per common share $ .23 $ .38 $ (.09) $ .05
========= =========== ========== ===========
Weighted average common shares
outstanding 12,930 12,966 13,440 12,966
======== ======= ======== ======
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Number of Additional Foreign
Common Common Paid-In Retained Currency Treasury
Shares Stock Capital Earnings Translation Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholder's equity,
December 31, 1995 ........ 12,978 $ 130 $ 61,528 $ 6,154 $ (95) $ (189) $ 67,528
Net income ................. -- -- -- 2,943 -- -- 2,943
Repurchase of common
shares ..................... -- -- -- -- -- (173) (173)
Exercise of warrants ....... 918 9 8,932 -- -- 8,941
Foreign currency translation -- -- -- -- 11 -- 11
-------- -------- -------- -------- -------- -------- --------
Stockholder's equity,
June 30, 1996 ............ 13,896 $ 139 $ 70,460 $ 9,097 $ (84) $ (362) $ 79,250
======== ======== ======== ======== ======== ======== ========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
EDISTO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 2,943 $ 4,957
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization ................................... 8,337 7,830
Abandonments and exploration costs ......................................... 781 1,017
Impairment of oil and gas properties ....................................... 1,120 --
Gains on sales of assets ................................................... (1,167) (5,963)
Equity in income of affiliates ............................................. (241) (189)
Minority interest expense .................................................. 379 532
Other ...................................................................... 807 --
Changes in assets and liabilities:
Accounts receivable and inventory ........................................ (15,760) (11,780)
Accounts payable and accrued liabilities ................................. 14,780 (5,113)
Other .................................................................... 1,377 (1,421)
-------- --------
Net cash provided (used) by operating activities ...................... 13,356 (10,130)
-------- --------
Cash flows from investing activities:
Net proceeds from sales of assets, including
discontinued operations ...................................................... 3,874 72,018
Purchase of assets from risk management activities ........................... (2,647) (1,000)
Cash from acquisition of Convest ............................................. -- 716
Acquisition, exploration and development costs ............................... (4,721) (4,786)
Payments from(to) affiliates ................................................. 79 --
Purchase of other noncurrent assets .......................................... (820) (2,115)
-------- --------
Net cash provided (used) by investing activities ....................... (4,235) 64,833
-------- --------
Cash flows from financing activities:
Borrowings on long-term debt ................................................. -- 2,075
Payments on long-term debt and capital leases ................................ (7,945) (55,480)
Repurchase of common shares .................................................. (173) --
Stock issue on exercise of warrants .......................................... 8,941 --
Currency translation ......................................................... 11 289
-------- --------
Net cash provided (used) by financing activities ....................... 834 (53,116)
-------- --------
Net increase in cash and cash equivalents ...................................... 9,955 1,587
Cash and cash equivalents, including restricted cash,
at beginning of period ....................................................... 33,697 41,083
-------- --------
Cash and cash equivalents, including restricted cash,
at end of period ............................................................. $ 43,652 $ 42,670
======== ========
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest ..................................................................... $ 888 $ 46
======== ========
Taxes ........................................................................ $ 410 $ 614
======== ========
<FN>
See the accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization and Presentation
The accompanying consolidated financial statements include the accounts
of Edisto Resources Corporation, a Delaware corporation ( the "Company" or
"Edisto"), and its wholly and majority owned subsidiaries. The Company conducts
its consolidated activities through two lines of business: (i) natural gas
marketing, and (ii) oil and gas exploration and production which is conducted
through a 73% interest in Convest Energy Corporation ("Convest"), an independent
oil and gas exploration and production company listed on the American Stock
Exchange. Edisto owns 7,598,771 shares of Common Stock of Convest.
Prior to March 1996, the Company conducted its natural gas marketing
operations through four wholly owned subsidiaries. In March 1996, Edisto
consolidated its domestic gas marketing operations into one subsidiary, Energy
Source, Inc. ("Energy Source"). Accordingly, Vesta Natural Gas Company
("Vesta"), Vesta Energy Company ("Vesta Energy") and Energy Trading, Inc.
("Energy Trading"), subsidiaries of Edisto, have been merged into Energy Source.
In connection with the consolidation, Energy Source Canada, Inc. (formerly Enex
Gas, Ltd.), and Energy Source Power, Inc., also subsidiaries of Edisto, have
become wholly owned subsidiaries of Energy Source. Prior to acquiring its 72%
interest in Convest, the Company conducted its oil and gas activities through
Edisto Exploration & Production Company ("Edisto E&P"). See Note 3 "Acquisitions
- - Convest Energy Corporation."
References to "Energy Source" shall refer to the Company's wholly owned
gas marketing subsidiaries, without Convest. References to the "Company" or
"Edisto" shall refer to Edisto Resources Corporation and all of its consolidated
subsidiaries, including Convest. References to "Convest" shall refer to Convest
and the oil and gas activities conducted through Edisto E&P prior to acquiring
the 72% interest in Convest.
Edisto conducted gas transmission activities through subsidiaries of
Vesta from July 1990 through the first quarter of 1994 when Vesta executed a
definitive agreement to sell its intrastate natural gas pipeline. The sale was
subject to regulatory approval and was closed in January 1995. In March 1994,
Edisto's 80% subsidiary, Multiflex International, Inc., sold all the stock of
its operating subsidiaries to Oceaneering International, Inc., at which time the
corporate name was changed to MINT Holding Company ("MINT"). See Note 4
"Discontinued Operations" for a discussion of both the sale of the pipeline and
the MINT subsidiaries.
On October 26, 1992, Edisto and certain of its affiliates, including
Edisto E&P, filed voluntary petitions under Chapter 11 of the Bankruptcy Code in
the U. S. Bankruptcy Court for the District of Delaware. On June 29, 1993,
Edisto's plan of reorganization became effective, and Edisto substantially
consummated its restructuring. Edisto's financial statements have been presented
in conformity with the AICPA's Statement of Position 90-7, "Financial Reporting
By Entities In Reorganization Under the Bankruptcy Code", issued November 19,
1990 ("SOP 90-7"). In accordance with SOP 90-7, Edisto adopted fresh start
reporting as of June 30, 1993, which provides for the allocation of the
reorganization value of the entity among the reorganized Edisto's assets on the
basis of the purchase method of accounting.
The accompanying unaudited interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, the accompanying financial statements
include all adjustments, which are of a normal recurring nature, necessary for a
fair statement of the Company's financial position and operating results for the
interim periods presented. Interim results are not necessarily indicative of
those for a full year. These interim financial statements should be read in
conjunction with Edisto's audited financial statements, and footnotes thereto,
which are included in Edisto's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.
Summary of Significant Accounting Policies
Cash and Cash Equivalents. Cash equivalents consist of short-term highly
liquid investments which are readily convertible into cash and have original
maturities of three months or less. At June 30, 1996, the Company had cash and
cash equivalents, including restricted cash, of approximately $43.7 million.
Risk Management. "Assets from Risk Management Activities" are primarily
cash on deposit with established brokerage firms and counterparties. At June 30,
1996 and December 31, 1995, the Company had "Assets from Risk Management
Activities" of $18.5 million and $19.1 million, respectively. Periodically,
Edisto enters into financial instruments to hedge against the volatility of
natural gas and oil prices. The hedging objectives include assurance of stable
and known minimum cash flows and fixed favorable prices. The hedges are effected
through the sale and purchase of futures contracts and options on the New York
Mercantile Exchange and price swap agreements with major financial institutions
and companies. Gains or losses on the hedging agreements are deferred
8
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
and recognized in either oil and gas production revenues or gas marketing
revenues, as appropriate, when the hedged transaction occurs, and are recorded
as revenue or expense in the month for which the hedged transaction is
completed.
Net Income Per Share. Income (loss) per share is based on the weighted
average number of common shares outstanding. The effect of common share
equivalents was not dilutive for 1996 or 1995.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. Edisto's oil and gas revenues are derived
principally from uncollaterallized sales to customers in the oil and gas
industry. The concentration of credit risk in a single industry affects the
Company's overall exposure to credit risk because customers may be similarly
affected by changes in economic and other conditions. Edisto has not experienced
significant credit losses on receivables from such sales.
Reclassifications and Consolidation. Certain reclassifications have been
made to the 1995 consolidated financial statements to conform to the
presentation for 1996. All significant intercompany balances and transactions
have been eliminated.
Convest Energy Corporation
Restricted Cash. Restricted cash of $333,000 at Convest consisted of
certificates of deposit held by various financial institutions. The certificates
of deposit are held in escrow as collateral for letters of credit issued for (i)
lease payments on certain offshore platforms and (ii) estimated plugging and
abandonment costs expected to be incurred on certain onshore oil and gas
properties. Restricted cash is included in cash and cash equivalents in the
accompanying consolidated statements of cash flows.
Abandonment Reserve. Convest records its estimate of future abandonment
costs of offshore properties, and accrues such costs using a unit-of-production
method based upon estimated proved recoverable reserves. Abandonment costs are
estimated under current regulations using current costs and are reviewed
periodically and adjusted as new information becomes available. Abandonment
costs on onshore properties are typically nominal due to the salvage value of
well equipment, and accordingly, the Company does not provide for the
abandonment of its onshore properties.
Upon emerging from bankruptcy in July 1993, Edisto E&P entered into a
settlement with the United States Minerals Management Service relating to
estimated plugging and abandonment costs for 14 Gulf of Mexico OCS leases in
which Edisto E&P owned interests. Pursuant to this settlement, the operator of
the leases, Edisto E&P and other co-lessees are required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. As of
June 30, 1996 and December 31, 1995, Convest was subject to total Abandonment
Fund payments of $4.3 million.
As of June 30, 1996 and December 31, 1995, Convest had made payments
totaling $4.1 million and $3.7 million to the Abandonment Fund. These payments
were applied to the total long-term abandonment reserve of $10.6 million and
$10.2 million, as of June 30, 1996 and December 31, 1995, respectively,
resulting in a net long-term abandonment reserve of $6.5 million as of those
dates. The current portion of the abandonment reserve was $158,000 and $556,000
as of June 30, 1996 and December 31, 1995, respectively. The current portion of
the abandonment reserve is included in "Accrued Liabilities and Other" and the
noncurrent portion is included in "Other Noncurrent Liabilities" in the
consolidated financial statements.
Lease Operating Expenses. In connection with a 1992 sale of certain
future production volumes of oil to Enron Reserve Acquisition Corp., Convest
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of June 30, 1996 and
December 31, 1995, the current balance of this reserve was $1.8 million, and the
long-term balance was $3.8 million and $4.6 million, respectively, and are
included in "Accrued Liabilities and Other" and "Other Noncurrent Liabilities,"
in the consolidated financial statements.
Gas Balancing. Convest uses the entitlements method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at June
30, 1996 and December 31, 1995 were $2.1 million and $1.4 million, respectively,
and are included in "Accounts Receivable - Oil and Gas Production" and "Other
Assets" in the consolidated financial statements. Deferred revenue and payables
resulting from overtakes of gas production at June 30, 1996 and December 31,
1995 were $2.9 million and $2.7 million, respectively, and are included in
"Deferred Revenue" in the consolidated financial statements.
9
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
Property and Equipment. Convest follows the successful efforts method of
accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including dry holes, and productive leases
are capitalized and amortized by lease on a unit-of-production basis over the
life of the remaining proved reserves. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
the well is determined to be unsuccessful. Gas is converted to equivalent
barrels of oil on an energy content basis of six Mcf of gas per barrel of oil.
Oil and gas leasehold costs are capitalized when incurred. Unproved properties
are assessed periodically on a property-by-property basis and impairments in
value are charged to expense. Exploratory expenses, including geological and
geophysical expenses and annual delay rentals, are charged to expense as
incurred.
In the fourth quarter of 1995, Convest adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121") regarding accounting for the
impairment of long-lived assets. SFAS 121 requires Convest to recognize an
impairment loss for its proved oil and gas properties if the carrying value of
such properties (i.e., total capitalized costs less accumulated depreciation and
depletion) exceeds the undiscounted expected future cash flows attributable to
such properties. Under SFAS 121, Convest must regularly assess the need for an
impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then an impairment loss is recognized to the extent
that net capitalized costs exceed discounted expected future cash flows.
The Company's SFAS 121 evaluation for the second quarter of 1996 was
prepared using the Company's 1995 year end reserve estimates adjusted for
production and other known changes subsequent to the preparation of the
Company's year end reserve estimates. As a result of this evaluation, the
Company determined that an offshore property had less reserves than as
previously estimated. Accordingly, the Company recorded an impairment loss on
the property of approximately $1.1 million based on production problems
encountered during the second quarter of 1996.
Fixed assets are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the lesser of the term of the lease or the
estimated useful lives of the improvements.
10
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(2) Business Segment Information
The Company conducts its activities through two lines of business:
natural gas marketing and oil and gas exploration and production.
Consolidating Balance Sheet
June 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Edisto Gas
Marketing & Consolidating Edisto
Convest Corporate Adjustments (Consolidated)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ................. $ 2,625 $ 41,027 $ -- $ 43,652
Assets from risk management activities .... 3,212 15,261 18,473
Storage inventory ......................... -- 3,068 3,068
Accounts receivable ........................ 6,653 92,259 (2,348) 96,564
Other current assets ...................... 2,178 958 -- 3,136
--------- --------- --------- ---------
Total current assets .................... 14,668 152,573 (2,348) 164,893
--------- --------- --------- ---------
Property and Equipment, net ............... 56,590 1,566 -- 58,156
--------- --------- --------- ---------
Other assets .............................. 2,830 729 -- 3,559
--------- --------- --------- ---------
$ 74,088 $ 154,868 $ (2,348) $ 226,608
========= ========= ========= =========
LIABILITIES AND EQUITY:
Current portion of long-term debt ......... $ -- $ 90 $ -- $ 90
Accounts payable .......................... 8,883 93,466 (2,348) 100,001
Accrued liabilities and other ............. 6,460 6,319 -- 12,779
Liabilities from risk management activities -- 1,861 -- 1,861
--------- --------- --------- ---------
Total current liabilities ............... 15,343 101,736 (2,348) 114,731
--------- --------- --------- ---------
Long-term debt ............................ 11,278 47 -- 11,325
Minority interest ......................... -- 9,039 -- 9,039
Other noncurrent liabilities .............. 11,002 1,261 -- 12,263
--------- --------- --------- ---------
Total long-term liabilities ............. 22,280 10,347 -- 32,627
--------- --------- --------- ---------
Stockholder's equity ...................... 36,465 42,785 -- 79,250
--------- --------- --------- ---------
$ 74,088 $ 154,868 $ (2,348) $ 226,608
========= ========= ========= =========
</TABLE>
11
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(3) Acquisitions/Dispositions
Convest Energy Corporation
On June 26, 1995, Convest acquired all of the capital stock of Edisto's
oil and gas exploration and production subsidiary, Edisto E&P, in exchange for
6,185,400 newly issued shares of Convest Common Stock and $10,000 in cash. These
newly issued shares increased Edisto's interest in Convest from 31% to 72%. Upon
the closing of the transaction with Convest (the "Convest Transaction"), the
Convest Board of Directors was restructured so that affiliates of Edisto
constituted a majority of the Convest Board.
Since Edisto acquired control of Convest in the Convest Transaction, the
Convest Transaction has been accounted for as a reverse acquisition with Edisto
E&P being considered the acquiring entity. As a result, Edisto E&P's historical
financial statements became the historical financial statements of Convest and
the purchase price was allocated to the assets and liabilities of Convest based
on their respective fair values at the acquisition date.
Edisto accounted for the Convest Transaction using the purchase method
of accounting. Edisto's Consolidated Statements of Operations include the
results of operations for Convest as if Convest was consolidated beginning
January 1, 1995. However, the share of the Convest loss attributable to the
interest not owned by Edisto prior to the date of the Convest Transaction has
been added back as a preacquisition loss in the accompanying Consolidated
Statement of Operations for such period.
In March 1996, the Board of Directors of Edisto authorized the open
market purchase of up to 1,160,000 shares of Common Stock of Convest from time
to time. The timing and amounts of purchases will be governed by applicable SEC
rules and market conditions. The purpose of the stock purchase is to increase
Edisto's ownership percentage of Convest to over 80% to allow Edisto and Convest
to consolidate for federal income tax purposes. Edisto has existing net
operating loss carryforwards that may be beneficial to Convest if the two
companies are consolidated for tax purposes. On a primary basis, Edisto needs to
acquire an additional 875,000 shares to allow it to reach 80.5% of Convest's
outstanding shares. On a fully diluted basis, however, Edisto needs to acquire
approximately 1,160,000 shares to reach 80.5% because of outstanding stock
options. As of July 31, 1996, Edisto had purchased an additional 92,000 shares
of Convest Common Stock. Edisto presently owns 7,598,771 shares of Common Stock
of Convest which is 73% of the outstanding Common Stock.
Edisto Resources Corporation
In April 1996, Edisto sold its 11% interest in the Zarat Permit offshore
of Tunisia for $1.4 million in cash which resulted in a gain of approximately
$0.3 million. This was Edisto's last remaining international oil and gas
property.
(4) Discontinued Operations
Gas Transmission Operations/Sale of Pipeline. Edisto conducted its gas
transmission activities through wholly owned subsidiaries of Vesta during the
period from July 1990 through the execution of a definitive agreement in
February 1994 for the sale of Vesta's 218-mile Missouri intrastate natural gas
pipeline to UtiliCorp United Inc. The sale was subject to regulatory approval
and was closed in January 1995. Vesta continued to operate the pipeline from the
date of the definitive agreement until the close of the sale, and reported
assets, liabilities and results of operations as discontinued operations.
The gross sales price, including adjustments for net working capital and
capital expenditures, was $78.1 million in cash. $45.6 million of the proceeds
was used to pay outstanding debt, including interest and prepayment penalties,
to three lenders of Vesta. Edisto recorded a gain on the sale of the pipeline of
approximately $2.6 million in the first quarter of 1995.
Manufacturing Operations/Sale of MINT Subsidiaries. In March 1994, MINT
sold the stock of its operating subsidiaries to Oceaneering International, Inc.
for a purchase price of $12.6 million in cash. After the payment of
approximately $3.6 million to third party lenders to retire debt of MINT and
certain expenses associated with the sale, the net proceeds were approximately
$9 million. Under the terms of the indemnification in the purchase agreement,
MINT retained $9 million in cash for the one year indemnification period to
settle any possible indemnification claims after the sale. After the
indemnification period ended in March 1995 with no claims being made, MINT
repaid $8.8 million of its outstanding debt owed to Edisto. Approximately
$450,000 was left in MINT to cover potential remaining liabilities of MINT.
Edisto recognized a gain on the MINT sale of $3.8 million in March 1995.
12
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(5) Related Party Transactions
In the Convest Transaction, Edisto retained the tax benefits of the net
operating loss carryforwards ("NOLs") of Edisto E&P. The tax benefits include a
$3.3 million NOL usable for regular taxable income and a $3.6 million NOL usable
for alternative minimum taxable income. Convest determined that the use of these
NOLs would reduce Convest's federal income taxes for 1995 by approximately
$437,000. In addition, based on current projections of Convest's future taxable
income, Convest determined that the remaining NOLs of Edisto E&P would be a
valuable asset that could be utilized by Convest in the near-term future.
Accordingly, Edisto allowed Convest to utilize the NOLs of Edisto E&P in
consideration for the payment by Convest of $550,000.
During January 1995, Convest entered into a gas marketing arrangement
with Energy Source, whereby Energy Source markets a substantial portion of
Convest's gas production and assumes certain related administrative functions.
Effective November 1, 1995, Convest and Energy Source extended the term of the
agreement to December 31, 1996 with Convest having the right to renegotiate the
pricing structure at each six month interval of the extended term. In exchange
for its services, Energy Source receives a fee of no more than 2% of the spot
market price.
In July 1996, Edisto and Convest obtained a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 68% to Edisto, for a cost of $204,000, based on the
relative percentage that the total assets of Edisto bear to the total assets of
both Edisto and Convest.
Energy Source executes trades of futures contracts on the New York
Mercantile Exchange on behalf of Convest. These trades are made in connection
with Convest's risk management program to hedge against the volatility of
natural gas and crude oil prices. In this regard, Energy Source acts solely in a
ministerial capacity to purchase or sell the futures contracts at price levels
directed by Convest's management. Energy Source charges a commission of $.0025
per Mcf of gas or barrel of crude oil for each trade executed to cover Energy
Source's administrative costs to perform such service.
Effective July 1, 1995, the Company and Convest agreed to share certain
administrative costs to reduce the overall cost that would otherwise be incurred
by each of them in the absence of such an arrangement. Under the arrangement,
certain costs associated with shareholder communication services, costs of
computer hardware and software systems and certain administrative staff who
perform duties on behalf of both entities are shared by Edisto and Convest based
on their respective utilization. In addition, the salary of Michael Y. McGovern,
who serves as the Chairman and Chief Executive Officer of Edisto and Convest, is
shared equally between the two companies. Effective July 1, 1995, Convest began
reimbursing Edisto for one-half of Mr. McGovern's base salary ($275,000) plus
one-half of his payroll taxes and benefits (such as health, disability and life
insurance and 401(k) plan contributions).
Each of the affiliated party transactions described above was approved
by either a special committee of the Convest Board, which was composed of
outside directors with no affiliation to Edisto, or the unanimous consent of the
Convest Board.
(6) Long-Term Debt
Long-term debt consisted of the following (in thousands):
June 30, December 31,
1996 1995
Convest Credit Agreement ............ $ 11,275 $ 19,175
Energy Source Canada Credit Agreement -- 73
Capital leases ...................... 137 175
Other ............................... 3 8
-------- --------
Total debt .......................... 11,415 19,431
Less current maturities ............. (90) (1,796)
-------- --------
Total long-term debt ............ $ 11,325 $ 17,635
======== ========
13
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
Convest
Convest Energy Corporation Credit Agreement
On June 26, 1995, simultaneous with the closing of the Convest
Transaction, Convest and Edisto E&P entered into an Amended and Restated Secured
Revolving Credit Agreement (the "Convest Credit Agreement") with Bank One,
Texas, N.A. ("Bank One"), and Compass Bank-Houston, N.A. This facility, which
terminates January 1, 1998, combined the existing credit facilities of Convest
and Edisto E&P. Bank One serves as agent bank of the Convest Credit Agreement.
The facility is secured by a first lien on all of Convest's assets, including
the oil and gas properties and gas plant. Interest on borrowings under the
Convest Credit Agreement is computed at (i) the agent bank's prime lending rate
(the "Base Rate") plus 3/4% or (ii) the London Inter Bank Offering Rate
("LIBOR") plus 2-3/4%. In addition, Convest pays a commitment fee equal to 1/2%
on any commitment amount in excess of outstanding borrowings.
The borrowing base is redetermined semi-annually on or before May 31
and November 30 of each year by the lending banks based on engineering criteria
established by the banks. As of June 30, 1996 and December 31, 1995, the
borrowing base available under the facility was $24.5 million and $29.8 million,
respectively, and reduces by $1.0 million per month. During January 1996, Edisto
E&P sold its interest in an offshore oil and gas property, and accordingly, the
borrowing base was reduced by $1.8 million simultaneous with the sale of the
property. In May 1996, the Company was notified by the lending banks that the
new borrowing base under the facility was $25.5 million, which reduces by $1.0
million per month beginning June 1, 1996.
As of June 30, 1996 and December 31, 1995, outstanding indebtedness
under the Convest Credit Agreement was $11.3 million and $19.2 million,
respectively, with an additional $200,000 of letters of credit outstanding as of
those dates, primarily related to performance bonds issued for oil and gas
operations. At June 30, 1996, substantially all of the outstanding borrowings
were subject to LIBOR interest at an effective rate of approximately 8-1/2% per
annum.
Energy Source
Energy Source, Inc. Credit Facility
During 1994, Energy Source entered into a loan agreement with Bank One
establishing a revolving credit facility (the "Energy Source Credit Facility").
On March 31, 1996, the Energy Source Credit Facility was amended to, among other
things, increase the available borrowings from $8.0 million to $20.0 million and
extend the maturity date from June 1, 1996 to December 31, 1997. Borrowings
under the facility are limited to the lesser of (i) $20.0 million or (ii) the
sum of 80% of Energy Source's eligible accounts receivable plus certain liquid
collateral. Availability under the Energy Source Credit Facility may be used for
direct borrowings up to a sublimit of $5.0 million, or for the issuance of
letters of credit. Interest accrues at Bank One's Base Rate (8-1/4% at March 31,
1996) plus 1% and is payable monthly. At June 30, 1996, no amounts were
outstanding under this facility.
Borrowings under the Energy Source Credit Facility are secured by a
pledge of all of Energy Source's accounts receivable, inventory and intangibles
and cash collateral equal to 25% of the outstanding letters of credit and/or
advances under the facility. The facility requires Energy Source to maintain a
minimum current ratio of 1.2 to 1.0 and a tangible net worth of $20.0 million.
Loan covenants prohibit dividends and place limits on general and administrative
expenses and certain open unhedged positions on fixed price commitments for the
purchase and sale of natural gas and natural gas products.
Energy Source Canada Credit Agreement
In March 1995, Energy Source Canada entered into a revolving credit
facility with the National Bank of Canada (the "ESC Credit Facility").
Borrowings under the facility are limited to the lesser of (i) $2.5 million
(CDN), (ii) the sum of 75% of Energy Source Canada's eligible accounts
receivable plus 50% of certain inventories or (iii) 200% of the equity position
of Energy Source Canada. Availability under the ESC Credit Facility may be used
for direct borrowings or for the issuance of letters of credit up to a sublimit
of $1.25 million (CDN). Interest accrues at National Bank of Canada's Prime Rate
(6-1/4% at June 30, 1996) plus 1% and is payable monthly. At June 30, 1996, no
borrowings were outstanding and letters of credit for $2.1 million (CDN) had
been issued.
Borrowings under this facility are secured by certain accounts
receivable and inventories. The facility contains covenants which prohibit
dividends and place limits on certain expenditures and open positions for the
purchase and sale of natural gas and natural gas products.
14
<PAGE>
EDISTO RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1996 and 1995
(7) Commitments and Contingencies
Firm Transportation Agreements
Energy Source has entered into long-term firm transportation
agreements with certain pipelines in order to ensure available transportation
services for its marketing activities. Energy Source's most significant firm
transportation agreements at June 30, 1996 are as follows:
Pipeline Firm Volume Contracted Contract Expiration
Panhandle Eastern 70 MMcf/day October 1996
Missouri Pipeline 55 MMcf/day (1) October 1996
(1) Includes an option to increase contracted volumes by up to an additional
15 MMcf/day during the winter months.
In connection with the sale of the Company's Missouri intrastate
pipeline in January 1995, Vesta Energy and a UtiliCorp pipeline subsidiary
entered into a new firm transportation agreement. The new agreement provides for
firm transportation for 55 MMcf/day of natural gas for the period from January
1995 through October 1996, and a supplemental firm transportation agreement for
up to 15 MMcf/day of natural gas. As part of the pipeline sale, Edisto also
guaranteed to the UtiliCorp pipeline subsidiary the payment by Vesta Energy of
the demand charges under the new firm transportation agreement until October
1996. Energy Source (as the successor by merger to Vesta Energy) uses these firm
transportation agreements to service its existing gas sales contract with
Laclede Gas Company and other industrial customers in St. Louis, Missouri.
Litigation
MINT Lawsuit. In January 1993, Bruce W. McConkey and two other
shareholders of MINT, who collectively hold 20% of the outstanding MINT common
stock, filed a lawsuit against Edisto, MINT and certain of its former directors
who were former officers of Edisto. The lawsuit, among other things, (i) alleges
that MINT constructively terminated Mr. McConkey's employment as the President
and CEO of MINT, thereby breaching his employment agreement; (ii) alleges that
certain directors of MINT breached their fiduciary duties to the plaintiffs, in
their capacity as minority shareholders, and (iii) asserts derivative claims on
behalf of MINT against certain directors for alleged mismanagement of MINT. The
plaintiffs seek actual damages in an unspecified amount, punitive damages and
attorney's fees. The Company intends to vigorously defend its position. The
Company is unable to determine a range of possible loss relating to the McConkey
litigation because the plaintiffs seek actual damages in an unspecified amount
and the Company believes it has meritorious defenses available in this matter.
Based on developments of the case to date, the Company's management does not
believe the outcome of this lawsuit will have a material adverse effect on the
Company's consolidated financial position or results of operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
Financial Results
The Company had net income for the six months ended June 30, 1996 of
$2.9 million and a net loss for the three months ended June 30, 1996 of $1.2
million. Set forth below is a table summarizing the Company's income by business
segment and subsidiary (in thousands):
Six Months Three Months
Ended Ended
June 30, June 30,
1996 1996
Energy Source, Inc. .............
U.S ........................ $ 1,276 $(1,599)
Canada ..................... (618) 150
------- -------
658 (1,449)
Convest Energy Corporation ...... 1,317 (390)
Corporate and other ............. (705) (14)
------- -------
Total Operating Income (Loss) 1,270 (1,853)
Interest and other .............. 1,673 693
------- -------
NET INCOME (LOSS) ......... $ 2,943 $(1,160)
======= =======
Edisto Resources Corporation
Gas Sales Volume Increases and Gross Margin Decreases
In accordance with the Company's business plan, the Company's gas
marketing sales volumes have increased significantly in 1996. The volumes of gas
sold for the six and three months ended June 30, 1996 have increased 52% and
53%, respectively, from the comparable periods in 1995, as shown by the table
set forth below:
Six Months Six Months
Ended Ended Percentage
June 30, 1996 June 30, 1995 Increase
Volume sold (MMcf)
Domestic 130,057 90,674 43%
Canadian 35,433 17,914 98%
------- ------- ---
Total 165,490 108,588 52%
Three Months Three Months
Ended Ended Percentage
June 30, 1996 June 30, 1995 Increase
Volume sold (MMcf)
Domestic 62,983 48,585 30%
Canadian 22,140 6,999 216%
------ ------ ----
Total 85,123 55,584 53%
16
<PAGE>
The Company's gross margins, however, decreased from $.05 per Mcf in
the first quarter of 1996 to $.01 per Mcf in the second quarter of 1996. The
gross margins in the first quarter of 1996 were unusually large due to the
volatile market conditions caused by the harsh winter conditions in many areas
of the United States. In the second quarter of 1996, the Company increased its
total volumes sold from 80,367 Mmcf to 85,123 Mmcf, but with substantially lower
margins. The combination of lower demand for natural gas and the continued
volatility of natural gas prices in the second quarter contributed to the
downward pressure on gross margins which the Company expects to continue during
the third quarter of 1996.
The larger volumes also have required the Company to increase its
general and administrative expenses (for both additional personnel and new
computer systems) to support the Company's increased volumes in the second
quarter and anticipated volume growth in the coming year. The Company's
strategic plan is to seek increased volumes with higher margins in the Northeast
United States as gas utilities begin to deregulate. This plan has increased
overhead as additional staff has been hired for the Company's new Pittsburgh
sales office, but the results from the expansion will not materialize until
future periods. The increased overhead contributed to the lower operating
results during the second quarter.
The increased volumes were achieved during a period when the Company's
gas marketing operations were consolidated under Energy Source. This
consolidation, which included the physical consolidation of the Tulsa and
Houston offices, employee relocations and staff reorganizations, had a negative
impact on operations during the second quarter. Also, the second quarter
operating results include $420,000 of non-recurring expenses associated with the
consolidation.
The Company's second quarter results include the Company's equity
share in the earnings of its unconsolidated affiliate, CEG Energy Options, Inc.
("CEG"), a gas marketing company which operates in Saskatchewan, Canada. CEG
contributed $151,000 of income during the second quarter of 1996.
Exercise of Warrants
Warrants for the purchase of 918,070 shares of Edisto Common Stock
were exercised prior to the June 28, 1996 expiration date. These Warrants were
issued in connection with the consummation of Edisto's bankruptcy on June 29,
1993 and entitled the holder to purchase Edisto Common Stock for $9.74 per
share. After the exercise of the Warrants, Edisto has 13,843,816 outstanding
shares of Common Stock. Edisto received $8.9 million from the exercise of the
Warrants, which adds to its existing working capital.
Sale of Offshore Tunisian Property
In April 1996, Edisto sold its 11% interest in the Zarat Permit
offshore of Tunisia for $1.4 million which resulted in a gain of approximately
$0.3 million. This was Edisto's last remaining international oil and gas
property.
Engagement of Investment Banking Firm
On March 8, 1996, the Company announced that it has engaged the
investment banking firm of Petrie Parkman & Co., Inc. to identify and evaluate
strategic partners for the Company's gas marketing operations. At this time, the
Company is still in the process of identifying and evaluating potential
strategic partners and does not expect this process to be concluded until later
in 1996.
Edisto Common Stock Repurchase
In December 1995, the Company's Board of Directors authorized the
Company to repurchase up to 1,000,000 shares of Edisto's Common Stock. In the
first quarter of 1996, the Company repurchased 28,500 shares. At July 31, 1996,
the Company had 13,843,816 outstanding shares of Common Stock.
Convest Energy Corporation
Impairment of Oil and Gas Properties under SFAS No. 121
As a result of Convest's SFAS No. 121 evaluation of its proved oil and
gas properties for the second quarter of 1996, Convest determined that an
offshore property had less reserves than as previously estimated. Accordingly,
the Company recorded an impairment loss on the property of approximately $1.1
million based on production problems encountered during the second quarter of
1996. This impairment loss is described in more detail in Note 2 to the
Consolidated Financial Statements and "Results of Operations - Impairment of Oil
and Gas Properties Under SFAS No. 121" below.
Convest Drilling Operations
During 1996, Convest has invested a substantial portion of its cash
flow in drilling operations on its offshore properties. As described below under
"Liquidity and Capital Resources - Capital Expenditures," Convest's capital
expenditure budget for 1996 has increased from approximately $8.0 million to
$15.0 million. The most significant drilling operations during 1996 are
described below.
17
<PAGE>
Eugene Island 281. During early 1996, Convest participated in the
drilling of a development well in Block 281 of the Eugene Island area in the
Gulf of Mexico. The well was drilled from an existing platform structure at an
estimated completed well cost of approximately $1.0 million, net to Convest's
37% working interest, and tested at a daily rate of 1,276 barrels of oil and
1,699 Mcf of gas. The well was connected to existing production facilities on
the platform and is presently flowing at approximately 600 barrels of oil per
day and 300 Mcf of gas per day.
South Timbalier. During April 1996, Convest participated in the
drilling of a development well on Block 221 of the South Timbalier area of the
Gulf of Mexico. The well was drilled from an existing well bore to approximately
12,000 feet. The well encountered productive sands and was tested at a rate of
approximately 7,000 Mcf of gas per day. The cost of this well was approximately
$1.4 million, net to Convest's 40% interest. This well is producing at
approximately 6,500 Mcf of gas and 115 barrels of oil per day.
During June 1996, Convest participated in the drilling of an 8,000
foot exploratory test well on a prospect located across Block 144 and Block 109
of the South Timbalier area. During early July 1996, the well encountered no
commercial production and was subsequently abandoned. The cost of the well was
approximately $600,000, net to Convest's 50% working interest. Convest also has
written off the approximate $350,000 leasehold cost of this property.
During early July 1996, Convest participated in a second exploratory
well in the South Timbalier area. The 5,700 foot well was drilled on a prospect
situated across Block 109 and Block 102 and encountered no commercial
production. This well cost approximately $750,000, net to Convest's 50%
interest.
Grand Isle. During June 1996, Convest participated in the drilling of
an 8,000 foot development well on Block 82 of the Grand Isle area of the Gulf of
Mexico. The well encountered productive sands and test flowed at approximately
4,200 Mcf of gas per day. Total cost of the well was approximately $1.0 million,
net to Convest's 39% working interest.
Expense for Unsuccessful Wells
Since Convest follows the successful efforts method of accounting, the
drilling costs and the leasehold writeoffs of approximately $1.7 million for the
two unsuccessful South Timbalier exploratory wells will be expensed based on the
costs incurred during the second and third quarters of 1996. Although the two
wells were completed in July 1996, the leasehold writeoffs and a portion of the
exploration costs were incurred prior to that time. Therefore, $750,000 of this
cost was expensed during the second quarter of 1996 while approximately $950,000
of additional costs will be expensed during the third quarter of 1996.
Convest Property Sales
During January 1996, Convest sold its interest in Vermillion Block 284
for approximately $2.0 million. Convest also sold other nonstrategic oil and gas
properties during the first quarter for aggregate sales proceeds of
approximately $400,000. As a result of these sales, Convest recorded a gain of
approximately $820,000 during 1996.
Convest Common Stock Purchase
In March 1996, the Board of Directors of Edisto authorized the open
market purchase of up to 1,160,000 shares of Common Stock of Convest from time
to time. The timing and amounts of purchases will be governed by applicable SEC
rules and market conditions. The purpose of the stock purchase is to increase
Edisto's ownership percentage of Convest to over 80% to allow Edisto and Convest
to consolidate for federal income tax purposes. Edisto has existing net
operating loss carryforwards that may be beneficial to Convest if the two
companies are consolidated for tax purposes. In April 1996, Edisto purchased an
additional 92,000 shares of Convest Common Stock. Edisto presently owns
7,598,771 shares of Common Stock of Convest which is 73% of the outstanding
Common Stock.
18
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical
results of operations of the Company for the periods indicated. The financial
information set forth below should be reviewed in conjunction with the unaudited
consolidated financial statements of the Company and the notes thereto set forth
elsewhere in this Report.
<TABLE>
<CAPTION>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Edisto Gas Marketing:
Domestic:
Gross margin (in thousands) $ 5,408 $ 460 $ 689 $ 225
======= ========== ======== ========
Volume sold (MMcf) 130,057 90,674 62,983 48,585
Average prices ($ per Mcf):
Sales price $ 2.40 $ 1.75 $ 2.27 $ 1.85
Purchase price 2.36 1.74 2.26 1.84
-------- --------- ----------- --------
Gross margin $ .04 $ .01 $ .01 $ .01
========= ========== ========== =========
Canadian:
Gross margin (in thousands) $ 98 $ 460 $ 534 $ 302
========== ========= ======== ========
Volume sold (MMcf): 35,433 17,914 22,140 6,999
Average prices ($ per Mcf):
Sales price $ 1.07 $ .98 $ 1.05 $ .95
Purchase price 1.07 .95 1.03 .91
-------- --------- --------- ---------
Margin $ - $ .03 $ .02 $ .04
=========== ========= ========= =========
Total:
Gross margin (in thousands) $ 5,506 $ 920 $ 1,223 $ 527
======= ======== ======= ========
Volume sold (MMcf) 165,490 108,588 85,123 55,584
Average prices ($ per Mcf):
Sales price $ 2.12 $ 1.62 $ 1.95 $ .92
Purchase price 2.09 1.61 1.94 .91
-------- -------- -------- -------
Margin $ .03 $ .01 $ .01 $ .01
========= ========= ========= ========
Convest Energy Corporation:
Revenue (in thousands):
Oil $ 7,845 $ 10,011 $ 4,085 $ 5,168
Gas 13,484 15,834 6,085 7,734
Gas Plant 704 623 343 319
--------- --------- --------- --------
$ 22,033 $26,468 $10,513 $13,221
======= ====== ====== ======
Production:
Oil (Mbbls) 460 592 243 303
Gas (MMcf) 7,006 10,148 3,434 5,143
Average sales price:
Oil (per Bbl)) $ 17.05 $ 16.91 $ 16.81 $ 17.06
Gas (per Mcf) $ 1.92 $ 1.56 $ 1.77 $ 1.50
Average expenses per equivalent barrel:(1)
Production Costs $ 5.07 $ 4.23 $ 4.89 $ 4.30
Depreciation and depletion $ 4.83 $ 4.76 $ 4.60 $ 4.95
<FN>
(1) Natural gas is converted into oil equivalents at a rate of six Mcf of gas per barrel of oil.
</FN>
</TABLE>
19
<PAGE>
Results of Operations for the Six Months Ended June 30, 1996 compared to 1995
Energy Source, Inc.
Energy Source's operating income for the six months ended June 30, 1996
was $0.7 million. Gross margin was $5.5 million compared to $0.9 million in
1995. Volumes sold increased 52% over 1995.
The domestic gross margin of $.04 per Mcf for the six months ended June
30, 1996 was a substantial improvement over the gross margin of $.01 per Mcf
over the corresponding period in 1995, but the improvement was due to Energy
Source's strong performance in the first quarter of 1996. Energy Source's first
quarter performance was caused by the volatile market conditions experienced
because of the harsh winter conditions in many areas of the United States and
Energy Source's strong supply positions. The improvement in the first six months
of 1996 over the corresponding period of 1995 also was due to the termination of
any further expense in 1996 under the price protection provision of a gas sales
agreement with Laclede Gas Company for 55 MMcf of gas per day. In 1995, the
Company incurred $3.5 million of expense for the price protection requirement
under this agreement, $1.2 million of which was incurred in the first six months
of 1995. There is no expense under this contract provision for 1996.
The Canadian gross margin per Mcf was breakeven for the six months ended
June 30, 1996 which is a decrease of $.03 per Mcf compared to the same period in
1995. This decrease was caused by a market anomaly during the first quarter of
1996 in the correlation between the prices used for the Company's purchase and
sales transactions and the NYMEX prices used to hedge these transactions.
This correlation anomaly was caused by the unexpectedly high demand during the
winter months.
Convest Energy Corporation
Oil and gas revenue decreased by approximately $4.5 million or 17%
between the six month periods ended June 30, 1996 and 1995. The average price
Convest received for its oil and gas sales increased by 1% and 23%,
respectively, between the corresponding periods. Oil and gas production
decreased by 22% and 31%, respectively. The decrease in production volumes was
due primarily to the sale of producing oil and gas properties coupled with the
steep production decline associated with Convest's offshore Gulf of Mexico
properties. The effects of these production declines was partially offset by the
additional drilling on Convest's South Timbalier Block 144 property completed in
late 1995 and the addition of the Sensor properties purchased in mid 1995. As
previously stated, Convest's offshore properties are subject to inherent steep
production declines. In order to minimize the future effects of such declines,
Convest must replace its reserves through its exploratory and development
drilling and acquisition activities.
Convest uses a combination of futures contracts traded on the NYMEX and
price swaps with major financial institutions to hedge against the volatility of
natural gas and oil prices. Gains and losses recognized upon settlement of
Convest's hedge positions are deferred and recognized as oil and gas sales
revenue in the month of the underlying physical production being hedged. As a
result of Convest's hedging activities, Convest recorded hedging losses of
approximately $4.5 million for the six month period ended June 30, 1996, and
hedging income of approximately $400,000 for the corresponding period of 1995.
Such amounts were recorded as oil and gas sales revenue in the accompanying
statements of operations, and accordingly, such amounts are reflected in the per
unit price Convest received for its oil and gas sales.
The hedges affecting 1996 were implemented early in the fourth quarter
of 1995 when oil and gas prices were substantially lower. These hedges were made
as a defensive measure to assure stable cash flows in 1996. The past harsh
winter, however, drove prices up substantially which caused the hedging losses
in 1996.
Production expenses decreased by approximately $1.4 million or 14%
between the corresponding periods. The decrease in production expenses is
primarily due to a decrease in workover activity during the six months ended
June 30, 1996, and the sale of producing oil and gas properties during 1995 and
early 1996. The decline in production expenses was offset by the incremental
operating expenses associated with the Sensor properties. Production expenses
per barrel of oil equivalent ("BOE") was $5.07 and $4.23 for the six months
ended June 30, 1996 and 1995, respectively. The increase in production expense
per BOE is caused by the decreased offshore production without a corresponding
decrease in production expense.
Abandonment and exploration costs increased by $423,000 between the
corresponding periods. Convest accrues its estimated cost of abandonment of its
offshore properties. Based upon a review of the reserve for abandonment, it was
determined that Convest had substantially provided for its future abandonment
liability, and accordingly, no additional accrual was provided for 1996.
During the second quarter of 1996, Convest expensed approximately
$750,000 of exploration costs and leasehold writeoffs associated with two
unsuccessful South Timbalier exploratory wells based on costs incurred at the
end of the period. Convest will expense approximately $950,000 of additional
costs during the third quarter of 1996 related to these wells.
Depreciation, depletion and amortization ("DD&A") on oil and gas
properties decreased by approximately $3.0 million or 28% between the
corresponding periods. The decrease in DD&A was due primarily to the production
declines discussed above. DD&A per BOE was $4.83 for the six month period ended
June 30, 1996, compared to $4.76 for the corresponding period of 1995.
20
<PAGE>
In mid-January 1996, Convest completed the sale of an offshore oil and
gas property for sale proceeds of approximately $2.0 million, which resulted in
a gain of approximately $620,000. In addition, Convest sold several other
nonstrategic oil and gas properties during 1996 for aggregate sale proceeds of
approximately $400,000, which resulted in a gain of approximately $200,000.
Prior to 1995, Convest provided an impairment reserve for proved oil and
gas properties to the extent that total capitalized costs less accumulated
depreciation and depletion, exceed undiscounted future net revenues attributable
to proved oil and gas reserves on an overall basis. During March 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires
Convest to provide an impairment reserve for proved oil and gas properties to
the extent that total capitalized costs, less accumulated depreciation and
depletion, exceed undiscounted expected future cash flows attributable to proved
oil and gas reserves on a property-by-property basis. Convest adopted the
provisions of SFAS No. 121 during the fourth quarter of 1995.
Convest regularly assesses the need for an impairment of its oil and gas
properties. Convest's SFAS No. 121 evaluation for the second quarter of 1996 was
prepared using the Convest's 1995 year end reserve estimates adjusted for
production and other known changes subsequent to the preparation of Convest's
year end reserve estimates. As a result of this evaluation, Convest determined
that an offshore property had less reserves than as previously estimated.
Accordingly, Convest recorded an impairment loss on the property of
approximately $1.1 million based on production problems encountered during the
second quarter of 1996.
Other Consolidated Income and Expenses
General and administrative expense decreased by $0.1 million for the six
months ended June 30, 1996 compared to the same period in 1995. The general and
administrative expenses in 1996 include $658,000 of non-recurring expenses
associated with the consolidation of the gas marketing subsidiaries.
Interest expense decreased by approximately 41% primarily due to the
repayment of a short-term promissory note issued upon Convest's purchase of the
oil and gas assets of an affiliate. The short-term promissory note was repaid
simultaneous with the closing of the Convest Transaction. In addition, Convest
repaid a portion of its outstanding borrowings under its long-term credit
facility during 1996.
The preacquisition loss of subsidiary is the loss attributable to the
shares of Convest not owned by the Company prior to the effective date of the
Convest Transaction on June 26, 1995.
Edisto recognized gains on sales of assets of $1.2 million for the six
months ended June 30, 1996 compared to a loss of $0.3 million for the same
period in 1995. The gain reported is attributable to the $0.3 million gain on
the sale of Edisto's Tunisian property and the sale of certain oil and gas
properties of Convest.
Results of Operations for the Three Months Ended June 30, 1996 compared to 1995
Energy Source, Inc.
Energy Source experienced an operating loss of $1.4 million for the
three months ended June 30, 1996 compared to an operating loss of $0.9 million
for the same period in 1995. Gross margin during this period was $1.2 million
compared to $0.5 million during the same period in 1995. The combination of
lower demand for natural gas and the continued volatility of natural gas prices
in the second quarter contributed to the downward pressure on gross margins
which the Company expects to continue in the third quarter of 1996. Volumes sold
increased 53% over 1995. These larger volumes have required the Company to
increase its general and administrative expenses (for both additional personnel
and new computer systems) to support the increased volumes in the second quarter
and anticipated volume growth in the coming year. The operating loss for the
three months ended June 30, 1996 includes $420,000 in non-recurring general and
administrative expenses related to the consolidation of the gas marketing
subsidiaries.
The domestic gross margin of $.01 per Mcf for the second quarter of 1996
was the same as the gross margin for the corresponding period in 1995. The gross
margin for the second quarter of 1996 did not have any expenses related to the
price protection requirement in the gas sales agreement with Laclede Gas Company
whereas the corresponding period in 1995 had $0.3 million of expense for this
contract provision.
The Canadian gross margin decreased to $.02 per Mcf for the second
quarter of 1996 from $.04 per Mcf for the second quarter of 1995.
Convest Energy
Oil and gas revenue decreased by approximately $2.7 million or 21%
between the three month periods ended June 30, 1996 and 1995. The average price
Convest received for its oil and gas sales decreased by 1% while the price
received for natural gas sales
21
<PAGE>
increased by 18%. As previously discussed, the primary reason for the decrease
in oil and gas sales volumes was due to the sale of several properties during
1995 and 1996 coupled with the steep production declines on Convest's offshore
properties.
As previously stated, Convest uses futures contracts and swap agreements
to hedge its oil and gas production thereby assuring stable cash flow. As a
result of the sharp increase in oil and gas prices during the past winter,
Convest has experienced losses associated with the contracts. For the three
months ended June 30, 1996, Convest has recorded hedging losses of approximately
$2.3 million compared to hedging losses of $200,000 for the corresponding period
of 1995. As previously stated, Convest records gains and losses realized on its
hedging activities as oil and gas sales revenue, accordingly, such amounts are
reflected in the per unit price Convest received for its oil and gas sales.
Production expenses decreased by approximately $1.0 million or 20%
between the three months ended June 30, 1996 and 1995. The decrease in
production expenses was primarily due to the aforementioned decrease in workover
expense. Production expenses per BOE were $4.89 and $4.30 between the
corresponding periods.
Abandonment and exploration costs increased by $745,000 between the
corresponding periods. Convest accrues its estimated cost of abandonment of its
offshore properties. Based upon a review of the reserve for abandonment, it was
determined that Convest had substantially provided for its future abandonment
liability.
During the second quarter of 1996, Convest expensed approximately
$750,000 of exploration costs and leasehold writeoffs associated with two
unsuccessful South Timbalier exploratory wells based on costs incurred at the
end of the period. Convest will expense approximately $950,000 of additional
costs during the third quarter of 1996 related to these wells.
Depreciation, Depletion and Amortization ("DD&A") on oil and gas
properties decreased by approximately $2.0 million or 35% between the
corresponding periods. As previously stated, the decrease in DD&A was directly
related to the previously mentioned production declines.
Convest's SFAS No. 121 evaluation for the second quarter of 1996 was
prepared using the Company's 1995 year end reserve estimates adjusted for
production and other known changes subsequent to the preparation of the
Company's year end reserve estimates. As a result of this evaluation, Convest
determined that an offshore property had less reserves than as previously
estimated. Accordingly, the Company recorded an impairment loss on the property
of approximately $1.1 million based on production problems encountered during
the second quarter of 1996.
Other Consolidated Income and Expenses
Interest expense decreased by approximately 46% primarily due to the
repayment of a short-term promissory note issued upon Convest's purchase of the
oil and gas assets of an affiliate. The short-term promissory note was repaid
simultaneous with the closing of the Convest Transaction. In addition, Convest
repaid a portion of its outstanding borrowings under its long-term credit
facility during 1996.
During the second quarter of 1996, Edisto consummated the sale of its
Tunisian properties for a gain of $0.3 million.
CAPITAL RESOURCES AND LIQUIDITY
Credit Facilities and Long-Term Debt
Energy Source, Inc.
Energy Source, Inc. During 1994, Energy Source entered into a loan
agreement with Bank One establishing a revolving credit facility (the "Energy
Source Credit Facility"). On March 31, 1996, the Energy Source Credit Facility
was amended to, among other things, increase the available borrowings from $8.0
million to $20.0 million and extend the maturity date from June 1, 1996 to
December 31, 1997. Borrowings under the facility are limited to the lesser of
(i) $20.0 million or (ii) the sum of 80% of Energy Source's eligible accounts
receivable plus certain liquid collateral. Availability under the Energy Source
Credit Facility may be used for direct borrowings up to a sublimit of $5.0
million, or for the issuance of letters of credit. Interest accrues at Bank
One's Base Rate (8-1/4% at June 30, 1996) plus 1% and is payable monthly. At
June 30, 1996, no amounts were outstanding under this facility.
Borrowings under the Energy Source Credit Facility are secured by a
pledge of all of Energy Source's accounts receivable, inventory and intangibles
and cash collateral equal to 25% of the outstanding letters of credit and/or
advances under the facility. The facility requires the maintenance of a minimum
current ratio of 1.2 to 1.0 and a tangible net worth of $20.0 million. Loan
covenants prohibit dividends and place limits on general and administrative
expenses and certain open unhedged positions on fixed price commitments for the
purchase and sale of natural gas and natural gas products.
Energy Source Canada. In March 1995, Energy Source Canada entered into a
revolving credit facility with the National Bank of Canada (the "ESC Credit
Facility"). Borrowings under the facility are limited to the lesser of (i) $2.5
million (CDN), (ii) the sum of 75% of Energy Source Canada's eligible accounts
receivable plus 50% of certain inventories or (iii) 200% of the equity position
of
22
<PAGE>
Energy Source Canada. Availability under the ESC Credit Facility may be used for
direct borrowings or for the issuance of letters of credit up to a sublimit of
$1.25 million (CDN). Interest accrues at National Bank of Canada's Prime Rate
(6-1/4% at June 30, 1996) plus 1% and is payable monthly. At June 30, 1996, no
borrowings were outstanding and letters of credit for $2.1 million (CDN) had
been issued.
Borrowings under this facility are secured by certain accounts
receivable and inventories. The facility contains covenants which prohibit
dividends and place limits on certain expenditures and open positions for the
purchase and sale of natural gas and natural gas products.
Convest Energy Corporation
On June 26, 1995, simultaneous with the closing of the Convest
Transaction, Convest and Edisto E&P entered into an Amended and Restated Secured
Revolving Credit Agreement (the "Convest Credit Agreement") with Bank One,
Texas, N.A. ("Bank One"), and Compass Bank-Houston, N.A. This facility, which
terminates January 1, 1998, combines the existing credit facilities of Convest
and Edisto E&P. Bank One serves as agent bank of the Convest Credit Agreement.
The facility is secured by a first lien on all of Convest's assets, including
the oil and gas properties and gas plant. Interest on borrowings under the
Convest Credit Agreement is computed at (i) the agent bank's prime lending rate
(the "Base Rate") plus 3/4% or (ii) the London Inter Bank Offering Rate
("LIBOR") plus 2-3/4%. In addition, Convest and Edisto E&P pay a commitment fee
equal to 1/2% on any commitment amount in excess of outstanding borrowings.
The borrowing base is redetermined semi-annually on or before May 31 and
November 30 of each year by the lending banks based on engineering criteria
established by the banks. As of June 30, 1996 and December 31, 1995, the
borrowing base available under the Convest Credit Agreement was $24.5 million
and $29.8 million, respectively, and reduces by $1.0 million per month. In May
1996, Convest was notified by the lending banks that the new borrowing base
under the facility was $25.5 million, which reduces by $1.0 million per month
beginning June 1, 1996.
As of June 30, 1996 and December 31, 1995, outstanding indebtedness
under the Convest Credit Agreement was $11.3 million and $19.2 million,
respectively, with an additional $200,000 letters of credit outstanding as of
those dates, primarily related to performance bonds issued for oil and gas
operations. At June 30, 1996, substantially all of the outstanding borrowings
were subject to LIBOR interest at an effective rate of approximately 8-1/2% per
annum.
Convest Capital Expenditures
Convest has devoted a substantial portion of its available cash flow to
drilling opportunities on its offshore properties and the reduction of its
outstanding borrowings under its long-term credit facility. In addition to the
drilling activity discussed, the Company has been notified by the operators of
several of its offshore properties of their intentions to propose additional
exploratory and development drilling activity during the remainder of 1996.
Therefore, Convest has increased its original capital expenditure budget from
approximately $8.0 million to approximately $15.0 million.
If Convest does not participate in a drilling operation proposed on one
of its properties, under the terms of the pertinent Joint Operating Agreement,
Convest could be subject to a substantial penalty being imposed on its interest
in a specific well. Accordingly, management plans to carefully evaluate all
proposed projects which represent a substantial draw on corporate resources or
which reduce near term liquidity. In addition, Convest continues to evaluate
possible acquisition and divestiture opportunities in an effort to upgrade
Convest's reserve base, primarily in geographic areas where Convest possesses
operating expertise and where the property profiles have a longer reserve life.
It is anticipated that Convest's 1996 exploratory and development
drilling operations will be funded with cash flow from Convest's oil and gas
properties. However, significant changes in oil and gas prices or significant
revisions in the reserve volumes securing the Company's long-term credit
facility could require management to dedicate all or a substantial portion of
the Company's cash flow to meet working capital needs and debt maturities,
thereby precluding Convest from participating in proposed drilling
opportunities.
Working Capital
At June 30, 1996, Edisto had cash and cash equivalents including
restricted cash of $43.7 million and Assets from Risk Management Activities of
$18.5 million which are primarily cash on deposit with brokerage houses and
counterparties. When combined with future cash from operations and the
flexibility provided by the various credit facilities, management believes its
cash resources will be sufficient to execute its business plan, satisfy its
liabilities and maintain current operations.
During the six months ended June 30, 1996, the Company's cash inflows
totalled approximately $26.3 million. This cash inflow resulted primarily from
(i) operations, (ii) proceeds from the sale of certain assets and (iii) the
exercise of warrants issued in connection with Edisto's bankruptcy in June 29,
1993.
23
<PAGE>
The Company's cash outflows totalled approximately $16.3 million for the
six months ended June 30, 1996. This net cash outflow resulted primarily from
(i) repayment of debt of $8.0 million, (ii) development and acquisition
expenditures of $4.7 million, (iii) the purchase of assets from risk management
activities of $2.6 million, (iv) repurchase of common shares of Edisto of $0.2
million, and (v) the purchase of other noncurrent assets of $0.8 million.
During the six months ended June 30, 1995, Edisto's cash inflows
totalled approximately $74.8 million. This net cash inflow resulted primarily
from proceeds from the sale of the Missouri pipeline of $71.8 million and
included borrowings of $2.0 million.
Edisto's cash outflows totalled approximately $73.2 million for the six
months ended June 30, 1995. This net cash outflow resulted primarily from (i)
repayment of debt of $55.5 million, (ii) cash used by operations of $10.1
million, (iii) development and acquisition expenditures of $4.8 million and (iv)
the purchase of natural gas hedging contracts of $0.4 million. Edisto funded
these cash outflows through available cash and sales of assets.
24
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The section entitled "Litigation" in Note 7 "Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on June 4,
1996 (the "Meeting"). The purposes of the Meeting were to (i) elect a board of
five directors and (ii) to ratify the selection of Arthur Andersen, LLP as the
independent public accountants of the Company for 1996. A total of 12,206,081
shares, or 94% of the outstanding shares, of Edisto's common stock were voted in
person or by proxy at the Meeting.
Results of voting on the election of directors are as follows:
Shares
Director Nominee Shares For Withheld
Timothy J. Andrews 12,188,830 17,251
John G. Graham 12,188,828 17,253
Vernon T. Jones, Sr. 12,188,805 17,276
Michael Y. McGovern 12,188,535 17,546
Leonard B. Rosenberg 12,188,242 17,839
The following votes were cast with respect to the ratification of Arthur
Andersen, LLP as the Company's independent public accountants for 1996.
Shares For Shares Against Shares Abstaining
12,179,548 11,522 15,011
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.1 - Amended and Restated Loan Agreement dated as of
March 31, 1996 between Energy Source, Inc. and
Bank One, Texas, N.A.
(b) Reports on Form 8-K.
None.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EDISTO RESOURCES CORPORATION
By: /s/ Michael Y. McGovern
Michael Y. McGovern
Chairman of the Board and
Chief Executive Officer
By: /s/ Jerry L. McNeill
Jerry L. McNeill
Controller and
Chief Accounting Officer
Dated: August 13, 1996
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 43,652
<SECURITIES> 0
<RECEIVABLES> 96,564
<ALLOWANCES> 0
<INVENTORY> 3,068
<CURRENT-ASSETS> 164,893
<PP&E> 115,997
<DEPRECIATION> 57,841
<TOTAL-ASSETS> 226,608
<CURRENT-LIABILITIES> 114,731
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 79,111
<TOTAL-LIABILITY-AND-EQUITY> 226,608
<SALES> 371,624
<TOTAL-REVENUES> 371,624
<CGS> 344,085
<TOTAL-COSTS> 370,354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,250
<INCOME-PRETAX> 3,213
<INCOME-TAX> 270
<INCOME-CONTINUING> 2,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,943
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
EXHIBIT 10.1
AMENDED AND RESTATED
LOAN AGREEMENT
BY AND BETWEEN
ENERGY SOURCE, INC.
("Borrower")
and
BANK ONE, TEXAS, N.A.
("Lender")
Dated as of the 31st day of March, 1996
1
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
TABLE OF CONTENTS
CAPTION PAGE
Section 1. General Terms................................................ 1
1.1 Indebtedness........................................... 1
1.2 Certain Definitions; Use of Defined Terms;
Accounting Terms; Singular or Plural................... 1
1.3 Credit Facility........................................ 9
1.4 Repayment Schedule..................................... 14
1.5 Prepayment/............................................ 14
1.6 Authorized Officer..................................... 15
Section 2. Representations and Warranties............................... 15
2.1 Corporate Existence.................................... 15
2.2 Corporate Authority.................................... 15
2.3 Financial Condition.................................... 15
2.4 Investments, Loans, Advances and Guarantees............ 15
2.5 Liabilities and Litigation............................. 16
2.6 Titles and Encumbrances................................ 16
2.7 No Default............................................. 16
2.8 Subsidiaries........................................... 16
2.9 Taxes.................................................. 17
2.10 Compliance............................................. 17
2.11 Pension Reform Act..................................... 17
2.12 Environmental Laws..................................... 17
2.13 Margin Securities...................................... 18
2.14 Patents, etc........................................... 18
2.15 Full Disclosure........................................ 19
2.16 Credit Agreements...................................... 19
2.17 Investment Company Act................................. 19
2.18 Public Utility Holding Company Act..................... 19
Section 3. Affirmative Covenants........................................ 19
3.1 Reporting Requirements................................. 19
3.2 Taxes and Other Liens.................................. 22
3.3 Maintenance............................................ 22
3.4 Further Assurances..................................... 22
3.5 Performance of Obligations............................. 22
3.6 Reimbursement of Costs and Expenses.................... 23
3.7 Insurance.............................................. 23
3.8 Certificate of Compliance.............................. 24
3.9 Litigation............................................. 24
3.10 Security............................................... 24
3.11 Borrowing Base......................................... 25
3.12 Payments from Account Debtors.......................... 25
3.13 Audits................................................. 25
(i)
<PAGE>
CAPTION PAGE
Section 4. Negative Covenants............................................ 26
4.1 Guarantees and Debts.................................... 26
4.2 Dividends and Redemption................................ 27
4.3 Investments, Loans and Advances......................... 27
4.4 Mergers, etc............................................ 27
4.5 Encumbrances............................................ 27
4.6 Sale of Assets.......................................... 28
4.7 Financial Covenants..................................... 28
4.8 Basic Line of Business.................................. 29
4.9 Transactions with Affiliates............................ 29
4.10 General and Administrative Expenses..................... 30
4.11 Maximum Unhedged Exposure............................... 30
Section 5. Events of Default and Remedies................................ 30
5.1 Events of Default....................................... 30
5.2 Remedies................................................ 31
Section 6. Closing....................................................... 32
6.1 Counsel to Lender....................................... 32
6.2 Required Documents...................................... 32
6.3 Other Conditions........................................ 32
6.4 Material Adverse Changes................................ 32
7.1 Survival of Various Matters............................. 33
7.2 Notices................................................. 33
7.3 Successors and Assigns.................................. 34
7.4 Renewals................................................ 34
7.5 No Waiver............................................... 34
7.6 Governing Law........................................... 34
7.7 Non-Subordination....................................... 34
7.8 Exhibits................................................ 35
7.9 Payment on Non-Business Days............................ 35
7.10 Severability............................................ 35
7.11 Controlling Document.................................... 35
7.12 Savings Clause.......................................... 35
7.13 Investment.............................................. 36
7.14 Set Off................................................. 36
7.15 INDEMNIFICATION......................................... 36
7.16 Change of Ownership or Control.......................... 36
(ii)
<PAGE>
Exhibits
"1.3.1" Borrowing Application
"1.3.2" Form of Revolving Note
"2.3" Adverse Change
"2.5" Liabilities and Litigation
"2.8" Subsidiaries
"3.1(f)" Bid Week Report
"3.8" Certificate of Compliance
"3.11" Borrowing Base Report
(iv)
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT made and entered into as of
the 31st day of March, 1996, by and between Energy Source, Inc. a Texas
corporation, with offices and place of business at 10375 Richmond, Suite 300,
Houston, Texas 77042 (hereinafter called "Borrower") and Bank One, Texas, N.A.,
a national banking corporation, with offices at 910 Travis, Houston, Texas 77002
(hereinafter called "Lender").
AGREEMENT
WHEREAS, Borrower and Lender entered into that certain Loan Agreement
dated as of October 31, 1994 (the "1994 Loan Agreement") whereby Lender agreed
to lend to and/or issue letters of credit for the account of Borrower in an
aggregate of up to $8,000,000; and
WHEREAS, Borrower and several of its affiliates have undertaken a
corporate restructuring which included the merger of certain affiliates into
Borrower; and
WHEREAS, certain letters of credit issued under the 1994 Loan Agreement
are outstanding as of the date hereof; and
WHEREAS, Borrower and Lender wish to amend and restate the terms of the
1994 Loan Agreement by fully replacing the terms and conditions thereof with the
terms and conditions that follow.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, Borrower and Lender agree as follows:
Section 1. General Terms
1.1 Indebtedness. Upon the terms and conditions hereinafter set forth,
the Lender agrees to lend to and/or issue letters of credit for the account of
Borrower in an aggregate of up to $20,000,000.00, outstanding at any time as
evidenced by a Revolving Line of Credit to be extended to the Borrower by the
Lender in an amount up to $5,000,000.00, as more specifically described in
Section 1.3(a) hereof and the Letter of Credit Facility as more specifically
described in Section 1.3(b) hereof.
1.2 Certain Definitions; Use of Defined Terms; Accounting
Terms; Singular or Plural. (a) As used herein:
1
<PAGE>
(1) "Administrative Service Fees" means fees paid by the Borrower to
the Parent or to another Affiliate for administrative and management
services and support rendered to the Borrower by such entity or in
respect of an allocated portion of the Parent's or such Affiliate's
general and administrative expenses. All Administrative Service Fees
shall be considered general and administrative expenses of the Borrower
for the purposes of Section 4.10 of this Agreement.
(2) "Affiliate" shall mean any Person who is an "affiliate"
within the meaning of the regulations promulgated pursuant to the
Securities Act of 1933, as such regulations are amended from time to
time.
(3) "Agreement" shall mean this Amended and Restated Loan
Agreement as it may be amended or supplemented from time to time.
(4) "Authorized Officer" shall mean the chairman, president,
vice president - finance or treasurer of the Borrower or any other
individual designated as an Authorized Officer by the Board of
Directors of Borrower.
(5) "Base Rate" shall mean the variable rate of interest
announced by Lender from time to time as its base rate of interest and,
without notice to the Borrower or any other person, such rate of
interest shall change as and when changes in that base rate of interest
are announced. The Base Rate is set by Lender as a general reference
rate of interest, taking into account such factors as Lender may deem
appropriate, it being understood that many of the Lender's commercial
or other loans are priced in relation to such rate, that it is not
necessarily the lowest or best rate of interest actually charged on any
loan, and that Lender may make various commercial or other loans at
rates of interest having no relationship to the Base Rate. If at any
time the "Base Rate" of Lender is no longer available, the owner of the
Note ("Owner") will designate as "Base Rate" a different variable rate
of interest announced by a national banking association of Owner's
choice.
(6) "Bid Week" shall mean such period in each month during
which Borrower and other gas marketing companies submit bids for the
purchase and sale of natural gas or natural gas products.
2
<PAGE>
(7) "Borrowing Base" shall mean the sum of (i) eighty percent
(80%) of Eligible Accounts plus (ii) one hundred percent (100%) of
Liquid Collateral.
(8) "Borrowing Base Report" shall mean the report in the
form attached as Exhibit "3.11".
(9) "Business Day" shall mean any weekday on which
Lender is open for business.
(10) "Capital Assets" shall mean tangible property, real or
personal, with a useful life of greater than one (1) year.
(11) "Capital Expenditures" shall mean the cost paid for
the acquisition of Capital Assets.
(12) "Certificate of Compliance" shall mean the
certificate described in Section 3.8 of this Agreement.
(13) "Collateral" shall mean the property described in Section
3.10 of this Agreement, securing payment of the Indebtedness and
performance of the obligations of the Borrower under this Agreement and
the Security Instruments.
(14) "Commitment Fee" means a fee payable by Borrower to
Lender on the average daily unused portion of the Revolving Line of
Credit (use shall include the face amount of Credits and the principal
amount of Loans outstanding) from and including March, 1996 to the end
of the Credit Facility Commitment Period, at the rate of one half of
one percent (1/2%) per annum based on a 365 or 366 day year as
applicable and the actual number of days elapsed, payable on the first
day of each January, April, July, and October, commencing on July 1,
1996, and payable through the end of the Credit Facility Commitment
Period, with the final payment due on December 31, 1997.
(15) "Consolidated Group" shall mean the affiliate group
of corporations of which the Parent is the common parent and
of which Borrower is a member for U.S. federal income tax
purposes.
(16) "Credit" means any irrevocable standby letter of credit
issued by Lender for Borrower's account which shall have an expiry date
of not later than 5:00 p.m. Houston, Texas time on the LOC Expiration
Date, and shall be in the form acceptable to Lender.
3
<PAGE>
(17) "Credit Facility" shall mean the credit facility
described in Section 1.3, including the Revolving Line of Credit and
the Letter of Credit Facility.
(18) "Credit Facility Commitment Period" means the period from
the date of the satisfaction of all the closing conditions in this
Agreement (and upon such satisfaction, to be effective as of March 31,
1996) until the earlier to occur of (i) a Default, or (ii) December 31,
1997.
(19) "Credit Fees" means three-fourths of one percent (3/4%)
per annum on the face amount of each Credit; provided, however, that
the minimum fee per Credit shall not be less than $500.00; provided,
further, that all Credit Fees shall be due and payable at the time of
the issuance of each Credit and shall be fully earned and
non-refundable when paid.
(20) "Current Ratio" shall mean current assets divided by
current liabilities, excluding amounts owed pursuant to the Revolving
Line of Credit.
(21) "Debt" shall mean with respect to any Person all items of
indebtedness, obligation or liability, whether matured or unmatured,
liquidated or unliquidated, direct or contingent, joint or several,
including, but without limitation:
(a) All indebtedness guaranteed, directly or
indirectly, in any manner, or endorsed (other than for
collection or deposit in the ordinary course of business) or
discounted with recourse;
(b) All indebtedness in effect guaranteed, directly
or indirectly, through agreements, contingent or otherwise:
(1) to purchase such indebtedness; or (2) to purchase, sell or
lease (as lessee) property, products, materials or supplies or
to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such indebtedness or to
assure the owner of the indebtedness against loss; or (3) to
supply funds to or in any other manner invest in the debtor;
(c) All indebtedness secured by (or for which the
holder of such indebtedness has an existing right, contingent
or otherwise, to be secured by) any mortgage, deed of trust,
pledge, lien, security interest or other charge or encumbrance
upon property owned or acquired subject to such mortgage, deed
of trust, pledge, lien,
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security interest, charge or encumbrance, whether or not
the liabilities secured thereby have been assumed; and
(d) All indebtedness incurred as the lessee of goods
or services under leases that, in accordance with generally
accepted accounting principles, should be reflected on the
lessee's balance sheet.
(22) "Default" shall mean an event which with the giving of
notice, the lapse of time, or both, constitutes an Event of Default.
(23) "Defined Benefit Pension Plans," "Pension Benefit
Guaranty Corporation," "Reportable Event," and "Prohibited
Transaction" shall have the same respective meanings as are
given to those terms in ERISA.
(24) "Eligible Accounts" shall mean the aggregate of all of
Borrower's accounts receivable acceptable to Lender in Lender's sole
discretion, including (a) accounts which have not yet been invoiced but
which have been earned by delivery of natural gas and natural gas
products (category B on the Borrowing Base Report) and (b) accounts
which will arise upon delivery of natural gas and natural gas products
pursuant to firm or best efforts agreements which have been approved by
Lender (category C on the Borrowing Base Report), and, in all events,
satisfy the following conditions: (i) are due and payable within thirty
(30) days; (ii) have been outstanding less than sixty (60) days past
the original date of invoice; (iii) have arisen from Borrower's sale of
goods in which Borrower had sole ownership where such goods have been
shipped or delivered to the account debtor; (iv) represent complete
bona fide transactions which require no further act under any
circumstances on Borrower's part to make such accounts receivable
payable by the account debtor; (v) the goods the sale of which gave
rise to such accounts receivable were shipped or delivered to the
account debtor on an absolute sale basis and not on consignment, a sale
or return basis, or on the basis of any similar understanding; (vi) the
goods of sale giving rise to such accounts receivable were not, at the
time of sale thereof, subject to any lien, except the security interest
in favor of Lender created by the Security Instruments; (vii) are not
subject to any provision prohibiting assignment or requiring notice of
or consent to such assignment; (viii) are subject to a perfected, first
priority security interest in favor of Lender; (ix) are not subject to
setoff, counterclaim, defense, allowance, dispute or adjustment other
than normal discounts for prompt payment and the goods of sale which
gave rise to accounts receivable
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have not been returned, rejected, repossessed, lost or damaged; (x)
have arisen in the ordinary course of Borrower's business and for which
no notice of bankruptcy, insolvency or financial difficulty of the
account debtor shall have been received or be anticipated by Borrower
or Lender; (xi) are not evidenced by chattel paper or an instrument of
any kind; (xii) are owed by a person or persons that are citizens of or
organized under the laws of the United States or a political
subdivision thereof and are not owned by any person located outside of
the United States; (xiii) are owed by the United States or any
department, agency or instrumentality thereof if the provisions of the
Federal Assignment of Claims Act have been satisfied; and (xiv) are not
owed by any of Borrower's Affiliates, including without limitation,
Energy Source Canada, Ltd. No account receivable owed by an account
debtor to Borrower shall be included as an Eligible Account if more
than fifteen percent (15%) of the balances then outstanding on accounts
receivable owed by such account debtor and its affiliates to Borrower
have remained unpaid for more than sixty (60) days. All accounts
receivable owed by an account debtor and its affiliates to Borrower in
excess of fifteen percent (15%) of Borrower's Eligible Accounts (prior
to making this adjustment) shall not be included as Eligible Accounts.
(25) "ERISA" means the Employee Retirement Income Security Act
of 1974, as the same may be amended from time to time.
(26) "Event of Default" shall mean any event specified in
Section 5 of this Agreement provided that any requirement for the
giving of notice, the lapse of time, or the happening of any condition,
event or act has been satisfied.
(27) "Facility Fee" shall mean a fee in the amount of
$50,000 payable upon execution of this Agreement.
(28) "Financial Statements" shall mean the audit report,
annual financial statements, and interim statements described or
referred to in Section 3.1 of this Agreement.
(29) "Indebtedness" shall mean all sums owed or to be owed by
the Borrower or any Subsidiary to Lender whether principal or interest,
including principal and interest on the Note, reimbursement of advances
pursuant to any Credit, and reimbursement of monies advanced by Lender
pursuant to Section 3.6 hereof.
(30) "Investment" shall mean an equity investment
resulting in the ownership of fifty percent (50%) or less of
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the securities of a corporation having ordinary voting power for
election of directors or resulting in the ownership of any partnership
interest.
(31) "Inventory" shall mean natural gas and natural gas
products owned by Borrower at any time in question, whether in the
possession of the Borrower, a bailee or any other Person.
(32) "Letter of Credit Facility" shall mean the Letter of
Credit facility described in Section 1.3(b).
(33) "Letter of Credit Request" means, as applicable, either
(i) a standby letter of credit application in the form prescribed by
Lender, with all the blanks appropriately completed, and showing
Borrower as the account party, or (ii) if Borrower has executed and
delivered to Lender a Master Letter of Credit Agreement (whether prior
to, contemporaneously with, or after the date of this Agreement), a
standby letter of credit request or application in the form prescribed
in such Master Letter of Credit Agreement with all the blanks
appropriately completed and showing Borrower as the account party, as
any of the same may be amended or modified from time to time.
(34) "Liquid Collateral" means (i) all certificates of deposit
issued by the Lender, owned by Borrower and in which the Lender has a
first perfected security interest, and (ii) any collected funds,
securities and otherwise unencumbered liquid investments with
maturities of less than one year held in the Trust Account including
Lender's certificates of deposit, eurodollar deposits, or U.S.
Government obligations, commercial paper issued by a United States
issuer rated P-1 or better by Moody's Investor Service, Inc. or A-1 or
better by Standard & Poor's Corporation, transferred to or purchased
through Bank One, Texas Trust Department, in which Lender has a first
perfected security interest.
(35) "Loan" shall mean any advance pursuant to the
Revolving Line of Credit.
(36) "LOC Expiration Date" means April 5, 1998.
(37) "Notes" shall mean the promissory note or notes delivered
to Lender by Borrower pursuant to this Agreement, including, but not
limited to, the Revolving Note.
(38) "Obligation" means all present and future obligations,
duties, and liabilities, now or hereafter owed to Lender by Borrower,
arising from or pursuant to the Note, this
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Agreement or any of the Security Instruments, together with all
interest accruing thereon and costs, expenses, and attorneys' fees
incurred in the enforcement thereof or collection of amounts due
thereunder.
(39) "Parent" shall mean Edisto Resources Corporation, a
Delaware corporation, the immediate parent corporation of the Borrower,
and the common parent corporation of an affiliated group of
corporations within the meaning of Section 1504(c) of the Internal
Revenue Code of 1986, as amended, which includes Edisto Resources
Corporation and the Borrower for U.S. federal income tax purposes.
(40) "Permitted Encumbrances" shall mean the encumbrances
and liens allowed pursuant to Section 4.5.
(41) "Person" shall mean any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated
organization, joint venture, court, government or political subdivision
or agency thereof.
(42) "Pro Forma Financial Statements" shall mean the unaudited
pro forma balance sheet of Borrower as of December 31, 1995 which has
been delivered to Lender.
(43) "Required Report" shall mean the report of (i) accounts
receivable, unbilled accounts and nominated accounts of the Borrower
and its Subsidiaries (whether invoiced or to be invoiced) reported for
Borrower and each Subsidiary separately in appropriate columns headed
"Current," "1-30 Days Past Due," "31-60 Days Past Due," and "61 Days
Past Due," (ii) accounts payable by Borrower and the Subsidiaries
reported in appropriate columns indicating the past due status of said
accounts as of the same date on which accounts receivable are
determined, and (iii) report of the Liquid Collateral, and (iv) such
other information as may be reasonably requested by Lender.
(44) "Revolving Line of Credit" shall mean the line of
credit pursuant to Section 1.3(a).
(45) "Revolving Note" shall mean the promissory note of the
Borrower in the original principal amount of $20,000,000.00 issued
pursuant to Section 1.3 of this Agreement in the form attached as
Exhibit "1.3.2" to this Agreement.
(46) "Security Agreement" shall mean the security
agreement or agreements of the Borrower and its Subsidiaries
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granting Lender a security interest in the Collateral
described in Section 3.10.
(47) "Security Instruments" shall mean the instruments
described or referred to in Section 3.10 of this Agreement, including
but not limited to the Security Agreement and any and all instruments
now or hereafter executed in connection with or as security for the
Notes.
(48) "Subsidiary" shall mean any corporation of which more
than 50% of the securities having ordinary voting power for the
election of directors is now, or shall hereafter be, owned or
controlled, directly or indirectly, by the Borrower and/or by one or
more Subsidiaries.
(49) "Tangible Net Worth" shall mean the sum of (i) par value
of capital stock, (ii) capital in excess of par value, and (iii)
retained earnings less (a) all intangible assets such as good will and
patent rights and (b) all promissory notes or accounts receivable due
from Affiliates other than transactions arising in the ordinary course
of business on an arm's length basis.
(50) "Tax Sharing Payments" shall mean payments made to the
Parent by the Borrower in respect of the consolidated federal income
tax liability of the Consolidated Group, which, in respect of any
taxable year of the Consolidated Group, do not exceed what would have
been the separate, consolidated federal income tax liability of the
Borrower and its Subsidiaries, if any, in respect of such taxable year
had the Borrower and its Subsidiaries, if any, not been members of the
Consolidated Group.
(51) "Trust Account" shall mean the trust account at Lender's
trust department in which Borrower shall deposit the cash and liquid
securities to constitute the Liquid Collateral as such term is used
herein.
(b) All terms defined in this Agreement shall have the defined meanings
when used in any Note, certificate, report, or other document made or delivered
pursuant to this Agreement, unless specifically required otherwise. All
accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles.
(c) Terms in the singular shall include the plural and those in the
plural shall include the singular unless the context shall otherwise require.
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1.3 Credit Facility. The Lender, during the period from the date of
this Agreement until December 31, 1997, subject to the terms and conditions of
this Agreement, and subject to the condition that at the time of each borrowing
and/or Credit issuance hereunder no Default or Event of Default has occurred and
is then continuing to occur and that the representations and warranties given by
the Borrower in Section 2 as of the date of this Agreement shall remain true and
correct in all respects:
(a) (1) agrees to make loans to Borrower pursuant to
a Revolving Line of Credit up to but not in excess of an
aggregate principal amount outstanding at any time of
$5,000,000.00, provided the aggregate amount borrowed, when
combined with the amount of outstanding Credits, shall not
exceed the lesser of the Borrowing Base and $20,000,000.00,
upon receipt from Borrower on or before 10:00 a.m. Houston
time on the prior Business Day of written applications for
loans hereunder in the form attached as Exhibit "1.3.1". Each
advance shall be in an amount of not less than $100,000.
(2) Commencing on the first anniversary of the
effective date of this Agreement and at all times thereafter
during the Credit Facility Commitment Period, the principal
amount outstanding under the Revolving Line of Credit shall be
zero for at least thirty (30) consecutive days during the
immediately preceding twelve (12) months.
(b) (1) agrees to open one or more Credits during the
Credit Facility Commitment Period for Borrower's account for
periods not to exceed ninety-five (95) days. Borrower shall
submit to Lender a Letter of Credit Request with respect to
each Credit to be opened by Lender, in accordance with the
terms hereof and the other letter of credit agreements in
effect, if any. Lender at its option may accept telecopy
requests for the issuance of Credits, provided that such
acceptance shall not constitute a waiver of Lender's right to
require delivery of a written Letter of Credit Request in
connection with the issuance of a Credit. If Lender receives a
request for a Credit issuance under the Credit Facility
satisfying the conditions thereof prior to 10:00 a.m. Houston,
Texas time on a Business Day, Lender shall use its best
efforts to issue such Credit prior to 5:00 p.m. Houston, Texas
time on such day, otherwise Lender shall use its best efforts
to issue such Credit before 5:00 p.m. on the following
Business Day (provided that the other conditions of the Credit
Facility have been
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satisfied). No credit shall be issued after the expiration of
the Credit Facility Commitment Period. Borrower will be
required to pay to Lender a Credit Fee for the issuance of
each credit. Each Credit shall be on substantially the terms
as Borrower may request and such Letter of Credit Request must
be in the form and substance satisfactory to Lender. The sum
of the outstanding face amount of all Credits when added to
the sum of the outstanding Loans shall not exceed the lesser
of the Borrowing Base or $20,000,000.00. Each Credit issued
under the 1994 Loan Agreement and outstanding on the effective
date hereof shall be deemed to have been issued under this
Credit Facility.
(2) Additional Agreements Regarding Credits:
(i) Prior to the earlier to occur of the
occurrence of a Default or the end of the Credit
Facility Commitment Period, if Borrower does not
provide Lender with funds, in the amount and on the
date necessary to settle Lender's obligations under
any draft drawn or demand made under a Credit, Lender
shall make, and Borrower shall accept, a Loan under
the Credit Facility in the amount necessary to settle
Lender's obligations under any draft or demand made
under such Credit to the extent Borrower does not
otherwise provide such funds, such Loan to be made as
of the date of such settlement of the Credit.
Borrower's obligations and indebtedness to Lender
pursuant to such Loans shall be evidenced by the
Note, this Agreement, the Letter of Credit Requests
and the other letter of credit agreements relating to
the subject Credit. Anything herein to the contrary
notwithstanding, in no event shall any Loan be made
under the Credit Facility which, together with the
outstanding principal amount thereof, would exceed
the positive difference, if any, between (1) the
lesser of the Borrowing Base or $20,000,000.00 less
(2) the aggregate principal amount of the outstanding
Credits. Borrower shall pay any such excess to Lender
on demand.
(ii) At the earlier to occur of a Default or the
end of the Credit Facility Commitment Period, and if
a Credit is outstanding, Borrower agrees (1) to
deposit in the Trust Account an amount equal to the
aggregate undrawn amount of all
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Credits, and (2) to reimburse Lender by paying to
Lender in immediately available funds (which amounts
Lender may draw from such Trust Account) at Lender's
principal office in Houston, Texas, upon its demand,
the amount necessary to settle Lender's obligations
under any draft drawn or demand made under a Credit
issued by Lender which has not been paid by the
proceeds of Loans made pursuant to the immediately
preceding paragraph hereof. Borrower's obligations
and indebtedness to Lender pursuant to such draws or
demands made on any Credit shall be evidenced by this
Agreement, the Letter of Credit Requests and the
other letter of credit agreements relating to the
subject Credit. After the respective expiry dates of
the Credits and after the Obligations are paid in
full, Lender shall return the unused portion of such
cash collateral described above to Borrower.
(iii) Borrower agrees that (1) Lender shall
not be responsible or liable for, and Borrower's
obligation to reimburse Lender for any payment made
by Lender under such Credit shall not be affected by
(x) the validity, enforceability or genuineness of
any note or other document (or such endorsement) if
such is proven to be invalid, unenforceable,
fraudulent or forged, or (y) any dispute between
Borrower and the beneficiary under such Credit, and
(2) any action taken or omitted to be taken by Lender
in connection with such Credit, if taken in good
faith and with reasonable care, shall be binding upon
Borrower and shall not create any liability for
Lender to Borrower.
(iv) In case of any conflict between the terms
of any Letter of Credit Request or other letter of
credit agreement and the terms of this Agreement, the
terms of this Agreement shall control. Such
additional provisions of each Letter of Credit
Request and other letter of credit agreement shall be
cumulative and in addition to the terms of this
Agreement.
(v) Neither Lender nor any of Lender's
correspondents shall be responsible for: (1) the
failure of any draft to bear any reference or
adequate reference to any Credit, or the failure of
any Person to surrender or to take up any Credit or
the failure of any Person to note the amount of any
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instrument on any Credit, (2) errors, omissions,
interruptions, or delays in transmission or delivery
of any messages, in person, by mail, cable,
telegraph, wireless or otherwise whether or not they
may be in cipher, (3) any use which may be made of
any Credit or any acts or omissions of beneficiary
thereof in connection therewith, or (4) the validity,
sufficiency, or genuineness of documents, or any
endorsement(s) thereon, even if such document should
in fact prove to be in any and all respects invalid,
insufficient, fraudulent or forged. Lender shall not
be responsible for any act, error, neglect, default,
omission, insolvency, or failure in business of any
of its correspondents (including without limitation
negligent acts and omissions, but expressly excluding
gross negligence and willful misconduct), and the
happening of any one or more of the contingencies
referred to in this sentence or the preceding
sentence shall not affect, impair, or prevent the
vesting of any of Lender's rights or powers under the
Note, this Agreement and the Security Instruments.
Lender and/or any of its correspondents may receive,
accept, or pay as complying with the terms of any
Credit, any drafts or other documents, otherwise in
order, which may be signed by, or issued to, the
administrator or executor of, or the trustee in
bankruptcy of, or the receiver for any of the
property of, the party in whose name any Credit
provides that any drafts or any other documents
should be drawn or issued. It is hereby further
agreed that any action, inaction, or omission taken
or suffered by Lender, or by any of its
correspondents, under or in connection with any
Credit or any drafts or documents referenced therein,
if in good faith and in conformity with such foreign
or domestic laws and customs or other regulations as
Lender or any of Lender's correspondents may deem to
be applicable thereto, shall be binding upon Borrower
and shall not place Lender or any of Lender's
correspondents under any resulting liability to
Borrower.
(c) The Borrower's obligation to repay the Credit
Facility shall be evidenced by a promissory note of the
Borrower in substantially the form attached as Exhibit "1.3.2"
hereto, payable to the order of Lender. The Revolving Note
shall bear interest at a rate of one percent (1%) over the
Base Rate per annum not to exceed
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the maximum non-usurious interest rate permitted by applicable
law with the balance of principal plus accrued and unpaid
interest due and payable on or before December 31, 1997.
(d) Borrower may, at any time, upon giving written
notice to Lender, reduce the maximum amount of Loans and/or
Credits Borrower has the right to request hereunder. Effective
upon Lender's receipt of such notice and as of such date, the
maximum amount of Loans and/or Credits Borrower has a right to
obtain shall be so reduced and Borrower's obligation to pay
the Commitment Fee shall be calculated based upon the reduced
amount after the effective date of such notice.
1.4 Repayment Schedule. Borrower hereby agrees to pay, and
authorizes and directs Lender to collect:
(a) Credit Fees (at the time of the issuance of a Credit), the
Facility Fee upon execution of this Agreement, and the Commitment Fee
(on the first day of each January, April, July, and October, commencing
July 1, 1996, and on December 31, 1997), both payable by Borrower by
debit to Borrower's Operating Account No. 1884149806 at Lender;
(b) the amount of any drawing under a Credit not
otherwise reimbursed to Lender by advance under the Note on
the earlier of the LOC Expiration Date by Lender by debit to
Borrower's Operating Account No. 1884149806 at Lender or any
other of Borrower's accounts at Lender; and
(c) advances under the Note (on the maturity of the Note), and
accrued interest on the advances under the Note (monthly on the first
day of each month and on maturity of the Note); provided, that all
advances under the Note to reimburse Lender for draws under any Credit
shall be due and payable in full on the maturity of the Note; provided
further, that all outstanding principal, together with accrued and
unpaid interest, shall be due and payable in full on or before December
31, 1997, such amounts to be paid by debit to Borrower's Operating
Account No. 1884149806 at Lender or any other of Borrower's accounts at
Lender.
1.5 Prepayment/Mandatory Prepayment. The Borrower shall have the right
to prepay without premium at any time any amount owing on the Revolving Note.
Borrower shall prepay all principal amounts outstanding under the Revolving Note
from time to time in accordance with Section 1.3(a)(2) hereof.
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1.6 Authorized Officer. Lender is authorized to rely on the
instructions of the Authorized Officer as to all matters related to
this Agreement and the transactions contemplated hereby.
Section 2. Representations and Warranties
The Borrower represents and warrants to the Lender that:
2.1 Corporate Existence. The Borrower is a corporation duly organized,
legally existing and in good standing under the laws of the jurisdiction in
which it is incorporated and duly qualified as a foreign corporation in all
jurisdictions wherein the property owned or the business transacted by it makes
such qualification necessary, except where the failure to be so qualified could
have a material adverse effect on Borrower's basic line of business.
2.2 Corporate Authority. The Borrower is duly authorized and empowered
to create and issue the Note, and to execute and deliver this Agreement. The
Borrower and each of its Subsidiaries is duly authorized and empowered to
execute and deliver the Security Instruments to which it is a party, and all
other instruments referred to or mentioned herein to which Borrower or any of
its Subsidiaries is a party, and all corporate action requisite for the due
creation, issuance and delivery of the Note and the due execu tion and delivery
of this Agreement and the Security Instruments has been duly and effectively
taken. This Agreement, the Note, and the Security Instruments to which the
Borrower or any of its Subsidiaries is a party when executed and delivered will
be valid and binding obligations of the Borrower and its Subsidiaries
enforceable in accordance with their terms (subject to any applicable
bankruptcy, insolvency or other laws generally affecting the enforcement of
creditors' rights). This Agreement, the Note, and the Security Instruments do
not violate any provisions of the Borrower's or any of its Subsidiaries'
corporate charter or bylaws, or any contract, agreement, law or regulation to
which the Borrower or any of its Subsidiaries is subject, and the same do not
require the consent or approval of any regulatory authority or governmental body
of the United States or any state.
2.3 Financial Condition. The Pro Forma Financial Statement
which has been delivered to Lender fairly presents the pro forma
financial position of the Borrower and its Subsidiaries at such
date.
2.4 Investments, Loans, Advances and Guarantees. As of the
date hereof the Borrower and its Subsidiaries have not made
Investments in, loans or advances to or guarantees of the
obligations of any Person which exceed, in the aggregate, $100,000.
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2.5 Liabilities and Litigation. Except as set forth on Exhibit 2.5, as
of the date hereof the Borrower has no liabilities and no litigation, legal or
administrative proceedings, investigation or other action is pending or to the
Borrower's knowledge threatened against or affecting the Borrower or any
Subsidiary which is not fully covered by insurance subject to deductible not
greater than $50,000.00 or which may adversely affect the business or the assets
of the Borrower or any Subsidiary or the Borrower or any Subsidiary's ability to
carry on their business as now conducted, except for liabilities incurred in the
ordinary course of business. No unusual or unduly burdensome restriction,
restraint or hazard exists by contract, law, governmental regulation or
otherwise relative to the business or the assets of the Borrower or any
Subsidiary.
2.6 Titles and Encumbrances. The Borrower and its Subsid iaries have
good title to its properties and assets, free and clear of all mortgages, liens
and encumbrances, except those referred to in Section 4.5 hereof.
2.7 No Default. No Default, or Event of Default exists under this
Agreement and the Borrower and its Subsidiaries are not in default in any
respect under any contract, agreement or instrument to which Borrower or any of
its Subsidiaries is a party or by which Borrower or any of its Subsidiaries or
any of their property may be bound, and Borrower is not aware of any default
under any contract, agreement or instrument, which Default, Event of Default,
default or breach could have an adverse effect on the ability of the Borrower or
any of its Subsidiaries to perform each of their obligations under the Note,
this Agreement, or any of the Security Instruments to which they are a party or
on each of their ability to conduct their business as now conducted.
2.8 Subsidiaries. As of the date hereof, set forth in Exhibit "2.8"
hereof is a complete and accurate list of all the Subsidiaries of the Borrower,
showing as of the date hereof, (i) the nature of each Subsidiary's business,
(ii) the jurisdiction of each Subsidiary's organization, (iii) the number of
shares of each class of capital stock authorized and the number of such shares
outstanding, and (iv) the percentage of the outstanding shares of each such
class owned (directly or indirectly) by the Borrower. All of the outstanding
capital stock of all of the Subsidiaries has been validly issued, is fully paid
and non-assessable, and all shares of such capital stock as are owned by the
Borrower or one or more of the Subsidiaries are owned free and clear of all
mortgages, deeds of trust, pledges, liens, security interests and other charges
or encumbrances, except as disclosed in such Exhibit "2.8." Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction pursuant to
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which it was incorporated, and duly qualified as a foreign corporation in all
jurisdictions wherein the property owned or the business transacted by it makes
such qualification necessary. Each Subsidiary has all power and authority,
corporate or otherwise, to conduct its business and to own its properties.
2.9 Taxes. As of the date hereof the Borrower and its Subsidiaries have
filed all tax returns required to be filed (or extensions have been granted)
before delinquency, and all Federal and state income taxes that are due and
payable by Borrower and its Subsidiaries have been paid or otherwise satisfied
before delinquency.
2.10 Compliance. As of the date hereof the Borrower and its
Subsidiaries have complied with all valid and applicable statutes, rules and
regulations of each jurisdiction to which each may be subject.
2.11 Pension Reform Act. In the event the ERISA may be applicable to
any Defined Benefit Pension Plan of the Borrower or any of its Subsidiaries, no
fact exists, including but not limited to, any Reportable Event or Prohibited
Transaction which might constitute grounds for the termination of any such
Defined Benefit Pension Plan by the Pension Benefit Guaranty Corporation or for
the appointment by the appropriate United States district court of a trustee to
administer any such Defined Benefit Pension Plan.
2.12 Environmental Laws. To Borrower's knowledge, and except as would
not have a material adverse effect on the operations or financial condition of
Borrower or on Borrower's ability to perform and pay its obligations hereunder
and under the Security Instruments:
(a) Borrower and all of its properties, assets, and
operations are in compliance with all Environmental Laws (as
hereinafter defined).
(b) Borrower is not aware of, nor has Borrower received notice
of, any past, present, or future conditions, events, activities,
practices, or incidents which may interfere with or prevent the
compliance or continued compliance of Borrower with the Environmental
Laws.
(c) Borrower has not (i) permitted violation of any
Environmental Laws with respect to any Hazardous Substances (as
hereinafter defined), wastes or materials which exist on, about, or
within or are used, generated, stored, transported, disposed of on, or
released or (ii) permitted actions which would cause the incurrence of
response costs or costs of
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corrective action on the part of Borrower as defined by the
Environmental Laws.
(d) The use which Borrower makes and intends to make of its
properties and assets will not result in violation of any Environmental
Laws in the use, generation, storage, transportation, accumulation,
disposal, or release of any Hazardous Substance, wastes or materials
on, in, or from any such properties or assets.
(e) There is no action, suit, proceeding, investigation, or
inquiry before any court, administrative agency or other governmental
authority pending or, to the knowledge of Borrower, threatened against
Borrower relating in any way to any Environmental Law.
(f) Borrower (i) has no liability for remedial or corrective
action or response costs under any Environmental Law, (ii) has not
received any request for information by any governmental authority with
respect to the condition, use, or operation of any of its properties or
assets, and (iii) has not received any notice from any governmental
authority or other person with respect to any violation of or liability
under any Environmental Law.
(g) Borrower has obtained and complied with, and is in
compliance with, all terms and conditions of all permits, licenses and
other authorizations that may be required pursuant to Environmental
Laws for the occupation of the properties of the Borrower and the
operation of the business of the Borrower.
"Environmental Laws" means any and all federal, state and local
environmental laws, regulations, and ordinances applicable to Borrower or
Borrower's operations, including without limitation the Resource Conservation
and Recovery Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, the Superfund Amendment and
Reauthorization Act of 1986, as amended, the Federal Water Pollution Control Act
and the Oil Pollution Act. "Hazardous Substances" shall mean any item defined as
hazardous under the Environmental Laws.
2.13 Margin Securities. The Borrower and its Subsidiaries do
not own any "margin security" or "margin stock" as defined in
Regulations G, U or X of the Board of Governors of the Federal
Reserve System (12 C.F.R. Parts 207, 221 and 224, respectively).
2.14 Patents, etc. The Borrower and its Subsidiaries have all
patents, patent rights or licenses, trademarks, trademark rights,
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trade names, trade name rights, copyrights, permits and franchises which are
required in order for them to conduct their business as now conducted without
known conflict with the rights of others. Neither the Borrower nor any of its
Subsidiaries is aware of any fact or condition which might cause any of such
foregoing not to be renewed in due course.
2.15 Full Disclosure. Neither this Agreement nor any certificate or
written statement or any other factual data furnished by the Borrower or any of
its officers in writing in connection with the negotiation of this Agreement or
the transactions contemplated hereby contains any statement of a material fact
which is untrue in any respect or omits a material fact known to the Borrower to
be necessary to make the statements contained herein or therein, taken as a
whole, not misleading in any material respect. There is no fact known to the
Borrower which the Borrower has failed to disclose to Lender in writing which
could adversely affect the business, operations, assets, prospects or condition,
financial or otherwise, of the Borrower.
2.16 Credit Agreements. Borrower and its Subsidiaries have no
agreements in effect providing for or relating to extensions of credit in
respect of which Borrower or any of its Subsidiaries is or may become directly
or contingently obligated, and has not signed any security agreement that is
currently outstanding except as disclosed in writing to Lender contemporaneously
with the execution and delivery of this Agreement.
2.17 Investment Company Act. Borrower is not and no
Subsidiary is an "investment company" or a company "controlled" by
an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
2.18 Public Utility Holding Company Act. Borrower is not and no
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
Section 3. Affirmative Covenants
Until the Indebtedness of the Borrower to the Lender has been paid or
while the Lender has a commitment to the Borrower here under:
3.1 Reporting Requirements. The Borrower will promptly
furnish to the Lender from time to time the following information
regarding the business affairs and financial condition of the
Borrower and its Subsidiaries.
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(a) as soon as possible and in any event within five (5)
Business Days after obtaining knowledge of the occurrence of each
Default or Event of Default, the statement of an Authorized Officer
setting forth details of such Default or Event of Default and the
action which the Borrower proposes to take with respect thereto;
(b) as soon as available and in any event within one hundred
and twenty (120) days after the end of each fiscal year, the balance
sheet of the Borrower as at the end of such year and the statements of
income, shareholders' equity and cash flow of the Borrower for such
year, together with comparative figures for the preceding fiscal year,
if applicable, the statements certified, without qualification, by
Arthur Andersen & Co. or other independent certified public accountants
acceptable to the Lender;
(c) as soon as available, and in any event, within forty-five
(45) days after the last day of each month the balance sheet of the
Borrower, as of the end of each such month, and the consolidating
statements of income, shareholders' equity and cash flow of the
Borrower including Energy Source Canada, Ltd. for such month, certified
by an Authorized Officer;
(d) as soon as available, and in any event, within fifteen
(15) days following the last day of each month (the "Reporting Date"),
the Borrowing Base Report as of the Reporting Date, together with the
Required Report as of the Reporting Date, in the form and substance
satisfactory to Lender;
(e) as soon as available, and in any event within forty-five
(45) days following the end of each fiscal quarter, and within one
hundred and twenty (120) days after the end of each fiscal year, the
certificate described in Section 3.8 of this Agreement;
(f) on the first Business Day following each Bid Week, a
report in form substantially similar to the form of report attached
hereto as Exhibit 3.1(f) and reasonably acceptable to Lender.
(g) Upon Lender's request:
(1) a complete customer list for Borrower and each
of its Subsidiaries with addresses for each customer;
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(2) a list of current insurance policies,
coverages, and expiration dates for Borrower and each of
its Subsidiaries; and
(3) a copy of the management letter delivered to
the Borrower by the independent public accountants.
(h) in the event the Parent ceases to be a reporting company
under the Federal Securities laws, upon Lender's request:
(1) as soon as available and in any event within one
hundred and twenty (120) days after the end of each fiscal
year, the consolidated and consolidating balance sheets of the
Parent and its Subsidiaries as at the end of such year and the
consolidated and consolidating statements of income and
consolidated statements of shareholders' equity and cash flow
of the Parent and its Subsidiaries for such year, together, in
the case of consolidated statements with comparative figures
for the preceding fiscal year, the consolidated statements
certified, without qualification, by independent certified
public accountants acceptable to the Lender and the
consolidating statements certified by the president or chief
financial officer of the Parent;
(2) as soon as available, and in any event, within
forty-five (45) days after the last day of each fiscal quarter
not the end of a fiscal year, the consolidated and
consolidating balance sheet of the Parent and its
Subsidiaries, as of the end of each such quarter, and the
consolidated and consolidating statements of income,
shareholders' equity and cash flow of the Parent and its
Subsidiaries for such quarter, certified by the president or
chief financial officer of the Parent;
(i) such other information the Lender may reasonably request
from time to time at reasonable intervals under the then applicable
circumstances.
The Financial Statements and other reports shall fairly present the
financial position and results of operations of the Borrower and, if applicable,
the Parent and its Subsidiaries in accordance with generally accepted accounting
principles, consistently applied.
The Borrower grants to the Lender the right to send the Lender's own
representatives and/or employees during normal business hours to inspect, copy,
and/or audit the books of the
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Borrower, the reasonable cost of which shall be paid by Borrower.
3.2 Taxes and Other Liens. The Borrower will pay and cause each
Subsidiary to pay all taxes, assessments, governmental charges, claims for
labor, supplies, rent and other obligations which if unpaid, might become a lien
against the property of the Borrower or any Subsidiary provided the Borrower
shall have the right to contest the foregoing by appropriate proceedings
diligently pursued.
3.3 Maintenance. Borrower will maintain and cause each Subsidiary to
maintain its current basic operations without change in line of business, its
corporate existence, remain in or become a corporation in good standing in each
jurisdiction in which it is required to be qualified, maintain all patents,
trademarks, franchises and licenses necessary in its business, and comply in all
respects with all valid and applicable statutes, rules and regulations including
without limitation the Fair Labor Standard Act and all Environmental Laws, and
it will maintain or cause to be maintained its properties in good and workable
condition at all times. The Borrower will maintain a minimum ownership in each
Subsidiary at the same level as at the date of this Agreement as indicated on
Exhibit "2.8".
3.4 Further Assurances. Borrower will promptly, at Lender's request
cure and cause each Subsidiary to cure any defects in the execution and delivery
of this Agreement, the Note, the Security Instruments and any other instrument
or instruments referred to or mentioned herein. Borrower will promptly, and in
any event within ten (10) days of Lender's request, execute and cause each
Subsidiary to execute and deliver to Lender upon request all security
agreements, financing statements, certificates of title, deeds of trust,
mortgages or any other instrument required to accomplish covenants and
agreements of Borrower and its Subsidiaries under this Agreement and the
Security Instruments.
3.5 Performance of Obligations. Borrower will pay the Note according to
the reading, tenor and effect thereof and will do and perform every act and
discharge all of the obligations provided to be performed and discharged by it
under this Agreement, the Note, the Security Instruments and any and all of the
instruments referred to or mentioned herein to which it is a party at the time
or times and in the manner therein and herein specified subject to the other
provisions hereof. The Borrower will perform all obligations and cause each
Subsidiary to perform all obligations to be performed by it, pursuant to the
terms of each indenture, agreement, contract, and other instrument by which the
Borrower, such Subsidiary or their respective properties are bound.
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3.6 Reimbursement of Costs and Expenses. The Borrower will pay the
reasonable fees and expenses of counsel for the Lender in connection with this
Agreement and all transactions pursuant hereto. The Borrower will, upon request
by Lender, within ten (10) days from said request, reimburse the Lender for all
amounts expended, advanced or incurred by the Lender to satisfy any obligation
of the Borrower under this Agreement, or to protect the properties, assets or
business of the Borrower, including without limitation wages paid to insure
compliance with the Fair Labor Standards Act, amounts incurred to collect the
Note or to enforce the rights of the Lender under this Agreement or any other
instrument referred to or mentioned herein or executed or to be executed in
connection herewith, which amounts will include all court costs, attorneys'
fees, fees of auditors and accountants, and investigation expenses reasonably
incurred by the Lender in connection with any such matters, and any and all
amounts expended by Lender after the occurrence of a Default or an Event of
Default and during the continuation thereof as a result of the provisions of all
Environmental Laws, together with interest at the greater of four percent (4%)
over the Base Rate per annum or 10% per annum, not to exceed the maximum
non-usurious interest rate permitted by applicable law, on each such amount from
the date that the same is due and payable to the Lender until the date it is
repaid to the Lender. All amounts advanced in connection herewith shall be
secured by the Collateral more fully described in Section 3.10. Except for
expenses advanced by Lender after (i) occurrence of an Event of Default, (ii) to
maintain insurance or (iii) to protect and preserve the Collateral, Lender shall
provide Borrower not less than five (5) days prior notice of any advance
hereunder.
3.7 Insurance. The Borrower will maintain and cause each Subsidiary to
maintain with financially sound and reputable insurers, insurance with respect
to its properties and business against such liabilities, casualties, risks and
contingencies and in such types and amounts as is customary in the case of
corporations engaged in the same or similar businesses and similarly situated.
Not less than annually, either concurrently with delivery of the audited
financial statements or promptly after renewal of the applicable policy, or upon
the reasonable written request of Lender, the Borrower will furnish Lender a
summary of the insurance coverage of the Borrower and its Subsidiaries showing
compliance herewith and in form and substance reasonably satis factory to Lender
and if requested will furnish Lender copies of the applicable policies. Borrower
will cause any and all insurance policies, if any, insuring the Collateral, or
any part thereof, to name Lender as loss payee thereunder as its interest may
appear and contain a provision requiring at least thirty (30) days prior notice
of cancellation to Lender. As soon as possible, and in any event, within ten
(10) days, Borrower will notify Lender of the
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cancellation of any insurance coverage, whether or not Lender is a loss payee
under the affected policy.
3.8 Certificate of Compliance. Within forty-five (45) days after the
end of each quarter, and within one hundred and twenty (120) days after the end
of each fiscal year there shall be furnished to the Lender a certificate in the
form attached as Exhibit "3.8" signed by an authorized officer of the Borrower
(1) stating that a review of the activities of the Borrower and its Subsidiaries
during such month or as of the end of such quarter has been made under his
supervision with a view to determining whether the Borrower and its Subsidiaries
have kept, observed, performed and fulfilled all of its obligations under this
Agreement, the Note, and Security Instruments, (2) containing calculations to
verify compliance and/or non-compliance with financial covenants hereunder, and
(3) stating that to the best knowledge and belief of such officer of Borrower
the Borrower and its Subsidiaries have kept, observed, performed and fulfilled
each and every covenant and condition contained in the Note, this Agreement and
the Security Instruments and to the best knowledge and belief of such officer of
Borrower is not at the time in default in the observance, performance or
fulfillment of any such covenants and conditions or if the Borrower and its
Subsidiaries shall be in default, specifying any such default, the nature and
status thereof, and what action, if any, has been taken to remedy the default or
defaults.
3.9 Litigation. As soon as possible and in any event, within ten (10)
Business Days of a president or chief financial officer of Borrower or any
Subsidiary obtaining knowledge thereof, Borrower shall give written notice to
Lender of commencement of litigation (other than litigation being defended by an
insurance carrier without reservation as to coverage claiming amounts within
said coverage) in which the Borrower or any Subsidiary is reasonably expected to
have liability in excess of $100,000.00 and of all proceedings before any
governmental or regulatory agency affecting Borrower or any Subsidiary in which
an adverse decision is reasonably expected to involve amounts in excess of
$200,000.00.
3.10 Security. The Indebtedness and Obligations of the
Borrower and its Subsidiaries under this Agreement and the Security
Instruments shall be secured by the following:
(a) all Borrower's accounts, accounts receivable, documents,
instruments, chattel paper, and general intangibles, whether now owned
or hereafter acquired, and all products and proceeds thereof;
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<PAGE>
(b) all Borrower's Inventory whether now owned or
hereafter acquired, and all products and proceeds thereof;
(c) without limiting any of the foregoing, all of Borrower's
customer lists, books, records, business records, computer programs,
computer software, database information, computer tapes and discs,
contracts of insurance, letters of credit, advices of credit,
confirmations of letters of credit, acceptances, drafts, warehouse
receipts, guaranties, deposit accounts at or with Lender, warranties,
and indemnities, whether now owned or hereafter acquired;
(d) any of the following issued by or held in the possession
of Lender: any deposit, deposit account, money market account, cash
management account, demand deposit account, savings account, security,
certificate of deposit, cash, cash equivalent, or other sum at any time
credited by or due (including without limitation any funds on deposit)
from any depository or other person or entity to Borrower, certificated
and uncertificated securities, whether now owned or hereinafter
acquired, and all and any and all proceeds and products thereof;
(e) all funds and securities held in the Trust Account;
and
(f) all products and proceeds of (a) through (e) above.
3.11 Borrowing Base. The aggregate indebtedness pursuant to the
Revolving Line of Credit and the amount of outstanding Credits shall never
exceed the Borrowing Base. In accordance with Section 3.1(e), Borrower shall
provide the Lender a calculation of the Borrowing Base on the Borrowing Base
Report. In the event the aggregate unpaid principal balance of Loans plus the
outstanding Credits exceeds the Borrowing Base calculated as described above,
the Borrower will immediately, but in any event no later than the close of
business on the same Business Day, reduce the indebtedness under the Revolving
Line of Credit until the amount owed is less than the amount permitted pursuant
to the Borrowing Base.
3.12 Payments from Account Debtors. Borrower agrees to direct payments
from its account debtors into its operating account No. 1884149806 at Lender via
wire transfer or such other manner approved in writing by Lender.
3.13 Audits. On July 1, 1996 and at any other time during the Credit
Facility Commitment Period, Lender shall have the right to cause a designated
employee or agent (the "Auditor") to be present on Borrower's premises for the
purpose of auditing the accounts
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<PAGE>
receivable, general intangibles and systems, books and records of the Borrower
and Borrower and its officers and employees shall extend reasonable cooperation
commensurate with sound management of its business in permitting the Auditor to
gather and verify information about the accounts receivable and general
intangibles of the Borrower; provided, however, the Auditor shall exercise no
control over Borrower's business; provided, further, that Borrower shall
reimburse Lender immediately upon its demand therefor for the reasonable costs
and expenses incurred by Lender in connection with the services of such Auditor.
Section 4. Negative Covenants
In the absence of a written consent from Lender (in the manner
hereinafter provided), so long as any part of the Indebtedness shall remain
unpaid or the Lender has a commitment to the Borrower hereunder:
4.1 Guarantees and Debts. The Borrower will not and will not permit any
Subsidiary to guarantee any contract or obligation or incur, create, permit to
exist, assume or guarantee or in any manner become or be liable in respect of
any Debt, except that the foregoing restrictions shall not apply to:
(a) the Note, Credits, and other obligations or
liabilities pursuant to this Agreement or the Security
Instruments;
(b) indebtedness on open account in connection with normal
trade obligations in the ordinary course of business and obligations
incurred in connection with the purchase and sale of natural gas
products in the ordinary course of business;
(c) lease obligations, general and administrative
expenses permitted pursuant to Section 4.10 of this Agreement
(including the Administrative Service Fees);
(d) liabilities of the Borrower or any of its Subsidiaries for
any unpaid taxes not yet due or being diligently contested in good
faith by appropriate proceedings and subject to the creation of
appropriate reserves under generally accepted accounting principles and
upon stay of levy and execution thereon; and
(e) obligations of the Borrower for Tax Sharing
Payments.
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4.2 Dividends and Redemption. The Borrower will not declare or pay
dividends (other than a dividend payable solely in stock of the Borrower) or
make any other distribution on account of, or purchase, acquire, redeem or
retire any stock of the Borrower other than retirement of outstanding common
stock of the Borrower upon conversion to other common or preferred stock of the
Borrower, whether now or hereafter outstanding. Tax Sharing Payments and
Administrative Service Fees paid in compliance with Section 4.9 shall not
violate this Section.
4.3 Investments, Loans and Advances. The Borrower will not and will not
permit any Subsidiary to make Investments in or loans or advances to any Person,
except (1) expense and salary advances made to employees of the Borrower or its
Subsidiaries in the ordinary course of business not to exceed $100,000.00 in the
aggregate at any time, (2) investments maintained in the Trust Account in
compliance with the provisions of this Agreement, (3) in corporations,
partnerships, or joint ventures, in the aggregate not to exceed $1,000,000, and
(4) other investments approved by Lender.
4.4 Mergers, etc. The Borrower will not and will not permit any
Subsidiary to (a) merge or consolidate with any corporation other than the
Borrower or a wholly-owned Subsidiary of the Borrower, (b) create any
Subsidiaries, (c) acquire all or substantially all the assets of any other
entity, except that the assets or stock of any Subsidiary may be purchased or
otherwise acquired by the Borrower or any other Subsidiary, nor (d) create or
participate in any partnerships or joint ventures. The Borrower will not and
will not permit any Subsidiary to liquidate or dissolve except that any
Subsidiary may voluntarily liquidate or dissolve into the Borrower or another
Subsidiary.
4.5 Encumbrances. The Borrower will not and will not permit any
Subsidiary to create, incur, assume or permit to exist any mortgage, pledge,
lien or encumbrance on any of its properties or assets (now owned or hereafter
acquired), nor acquire or agree to acquire property or assets under any
conditional sale agreement or title retention contract, except that the
foregoing restrictions shall not apply to:
(a) liens of vendors, carriers, warehousemen, mechanics,
laborers and materialmen arising by law in the ordinary course of
business for sums not yet due or which are being diligently contested
in good faith;
(b) liens for taxes not yet due or which are being
diligently contested in good faith by appropriate proceedings;
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(c) pledges or deposits in connection with or to secure
workmen's compensation, unemployment insurance, pensions or
other employee benefits;
(d) liens required by this Agreement or any of the
Security Instruments;
(e) statutory liens and easements or other servitudes arising
in the ordinary course of business and minor irregularities of title
which do not materially impair the ownership or use of the property
subject thereto for the purposes for which such property is owned and
held by the Borrower or any of its Subsidiaries or limit or restrict
Lender's remedies hereunder;
(f) liens incurred in the ordinary course of business, not on
any of the collateral, to secure performance of tenders, statutory
obligations, leases and contracts (other than for borrowed money)
entered into in the ordinary course of business or to secure
obligations on appeal bonds; and
(g) judgments in existence less than 30 days after the entry
thereof or with respect to which execution has been properly stayed.
As to the liens and encumbrances permitted pursuant to paragraphs (a)
and (b) above, Borrower's right to contest dili gently in good faith by
appropriate proceedings is conditioned upon the Borrower setting up appropriate
reserves under generally accepted accounting principles and upon stay of levy
and execution thereon.
4.6 Sale of Assets. The Borrower will not and will not permit any
Subsidiary to sell, transfer or otherwise dispose of any of its assets except in
the ordinary course of business. The Borrower will not and will not permit any
Subsidiary to enter into any arrangement directly or indirectly with any person,
firm, or corporation whereby the Borrower or any Subsidiary would sell or
transfer any property, whether now owned or hereafter acquired, and then or
thereafter lease as lessee such property or any part thereof or any other
property which the Borrower or any Subsidiary would use for substantially the
same purpose or purposes as the property sold or transferred.
4.7 Financial Covenants. The Borrower will not at any time
permit:
(a) its Current Ratio to be less than 1.2 to 1.0;
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(b) its Tangible Net Worth (without consideration of the
par value of the capital stock and capital in excess of par
value of Energy Source Canada, Ltd.) to be less than
$20,000,000;
(c) or permit the amount of the Liquid Collateral to be less
than twenty-five percent (25%) of the sum of (i) the
outstanding principal balance under the Revolving Note plus
(ii) the face amount of all outstanding Credits.
All terms not expressly defined shall be defined in accordance
with generally accepted accounting principles. All
determinations under this Agreement shall be made in
accordance with generally accepted accounting principles
consistently applied, on a consolidated basis, except where
expressly provided to the contrary. All references to a
preceding period shall mean the period ending as of the end of
the month, quarter or fiscal year for which the applicable
report is delivered. All references to a period immediately
following shall mean the period beginning on the first day of
the month, quarter or fiscal year following the end of the
period for which the applicable report is delivered.
4.8 Basic Line of Business. Borrower will not and will not permit any
Subsidiary to change its basic line of business from the gas marketing business;
provided, however, that either Borrower or one of its Subsidiaries may engage in
a business other than the gas marketing business if for any fiscal quarter
Borrower's revenues from any such line of business do not exceed 10% of total
consolidated revenues of Borrower. In the event such revenues exceed 10% of
consolidated total revenues, Borrower shall promptly notify Lender in writing of
such fact and Lender shall have the option for a period of sixty (60) days from
receipt of said notice to review Borrower's lines of business and declare the
indebtedness of the Borrower to be due and payable.
4.9 Transactions with Affiliates. Borrower will not and will not permit
any Subsidiary to enter into transactions with an Affiliate which is not on an
arms-length basis comparable to the terms which would apply to a transaction
with a bona-fide third party. The obligations of Borrower for Administrative
Service Fees and for Tax Sharing Payments shall not be subject to this
limitation, but Tax Sharing Payments shall be subject to the restriction that
both before payment of such Tax Sharing Payments and after payment of such Tax
Sharing Payments no Default or Event of Default shall exist, provided that such
limitation shall not apply to a Tax Sharing Payment to pay taxes actually owed.
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4.10 General and Administrative Expenses. Borrower will not
permit its general and administrative expenses to exceed $2,100,000
in the fiscal quarter ending June 30, 1996 or any fiscal quarter
thereafter.
4.11 Maximum Unhedged Exposure. The Borrower will not permit its
aggregate uncovered fixed price commitments to purchase and sell natural gas and
natural gas products to exceed $6,000,000 at any time. "Uncovered, fixed price
commitments" means commitments to make or take delivery of natural gas or
natural gas products at fixed prices which are not tied to a market index to the
extent such commitments are not covered by back-to-back, hedge, or swap
agreements.
Section 5. Events of Default and Remedies
5.1 Events of Default. Any of the following events which
shall occur and be continuing shall be considered an Event of
Default as that term is used herein:
(a) Borrower does not pay any installment of interest on the
Note or a payment of fees owed to Lender within three (3) days of the
due date or does not pay when due any installment of principal of the
Note;
(b) Borrower or any Subsidiary does not pay at the scheduled
maturity (but after expiration of any grace period applicable to such
maturity) or when due whether by acceleration or otherwise (subject to
applicable grace periods) all or any part of any Debt of the Borrower
or any Subsidiary to any other person or entity, except that no
indebtedness on open account shall be considered past due (i) if paid
within sixty (60) days of date when due or (ii) is disputed in good
faith;
(c) The Borrower or any Subsidiary shall fail or refuse for a
period of fifteen (15) days to furnish to the Lender any information,
data, certificate, or other document required by this Agreement;
(d) The Borrower or any of its Subsidiaries does not comply
with or fails in the performance of any covenant contained in Section 3
of this Agreement (other than delivery of information which shall be
governed by Section 5.1(c) hereof) or any of the Security Instruments
to be kept or performed by the Borrower or any Subsidiary;
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(e) The Borrower or any of its Subsidiaries does not comply
with or fails in the performance of any covenant contained in Section
4.7(a) or 4.7(b) of this Agreement to be kept or performed by the
Borrower or any Subsidiary and fails to cure such default within thirty
(30) days of the occurrence thereof;
(f) The Borrower or any of its Subsidiaries does not comply
with or fails in the performance of any covenant contained in Section 4
of this Agreement (other than Section 4.7(a) and 4.7(b)) to be kept or
performed by the Borrower or any Subsidiary;
(g) Any representation or warranty made by the Borrower or any
Subsidiary herein or in any of the Security Instruments proves to have
been untrue in any respect, or any representation, statement (including
financial statements), certificate or data furnished or prepared and
made available by the Borrower or any Subsidiary to Lender hereunder
proves to have been untrue in any respect, as of the date as of which
the facts therein set forth were stated or certified;
(h) The Borrower shall discontinue business, or the Borrower
or any Subsidiary shall (i) make a general assignment for the benefit
of creditors, or (ii) apply for or consent to the appointment of a
receiver, a trustee or liquidator of itself or of all or a substantial
part of its assets, or (iii) be adjudicated a bankrupt or insolvent, or
(iv) file a voluntary petition in bankruptcy or file a petition or
answer seeking reorganization or an arrangement with creditors or
seeking to take advantage of any other law (whether federal or state)
relating to relief of debtors, or admit (by answer, by default or
otherwise) the material allegations of a petition filed against it in
any bankruptcy, reorganization, arrangement, insolvency or other
proceedings (whether federal or state) relating to relief of debtors,
or (v) suffer or permit to continue unstayed and in effect for sixty
(60) consecutive days any judgment, decree or order, entered by a court
of competent jurisdiction, which approves a petition seeking
reorganization of the Borrower or any Subsidiary or appoints a
receiver, trustee or liquidator of the Borrower or any Subsidiary or of
all or a substantial part of its assets, or (vi) take or omit to take
any action for the purpose or with the result of effecting or
permitting any of the foregoing.
5.2 Remedies. Upon the happening of an Event of Default
specified in Section 5.1(g), immediately and without notice, and
upon the happening of any other Default or Event of Default
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specified in Section 5.l, at the option of the Lender, without notice to
Borrower, Lender may declare any commitment hereunder cancelled and cease
advances thereunder, and/or upon the happening of an Event of Default specified
in Section 5.1(g), immediately and without notice, and otherwise, at the option
of the Lender, upon notice to Borrower, Lender may declare the entire aggregate
principal amount of the Note then outstanding and the interest accrued thereon
immediately due and payable without further notice and without presentment,
demand, protest, notice of protest or other notice of default or dishonor of any
kind, all of which are hereby expressly waived by the Borrower.
Section 6. Closing
The closing of the loans and the commencement of advances pursuant to
the Revolving Line of Credit contemplated hereby shall be subject to the
satisfaction of the following conditions:
6.1 Counsel to Lender. All legal matters incident to the transactions
herein contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs,
L.L.P., counsel to the Lender.
6.2 Required Documents. The Lender shall have received
executed copies of the following closing documentation:
(a) This Agreement;
(b) The Revolving Note;
(c) The Security Agreement;
(d) The Notice of Final Agreement;
(e) an opinion of counsel satisfactory to Lender; and
(f) Such other documentation as Lender may require.
6.3 Other Conditions. Other conditions and/or documentation have been
completed and/or executed in a manner satisfactory to Lender in its sole
discretion, including without limitation, confirmation by the Parent that the
Borrower's total consolidated equity is at least $24,000,000.
6.4 Material Adverse Changes. No event has occurred that could
reasonably be expected to have a material adverse effect on Borrower's business,
operations or property, Borrower's ability to perform its obligations under this
Agreement, the Note or any of the Security Instruments, or the validity or
enforceability of this Agreement, the Note or any of the Security Instruments or
Lender's remedies and rights hereunder or thereunder.
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Section 7. Miscellaneous
7.1 Survival of Various Matters. All representations and warranties of
the Borrower and its Subsidiaries herein shall be deemed remade as of the date
of any borrowing hereunder (except to the extent such representation and
warranty expressly provides it is as of the date hereof), and all covenants and
agreements herein not fully performed before the date of this Agreement, shall
survive such date.
7.2 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and may be personally served
or sent by telex, telecopier, mail or the express mail service of the United
States Postal Service, Federal Express or other equivalent overnight or
expedited delivery service and (i) if given by personal service, telex
(confirmed by telephone) or telecopier (confirmed by telephone), it shall be
deemed to have been given upon receipt, (ii) if sent by telex or telecopier
without telephone confirmation, it shall be deemed to have been given
twenty-four (24) hours after being given, (iii) if sent by mail, it shall be
deemed to have been given upon receipt and (iv) if sent by Federal Express, the
Express Mail Service of the United States Postal Service or other equivalent
overnight or expedited delivery service, it shall be deemed given twenty-four
(24) hours after delivery to such overnight or expedited delivery service,
delivery charges prepaid and properly addressed to Borrower or Lender, as the
case may be. For purposes hereof, the address of Borrower and Lender shall be as
follows:
Borrower:
Energy Source, Inc.
10375 Richmond
Suite 300
Houston, Texas 77042
Attention: Lisa Holliday
Fax No. (713) 917-1597
with a copy to:
Snell & Smith
1000 Louisiana, Suite 3650
Houston, Texas 77002
Attention: Paul Pryzant
Fax No.: (713) 651-8010
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Lender:
Bank One, Texas, N.A.
910 Travis
Houston, Texas 77002
Attention: John B. Lane
Fax No.: (713) 751-3544
with a copy to:
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002
Attention: Mr. Robert W. Bramlette
Fax No.: (713) 308-5555
Any party may, by proper written notice hereunder to the other parties, change
the address to which notices shall thereafter be sent to it.
7.3 Successors and Assigns. All covenants and agreements herein
contained by or on behalf of the Borrower and its Subsid iaries shall bind its
successors and assigns and shall inure to the benefit of the Lender and its
successors and assigns and all covenants and agreements herein contained by or
on behalf of the Lender shall bind the Lender and its successors and assigns.
7.4 Renewals. All provisions of this Agreement relating to the Note
shall apply with equal force and effect to each and all promissory notes
hereafter executed which in whole or in part represent a renewal, extension or
rearrangement of any part of the Indebtedness originally represented by the
Note.
7.5 No Waiver. No course of dealing on the part of the Lender or its
officers or employees, or any failure or delay by the Lender with respect to
exercising any right, power or privilege of the Lender under this Agreement, the
Note, or Security Instruments, shall operate as a waiver thereof. The rights and
remedies of the Lender under this Agreement, the Note, and the Security
Instruments shall be cumulative and the exercise or partial exercise of any such
right or remedy shall not preclude the exercise of any other right or remedy.
7.6 Governing Law. This Agreement and the Note which may be
issued hereunder shall be deemed to be contracts made under and
shall be construed in accordance with and governed by the laws of
the State of Texas.
7.7 Non-Subordination. The Note shall never be in a position
subordinate to any indebtedness owing to any other creditor of the Borrower or
its Subsidiaries, except to the extent that such other creditor may hold a lien
or liens on specific assets of the
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Borrower or its Subsidiaries pursuant to the terms hereof or with the knowledge
and written consent of the Lender.
7.8 Exhibits. The Exhibits attached to this Agreement are incorporated
herein for all purposes, and shall be considered a part of this Agreement. Those
exhibits are: Borrowing Application - Exhibit "1.3.1"; Revolving Note - Exhibit
"1.3.2"; Adverse Change - Exhibit "2.3"; Liabilities and Litigation Exhibit
"2.5"; Subsidiaries - Exhibit "2.8"; Bid Week Report Exhibit "3.1(f)";
Certificate of Compliance - Exhibit "3.8"; and Borrowing Base Report - Exhibit
"3.11".
7.9 Payment on Non-Business Days. Whenever (i) any payment to be made
hereunder or under the Note or (ii) any certificate, report or financial
statement is due on a day that is a Saturday, Sunday or banking holiday under
the laws of the State of Texas, such payment shall be made on the next
succeeding day which is not a Saturday, Sunday or banking holiday under the laws
of the State of Texas and such extension of time shall be included in the
computation of interest due with such payment.
7.10 Severability. In the event any one or more of the provisions
contained in this Agreement, the Note, or the Security Instruments, or in any
other instrument referred to herein or executed in connection with or as
security for the Note shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, the Note, or the
Security Instruments, or any other instrument referred to herein or executed in
connection with or as security for the Note. Furthermore, in lieu of such
invalid, illegal or unenforceable provision, there shall automatically be added
a provision as similar in terms to such invalid, illegal or unenforceable
provision as may be possible and as may be valid, legal and enforceable.
7.11 Controlling Document. Should a direct conflict exist between the
specific terms of the Note, this Agreement or any of the Security Instruments,
the Note shall control over this Agreement and the Security Instruments, and
this Agreement shall control over the Security Instruments and the exhibits
attached to this Agreement.
7.12 Savings Clause. Nothing contained in this Agreement or in the Note
or in any other agreement or undertaking relating hereto shall be construed to
obligate Borrower, under any circumstances whatsoever, to pay interest in excess
of the maximum rate that Borrower may pay pursuant to Texas law and in regard to
which Borrower would be prohibited from successfully raising the claim or
defense of usury (the "Maximum Rate"). In the event that any sums received from
Borrower are at any time under applicable law deemed or held to provide a rate
of interest in excess of the Maximum Rate, the effective rate of interest on the
loans hereunder shall be deemed reduced to and shall be the Maximum Rate and the
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Borrower and all sureties, endorsers and guarantors shall accept as their sole
remedy under such circumstances either the return of any sums of interest which
may have been collected and which produced a rate in excess of the Maximum Rate,
or the application of those sums as a credit against the unpaid principal amount
of the loan, whichever remedy may be elected by Lender. In addition, in the
event that the Note are prepaid or the maturity of the Note is accelerated by
reason of election by Lender hereunder, then all unearned interest shall either
be cancelled or, if theretofore paid, shall either be returned to Borrower or
credited on the unpaid principal amount due under the Note, whichever action may
be elected by Lender.
7.13 Investment. Lender represents that it is the present intention of
Lender to acquire the Note for its own account for the purpose of investment and
not with a view to the distribution or sale thereof, subject, nevertheless, to
the necessity that Lender remain in control at all times of the disposition of
property held by it for its own account; it being understood that the foregoing
representation shall not affect the character of the loans pursuant to this
Agreement as commercial lending transactions, and that Lender may grant a
participation interest in the Note in the ordinary course of business.
7.14 Set Off. Upon the occurrence and during the continuance of any
Default or Event of Default, the Lender is hereby authorized at any time and
from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Lender to or for the credit or the
account of the Borrower against any and all of the Indebtedness, irrespective of
whether or not the Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The Lender agrees promptly to notify
the Borrower after any such set off and application made by the Lender, provided
that the failure to give such notice shall not affect the validity of such set
off and application. The rights of the Lender under this Section are in addition
to other rights and remedies (including, without limitation, other rights of set
off) which the Lender may have.
7.15 INDEMNIFICATION. BORROWER AGREES TO INDEMNIFY AND HOLD LENDER AND
ITS OFFICERS, EMPLOYEES, DIRECTORS AND AGENTS HARMLESS AGAINST ALL THIRD PARTY
CLAIMS, DAMAGES, LIABILITIES AND EXPENSES WHICH MAY BE ASSERTED AGAINST LENDER
IN CONNECTION WITH OR ARISING OUT OF ANY THIRD PARTY INVESTIGATION, LITIGATION
OR PROCEEDING RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY
OTHER THAN CLAIMS ARISING FROM LENDER'S BAD FAITH, GROSS NEGLIGENCE OR WILFUL
MISCONDUCT.
7.16 Change of Ownership or Control. If at any time while any
Note shall be outstanding or the Lender has a commitment hereunder
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the Parent shall cease to own one hundred percent (100%) of the then outstanding
stock of the Borrower having ordinary voting power; a "Change of Ownership or
Control" shall be deemed to have occurred. The Borrower shall promptly, but in
any event within ten (10) days give written notice to Lender upon obtaining
knowledge of an event which is or would constitute the occurrence of a Change of
Ownership or Control. Lender shall, upon the happening of a Change of Ownership
or Control, have the privilege of declaring the Note to be due and payable on a
date not earlier than ten (10) days from the date of the exercise of said
privilege. The Note then out standing shall thereupon become due and payable on
the date specified in the notice sent to the Borrower by Lender including the
principal amount thereof plus accrued interest thereon to the accelerated
maturity date and any amounts owed by Borrower or its Subsidiaries to Lender
pursuant to this Agreement or the Security Instruments.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed in multiple counterparts, each of which is an original
instrument for all purposes, all as of the day and year first above written.
THE WRITTEN AMENDED AND RESTATED LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENTS BETWEEN THE BORROWER AND THE LENDER AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
BORROWER AND THE LENDER, OR BY THE TERMS OF THE 1994 LOAN AGREEMENT. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE LENDER AND THE BORROWER.
ENERGY SOURCE, INC.
By: /s/ Lisa D. Holliday
Name: Lisa D. Holliday
Title: Treasurer
BANK ONE, TEXAS, N.A.
By: /s/ John B. Lane
Name: John B. Lane
Title: Vice President
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